http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 9  

PETITIONER: M/S.  HAJI AZIZ AND ABDUL SHAKOOR BROS.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY II

DATE OF JUDGMENT: 24/11/1960

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1961 AIR  663            1961 SCR  (2) 651  CITATOR INFO :  RF         1961 SC 668  (8)  R          1964 SC1722  (9)  D          1969 SC 288  (12)  RF         1972 SC 391  (6)  RF         1980 SC1271  (7)

ACT: Income-tax--Business    deduction--Import   of   goods    by steamer--Government   notification  prohibiting  import   by steamer--Payment      of     penalty     in     lieu      of confiscation--Allowable expenditure--Commercial expense--Sea Customs Act, 1878 (8 of 1878), s. 167(8)--Indian  Income-tax Act, 1922 (11 of 1922), S. 10(2)(XV).

HEADNOTE: The  appellant  firm imported dates from  abroad  partly  by steamer  and partly by country craft.  At the relevant  time import   of  dates  by  steamers  had  been  prohibited   by Government (1) [1945] 1 3 I.T.R. Supp. 1. (2) [1956] S.C.R. 551. 652 notification,  and the consignments which were  imported  by steamer   were,  therefore,  confiscated  by   the   customs authorities  under s. 167, item 8, of the Sea  Customs  Act, i878, but under s. 183 of the Act the appellant was given an option to pay Rs. 82,250 as penalty in lieu of confiscation. The  appellant paid the amount and got the  dates  released. Before  the Income-tax authorities it claimed to deduct  the amount paid as penalty as an allowable expenditure under  S. 1O(2)(XV) of the Indian Income-tax Act, 1922, but the  claim was   rejected.   It  was  contended  that  the   order   of confiscation was against the stock-in-trade and not  against the person of the appellant firm and as the amount paid  was expended  for the release of the stock-in-trade, it  was  an allowable expenditure. Held,  that  the  amount paid by the  appellant  by  way  of penalty  for a breach of the law could not be considered  to be  an expenditure laid out wholly and exclusively  for  the purpose  of the business and was not an allowable  deduction under S. 1O(2) (xv) of the Indian Income-tax Act, 1922.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 9  

Expenses which are permitted as deductions are such as are made in order to enable a person to carry on and earn profit in  the business.  It is not enough that  the  disbursements are  made in the course of or arise out of or are  concerned with  or  made out of the profits of the business  but  they must  also be for the purpose of earning the profits of  the business.   An expenditure is not deductible unless it is  a commercial loss in trade and a penalty imposed for breach of the  law  during the course of trade cannot  on  grounds  of public  policy  be said to be a commercial expense  for  the purpose  of a business or disbursement made for the  purpose of earning the profits -of such business. Case law reviewed.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No.110 of 1957. Appeal  by special leave from the judgment and  order  dated February 25, 1955, of the former Bombay High Court in I.T.R. No. 57/X of 1954. N. A. Palkhivala and I. N. Shroff, for the Appellant. A. N. Kripal and D. Gupta, for the Respondent. 1960.  November 24.  The Judgment of the Court was delivered by KAPUR,  J.-This  is an appeal by special leave  against  the judgment and order of the High Court of Bombay answering the question  submitted to it. against the assessee firm who  is the appellant before 653 us, the respondent being the Commissioner of Income-tax. The  appeal  relates  to the assessment  year  1949-50,  the accounting year ended on July 25, 1948.  The appellant is  a firm  doing the business of importing dates from abroad  and selling  them  in  India.  During the  accounting  year  the appellant  imported dates from Iraq.  At the  relevant  time the  import  of  dates by steamers  was  prohibited  by  two notifications dated December 12, 1946, and June 4, 1947, but they  were permitted to be brought by country craft.   Goods which had been ordered by the appellant were received partly by steamer and partly by country craft.  Consignments, which were imported by steamer and were valued at Rs. 5 lacs  were confiscated by the Customs Authorities under s. 167, item  8 of  the  Sea Customs Act but under s. 183 of that  Act  the, appellant  was given an option to pay fines aggregating  Rs. 1,63,950  which  sum on appeal was reduced  to  Rs.  82,250. This sum was paid and the dates were released.  On the  sale of the goods certain profits accrued out of which it  sought to deduct Rs. 82,250 paid as penalty on ordinary  principles of commercial accounting.  The Income-tax Officer disallowed this  claim  which  was also  disallowed  by  the  Appellate Assistant   Commissioner.   On  appeal  to  the   Income-tax Appellate  Tribunal this sum was held to be allowable  by  a majority  of two to one.  At the instance of the  respondent the  Tribunal  referred the following question to  the  High Court for its opinion:- "Whether on the facts and in the circumstances of the  case, the payment of Rs. 82,250 is an allowable expenditure  under Section 10(2) (xv) of the Indian Income-tax Act?" The  High  Court held that the above amount  of  Rs.  82,250 could not be said to have been paid for salvaging the  goods but  was  paid as a penalty incurred in  consequence  of  an illegal, act on the part of the appellant and was  therefore not  an allowable item under s. 10(2)(xv) of the  Income-tax Act.   Against this judgment the appellant firm has come  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 9  

