Assessee-company was engaged in activities of operating and maintenance of roads. It claimed deduction on account of damages paid to NHAI as business expenditure. Assessing Officer held that said expenditure was representing penalty and held that such a penalty could not be allowed as deduction under Explanation to section 37(1).  Assessing Officer also found that such damage charges were pertaining to earlier year and, therefore, same could not be allowed as deduction on this count as well, being prior period expenses.  CIT(A) deleted the disallowances. On appeal the Tribunal held that  since provision of Explanation 1 to section 37(1) excludes allowing deduction of expenditure incurred for purpose which is an offence or prohibited by law and however penalty had been paid by assessee on account of breach of contract which could not be equated with offence, or something prohibited by law, assessee was entitled to deduction under section 37(1). Further, since amount of damage crystallized in year under consideration, it could not be said that such damages were prior period expenses. (AY. 2018-19)