Penalty having commercial nature and paid in the normal course business is allowable

Explanation to s. 37 (1) does not apply to “penalty” which is not of the nature of illegal / unlawful expenditure The assessee became liable to pay “penalty” for overloading wagons under the rules of the Railways. The question arose whether the said “penalty” was disallowable under the Explanation to s. 37 (1) which provides that “expenditure incurred for any purpose which is an offence or which is prohibited by law” shall not be allowable. HELD, deciding in favour of the assessee: The substance of the matter had to be looked into and given preference over the form. Though the...