appeal to this Court by special leave. 83 654 any  contract of hire purchase was contemplated,  cannot  be applied  simpliciter, because such a contract has in it  not only  the element of bailment but also the element of  sale. At  common law the term  ’hire -purchase’  properly  applies only to contracts of hire conferring an option to  purchase, but  it  is often used to describe contracts  which  are  in reality  agreements  to purchase  chattels  by  instalments, subject  to a condition that the property in them is not  to pass until all instalments have been paid.  The  distinction between  these  two  types of hire  purchase  contracts  is, however, a most important one, because under the latter type of  contract there is a binding obligation on the  hirer  to buy  and  the  hirer can therefore pass a good  title  to  a purchaser  or  pledgee dealing with him in  good  faith  and without  notice of the rights of the true owner, whereas  in the  case  of a contract which merely confers an  option  to purchase there is no binding obligation on the hirer to buy, and  a purchaser or pledgee can obtain no better title  than the hirer had, except in the case of a sale in market overt, the  contract  not  being an agreement  to  buy  within  the Factors Act, 1889, or the Sale of Goods Act, 1893." The  observations  quoted  above are  based  mostly  on  two leading  cases which have come to be regarded as  the  locus classicus  upon  the subject, namely Lee v.  Butler  (1)  in which the transaction was described by Lord Esher, M.R.,  as "Hire and Purchase Agreements" and Helby v. Matthews (2)  in which  the House of Lords distinguished the former  case  on the ground that in that case there was a binding contract to buy and not merely an option to buy, without any  obligation to  buy.  Both these cases were decided in terms of  Factors Act of 1889 (52 & 53 Viet. c. 45, s. 9).  Both the kinds  of agreements  exemplified by the two leading  cases  aforesaid would  now be included in the definition of  ’hire-purchase’ as contained in s. 21 of the Hire Purchase Act, 1938 (1 &  2 Geo., 6, c. 53):- "’Hire-purchase  agreement’  means  an  agreement  for   the bailment of goods under which the bailee (1) [1893] 2 Q.B. 318. (2) (1895] A.C. 471. 655 may  buy the goods or under which the property in the  goods will or may pass to the bailee, and where, by virtue of  two or  more agreements, none of which by itself  constitutes  a hire-purchase  agreement, there is a bailment of  goods  and either the bailee may buy the goods, or the property therein will  or  may pass to the bailee, the  agreements  shall  be treated  for the purposes of this Act as a single  agreement made at the time when the last of the agreements was made."               It  is  clear that under the Law,  as  it  now               stands,  which has now been crystallised  into               the  section of the Hire Purchase Act,  quoted               above, the transaction partakes of the  nature               of  a contract or bailment with an element  of               sale, as aforesaid, added to it.  ’in such  an               agreement,  the  hirer  may not  be  bound  to               purchase  the thing hired;. he may or may  not               be.   But  in  either case,  if  there  is  an               obligation  to buy, or an option to  buy,  the               goods  delivered to the hirer by the owner  on               the  terms  that the hirer, on  payment  of  a               premium  as also of a number  of  instalments,               shall  enjoy  the  use  of  the  goods,  which               ultimately   may  become  his  property,   the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 9  

