PRAKASH COTTON MILLS PRIVATE LIMITED vs THE COMMISSIONER OF INCOME TAX(CENTRAL).

The Supreme Court held that under Section 37(1) of the Income Tax Act, 1961, deductions must be allowed for payments that are purely compensatory in nature. The Court ruled that if a payment is composite, comprising both compensatory and penal elements, the assessing authority must bifurcate the components and allow deductions only for the compensatory part. The Court affirmed the necessity of examining the relevant statute to determine the nature of the payment, emphasizing that the nomenclature of the payment does not dictate its classification as compensatory or penal.