As far as the disallowance of penalty of Rs.3000 imposed for minor violations is concerned, it is necessary to see the provisions of Sec.119 of the Motor Vehicles Act, 1988 (MV Act), in the light of the various violations for which the payment in question was made by the Assessee. Some of the Sections of the MV Act which have been quoted in the bills evidencing payment of the aforesaid sums reads thus:
‘119. Duty to obey traffic signs.—
(1) Every driver of a motor vehicle shall drive the vehicle in conformity with any indication given by mandatory traffic sign and in conformity with the driving regulations made by the Central Government, and shall comply with all directions given to him by any police officer for the time being engaged in the regulation of traffic in any public place.
(2) In this section “mandatory traffic sign” means a traffic sign included in Part A of the First Schedule, or any traffic sign of similar form (that is to say, consisting of or including a circular disc displaying a device, word or figure and having a red ground or border) placed or erected for the purpose of regulating motor vehicle traffic under sub-section (1) of section 116.”
“SECTION 177 IN THE MOTOR VEHICLES ACT, 1988
177. General provision for punishment of offences.—Whoever contravenes any provision of this Act or of any rule, regulation or notification made thereunder shall, if no penalty is provided for the offence be punishable for the first offence with fine which may extend to one hundred rupees, and for any second or subsequent offence with fine which may extend to three hundred rupees.”
“SECTION 122 IN THE MOTOR VEHICLES ACT, 1988
122. Leaving vehicle in dangerous position.—No person in charge of a motor vehicle shall cause or allow the vehicle or any trailer to be abandoned or to remain at rest on any public place in such a position or in such a condition or in such circumstances as to cause or likely to cause danger, obstruction or undue inconvenience to other users of the public place or to the passengers.”
“SECTION 129 IN THE MOTOR VEHICLES ACT, 1988
129. Wearing of protective headgear.—Every person driving or riding (otherwise than in a side car, on a motor cycle of any class or description) shall, while in a public place, wear 1[protective headgear conforming to the standards of Bureau of Indian Standards]: Provided that the provision of this sections shall not apply to a person who is a Sikh, if he is, while driving or riding on the motor cycle, in a public place, wearing a turban: Provided further that the State Government may, by such rules, provide for such exceptions as it may think fit. Explanation.— “Protective headgear” means a helmet which,—
(a) by virtue of its shape, material and construction, could reasonably be expected to afford to the person driving or riding on a motor cycle a degree of protection from injury in the event of an accident; and
(b) is securely fastened to the head of the wearer by means of straps or other fastenings provided on the headgear.’
Explanation to Sec. 37(1) of the Act use the expression expenditure incurred “for any purpose which is an offence or which is prohibited by law” The word “offence” is not defined in the Income Tax Act. However, it is defined in Section 3(38) of the General Clauses Act, 1887 as follows: “offence” shall mean any act or omission made punishable by any law for the time being in force;”. The expression “prohibited by law” , too, is not defined in the Income Tax Act. It may be viewed either as an act arising from a contract which is expressly or impliedly prohibited by statute, or contracts entered into with the object of committing an illegal act. The Hon’ble Supreme Court in Haji Aziz and Abdul Shakoor Bros. v CIT  41 ITR 350, it was held that ‘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’.
It is clear from the statutory provisions of the MV Act as well as the law laid down in judicial pronouncements that payments made for any purpose which is an offence or which is prohibited by law and which are not compensatory in nature cannot be allowed as a deduction u/s.37(1) read with Explanation thereto. Perusal of the various statutory provisions of the MV Act under which the payment in question were made were for offences committed by the employees of the Assessee for which the Assessee was vicariously liable. These payments were not compensatory in nature. Therefore these sums cannot be allowed as a deduction. We uphold the order of the CIT(A) to this extent.