             transaction  amounts to one of  hire-purchase,               even  though  the  title  to  the  goods   has               remained with the owner and shall not pass  to               the hirer until a certain event has  happened,               namely,  that all the  stipulated  instalments               have   been  paid,  or  that  the  hirer   has               exercised his option to finalise the  purchase               on payment of a sum, nominal or otherwise. But it has been contended on behalf of the petitioners  that there is no binding agreement to purchase the goods and that title is retained by the owner not as a security for payment of the price but absolutely.  According to third term of the agreement,  on the hirer duly performing and  observing  the terms  of  the agreement, with particular reference  to  the payment  of the monthly instalments, "the hiring shall  come to an end and the vehicle shall, at the option of the hirer, become  his  absolute property; but until such  payments  as aforesaid  have  been  made, the vehicle  shall  remain  the property  of  the  owners.  The hirer shall  also  have  the option of purchasing the vehicle at any 656 belonging to him may be, the name and residence of the  said person  and the amount of penalty or increased rate of  duty unrecovered; and such Magistrate shall thereupon proceed  to enforce payment of the said amount in like manner as if such penalty  or  increased  rate had been a  fine  inflicted  by himself." These sections show the punishments provided for the  breach of the prohibitions in regard to importation or  exportation of  goods  under  ss. 18 and 19; the power  of  the  Customs Authorities to give an option to pay in lieu of confiscation and how the penalties are to be imposed.  Therefore when the appellants  incurred the liability they did so as a  penalty for an infraction of the law; but it cannot be said that the money which they had to pay was not paid as a penalty and in fact under s. 167(8) it was a penalty. In  support of his argument counsel for the  appellant  firm referred to Maqbool Hussain etc. v. The State of Bombay etc. (1)  and to the following passage at p. 742 where  Bhagwati, J., said:- "Confiscation  is  no doubt one of the penalties  which  the Customs  Authorities  can  impose but that is  more  in  the nature  of proceedings in rem than proceedings in  personam, the  object  being to confiscate the offending  goods  which have  been dealt with contrary to the provisions of the  law and  in respect of the confiscation also an option is  given to  the  owner of the goods to pay in lieu  of  confiscation such  fine as the officer thinks fit.  All this is  for  the enforcement of the levy of and safeguarding the recovery  of the sea customs duties." Similar  observations  were  made  by  S.  K.  Das,  J.,  in Shewpujanrai Indrasanrai Ltd. v. The Collector of Customs  & Ors. (2) where it was said that a distinction must be  drawn between an action in rem and proceeding in personam and that confiscation  of  the goods is a proceeding in rem  and  the penalties  are  enforced  against  the  goods  whether   the offender  is known or not.  The view taken by this Court  in the  other  two cases cited by counsel for  the  appellants, i.e., Leo Roy (1) [1953] S.C.R. 730.   (2) [1959] S.C.R. 821, 836. 657 Frey v. The Superintendent, District Jail, Amritsar (1)  and Thomas Dana v. The State of Punjab (2) is the same.  In Dana case (2) Subba Rao, J., said at p. 298:- "If  the authority concerned makes an order of  confiscation

