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While damages or penalty which are compensatory in nature are allowable as a deduction u/s 37(1) of the Act, damages which are penal in nature and in respect of infraction of law are not allowable as a business expenditure. Amounts paid by way of damages for a contractual breach is a normal incident of business and allowable as a deduction.
Baldev Singh Kanwar vs. CIT (1997) ITR 640 overruled.
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