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 9  

it  is only a proceeding in rem and the penalty is  enforced against  the  goods.   On the other hand, if  it  imposes  a penalty  against  the person concerned, it is  a  proceeding against  the  person and he is punished for  committing  the offence.  It follows that in the case of confiscation  there is  no  prosecution against the person or  imposition  of  a penalty on him." In Maqbool Hussain’s case (3) the question for decision  was whether  after  proceedings  had been taken  under  the  Sea Customs Act an accused person could be prosecuted and  could or  could not rely upon the plea of double jeopardy, it  was held  that  he could not.  In Shewpujanrai’s  case  (4)  the contention raised was that after proceedings had been  taken under the Foreign Exchange Regulation Act it was not open to the  Customs  Authorities to take any action under  the  Sea Customs  Act.  The other two cases were similar  to  Maqbool Hussain’s case (3).  The contention now raised before us  is quite different.  What is to be decided in the present  case is whether the penalty which was paid by the appellant  firm was  an  allowable  deduction within  s.  10(2)(xv)  of  the Income-tax Act which provides: S.  10(2)(xv) "any expenditure (not being in the  nature  of capital  expenditure or personal expenses of  the  assessee) laid out or expended wholly and exclusively for the  purpose of such business, profession or vocation." The  words  "for  the purpose of such  business"  have  been construed in Inland Revenue v. Anglo Brewing Co. Ltd. (5) to mean  "for  the purpose of keeping the trade  going  and  of making  it  pay".  The essential condition of  allowance  is that  the expenditure should have been laid out or  expended wholly and exclusively for the purpose of such business. (1)  [1958] S.C.R. 822. (2) [1959] Supp.  I S.C.R. 274, 298. (3) [1953] S.C.R. 730. (4) [1959] S.C.R. 821, 836. (5) (1925) 12 T.C. 803, 813. 658 In  deciding  this  case, reference  to  decisions  in  some English cases will be fruitful.  In Commissioners of  Inland Revenue v. Warnes & Co. (1), the assessee who carried on the business  of  oil exporters were sued for a  penalty  on  an information exhibited by the Attorney-General under the  Sea Customs   Consolidation  Act  for  breach  of   orders   and proclamations.   The  matter was settled by consent  on  the assessee agreeing to pay a mitigated penalty of pound 2,000. All  imputations on the moral culpability of  the  assessees were withdrawn.  The provisions of the Act under which  this information  was lodged and penalty paid was similar to  the provisions  of the Indian Sea Customs Act.  This amount  was held  not  to be a proper deduction because in order  to  be within the provision similar to s. 10(2) (xv) of the  Indian Act   the  loss  had  to  be  something  within   commercial contemplation  and  in  the nature  of  a  commercial  loss. Rowlatt, J., relying on the observation of Lord Loreburn, L. C., in Strong & Co. v.   Woodifield (2) said at p. 452:- "but  it  seems to me that a penal liability  of  this  kind cannot  be regarded as a loss connected with or arising  out of  a trade.  I think that a loss connected with or  arising out of a trade must, at any rate, amount to something in the nature of a loss which is contemplable and in the nature  of a commercial loss.  I do not intend that to be an exhaustive definition,  but I do not think it is possible to  say  that when  a fine--which is what the penalty in the present  case amounted  to-has been inflicted upon a trading body, it  can be said that that is a "loss connected, with or arising  out of" the trade within the meaning of this rule." This statement of the law was approved in the  Commissioners

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 9  

of  Inland  Revenue v. Alexander Von Glehn &  Co.  Ltd.  (3) where  also  in  similar circumstances  by  consent  of  the assessee  penalty  of pound 3,000 was paid and  the  penalty plus the costs were claimed as deduction in arriving at  the profits.   The  Special  Commissioners had  found  that  the penalty  and  costs  were incurred by the  assessee  in  the course of carrying on (1) [1919] 2 K.B. 444.            (2) [1906] A.C. 448. (3) [1920] .2 K.B. 553. 659 their  trade and so incidental thereto and  were  admissible deductions.  Rowlatt, J., on a reference held it to    be  a non-deductible item.  This judgment was affirmed  on  appeal by the Court of Appeal.  Lord Sterndale, M.  R., was of  the opinion  that  it  was immaterial  whether  technically  the proceedings  were criminal or not.  The money that was  paid was  paid  as  a penalty and it did not  matter  if  in  the information it was called a forfeiture. It  was  argued by the assessee in that case that  no  moral obliquity was attributed to them and that it did not  matter whether  the  expense  was incurred  in  consequence  of  an infraction of the law or whether it was a penalty for  doing an illegal act.  At p. 565 Lord Sterndale said:- "Now  what  is  the  position  here?   This  business  could perfectly  well be carried on without any infraction of  the law.   This penalty was imposed because of an infraction  of the  law, and that does not seem to me to be, any more  than the  expense  which  had  to be paid  in  Strong  &  Co.  v. Woodifield (1) appeared to Lord Davey to be, a  disbursement or expense which was laid out or expended for the purpose of such trade......." Warrington L.J. said at p.569:- "It is a sum which the persons conducting the trade have had to  pay  because in conducting it they have so acted  as  to render  themselves  liable  to this penalty.  It  is  not  a commercial  loss, and I think when the Act speaks of a  loss connected  with  or  arising out of such trade  it  means  a commercial  loss,  connected  with or  arising  out  of  the trade." In Strong & Co. v. Woodifield (1) a brewing company owned  a licensed house in which they carried on the business of inn- keepers.   They  incurred  a liability  to  pay  damages  on account  of injuries caused to a visitor, by the falling  in of  a chimney.  This sum was held not to be allowable  as  a deduction in computing the profits’ Lord Loreburn, L. C., in his speech said no sum could be deducted unless it be  money wholly and exclusively laid out or expended for the  purpose of such (1)  (1906) A.C. 448. 660 trade  and that only such losses could be deducted  as  were connected  with  it  in  the sense  that  they  were  really incidental  to  the  trade  itself and  they  could  not  be deducted  if  they  were mainly  incidental  to  some  other vocation or fell on the trader in some character other  than that  of  a  trader.   Lord  Davey  observed:"I  think   the disbursements  permitted  are  such as  are  made  for  that purpose.  It is not enough that the disbursement is made  in the  course  of, or arise out of, or is connected  with  the trade  or is made out of the profits of the trade.  It  must be made for the purpose of earning profits." The  following passage from Lord Sterndale’s judgment at  p. 566  in  Von  Glehn’s case (1) from which  we  have  already quoted  shows the effect of incurring a penalty as a  result of a breach of the law:

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 9  

"During  the course of the trading this company committed  a breach  of the law.  As I say, it has been agreed that  they did  not intend to do anything wrong in the sense that  they were willingly and knowingly sending these goods to an enemy destination; but they committed a breach of the law, and for that breach of the law, they were fined.  That, as it  seems to me, was not a loss connected with the business, but was a fine  imposed  upon  the company personally,  so  far  as  a company  can be considered to be a person, for a  breach  of the  law  which it had committed.  It is  perhaps  a  little difficult  to put the distinction into very exact  language, but  there  seems  to  me  to  be  a  difference  between  a commercial  loss  in trading and a penalty  imposed  upon  a person or a company for a breach of the law which they  have committed  in  that trading.  For that reason I  think  that both  the  decision of Rowlatt, J., in this  case,  and  his former decision in Inland Revenue Commissioners v.  Warnes & Co.  (2) which he followed were right, and that this  appeal should be dismissed with costs." In  Spofforth  and Prince v. Glider (3) the assessee  was  a firm  of chartered accountants, who claimed a deduction  for certain legal costs paid in connection with a (1) [1920) 2 K.B. 55.3.          (2) [1919] 2 K.B. 444. (3) (1945) 26 T.C. 310. 661 successful defence of one of the partners in a Police Court. The  assessee  firm also sought legal advice  in  regard  to matters  connected  with  some  proceedings.   Summons  were issued  against  the  assessee  firm  but  were   eventually dismissed.   The  assessee contended that the whole  of  the costs  incurred  in  connection with  the  proceedings  were "wholly  and  exclusively"  laid out  or  expended  for  the appellant’s   profession   and  were   therefore   allowable deductions.   The Special Commissioner had held against  the assessee which was upheld by the Court.  The test laid  down by Lord Davey in Strong & Co. v. Woodifield (1) was  applied and applying that test it was held that except the  expenses for  obtaining  legal  advice the other  expenses  were  not admissible. In Farrie v. Hall (2) F, a sugar broker was sued in the High Court  for  libel  and  the Court  held  that  F  had  acted maliciously  and  that the defence of  privilege  could  not prevail and awarded damages against him.  F sought to  claim the  amount of damages as an allowable deduction  contending that  it was an expenditure laid out wholly and  exclusively for  the purposes of his trade or was a loss connected  with or  arising  out of the trade.  Relying on the  cases  above mentioned this amount was disallowed because it fell on  the assessee in his character of a calumniator of a rival  sugar broker and it was only remotely connected with his trade  as a  sugar broker.  Therefore it was not laid out  exclusively and  wholly for the purpose of his business.  We  were  also referred to the observations of Danckwerts, J. in Newson  v. Robertson  (3) where it was said that if the expenditure  is incurred  by  the  tax-payer  for  more  than  one  -purpose including  the commercial purposes in the sense that  it  is incurred  for the purposes of earning profits of  the  trade and  also some outside purpose then the expenses  cannot  be claimed at all as not being wholly and exclusively laid  out or  expended  for the purpose of the trade.   In  that  case expenses claimed by a Barrister for (1) [1906] A.C. 448.         (2) [1947] 28 T.C. 200. (3) [1952] 33 T.C. 452, 459. 84 662

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 9  

travelling   between  his  house  and  his   chambers   were disallowed because his object and purpose in travelling  was mixed  and not wholly and exclusively for the     purpose of the profession. Coming now to Indian cases; In Mask & Co. v. Commissioner of Income-tax,  Madras  (1)  the  assessee  in  breach  of  his contract  sold  crackers at a lower rate and  a  decree  was passed against him for damages for breach of contract  which he  claimed as an allowable deduction.  It was held that  as the  assessee had disregarded the undertaking given and  his conduct  was  palpably dishonest it did  not  constitute  an allowable  expenditure.   Sir  Lionel Leach,  C.  J.,  after referring to Warne’s case (2) and Von Glehn’s case (3)  held that  the amount did not constitute an  expenditure  falling within s. 10(2)(xii).  The Madras High Court in Senthikumara Nadar & Sons v. Commissioner of Income-tax, Madras (4)  held that payments of penalty for an in. fraction of the law fell outside  the  scope  of  permissible  deductions  under   s. 10(2)(xv).  In that case the assessee had to pay  liquidated damages  which  was  akin to penalty  incurred  for  an  act opposed  to  public policy a policy  underlying  the  Coffee Market Expansion Act, 1942, and which was left to the Coffee Board to enforce. Reference  was also made during the course of  arguments  to Commissioner of Income-tax v. Hirjee (1).  In that case  the assessee was prosecuted under the Hoarding and  Profiteering Ordinance  but was finally acquitted and claimed the  amount spent  in  defending  himself  under  s.  10(2)(xv)  in  his assessment.   It was held that the distinction  between  the legal expenses on a successful and unsuccessful defence  was not sound and that the deductibility of such expenses  under s.  10(2)(xv) must depend on the nature and purpose  of  the legal proceedings in relation to the business whose  profits are  in computation and are unaffected by the final  outcome of the proceedings. A review of these cases shows that expenses which (1)  [1943] 11 I.T.R. 454. (3)  [1920] 2 K.B. 553. (2)  [1910] 2 K.B 444. (4)  [1957] 32 I.T.R. 138 (5)  [1953] S.C.R. 714. 663 are  permitted  as deductions are such as are made  for  the purpose  of  carrying  on the business, i.e.,  to  enable  a person to carry on and earn profit in that business.  It  is not enough that the disbursements are made in the course  of or  arise  out of or are concerned with or made out  of  the profits  of  the  business but they must  also  be  for  the purpose  of  earning the profits of the  business.   As  was pointed  out in Von Glehn’s case (1) an expenditure  is  not deductible  unless  it is a commercial loss in trade  and  a penalty  imposed for breach of the law during the course  of trade  cannot be described as such.  If a sum is paid by  an assessee  conducting his business, because in conducting  it he  has acted in a manner, which has rendered him liable  to penalty  it cannot be claimed as a deductible  expense.   It must  be  a commercial loss and in its nature must  be  con- templable as such.  Such penalties which are incurred by  an assessee   in  proceedings  launched  against  him  for   an infraction  of  the law cannot be called  commercial  losses incurred  by  an  assessee  in  carrying  on  his  business. Infraction  of the law is not a normal incident of  business and therefore only such disbursements can be deducted as are really  incidental to the business itself.  They  cannot  be deducted  if  they fall on the assessee  in  some  character

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 9  

other  than that of a trader.  Therefore where a penalty  is incurred  for  the contravention of any  specific  statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which  are for the purpose of enabling a person to carry  on trade  for making profits in the business are permitted  but not if they are merely connected with the business. It  was argued that unless the penalty is of a nature  which is  personal  to the assessee and if it  is  merely  ordered against  the  goods imported it is an  allowable  deduction. That,  in our opinion, is an erroneous  distinction  because disbursement  is  deductible  only if  it  falls  within  s. 10(2)(xv) of the Income-tax Act and no such deduction can be made unless it falls within the test laid down in the  cases discussed above and it can be said to be expenditure  wholly and  exclusively laid for the purpose of the business.   Can it be said (1)  (1920) 2 K.B. 553. 664 that  a  penalty  paid for an infraction of  the  law,  even though it may involve no personal liability in the sense  of a  fine  imposed for an offence committed, is    wholly  and exclusively  laid  for the business in the  sense  as  those words are used in the cases that have been discussed  above. In  our opinion, no expense which is paid by way of  penalty for  a breach of the law can be said to be an amount  wholly and  exclusively laid for the purpose of the business.   The distinction sought to be drawn between a personal  liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law  and is visited with a penalty cannot on grounds of public policy be  said  to be a commercial expense for the  purpose  of  a business or a disbursement made for the purposes of  earning the profits of such business. In  our opinion the High Court rightly held that the  amount claimed  was  not deductible and we therefore  dismiss  this appeal with costs.                                 Appeal dismissed.