Polite - looking embarrassed about penalty (7)
I believe the answer is:
refined
'polite' is the definition.
('refined' can be similar in meaning to 'polite')
'looking embarrassed about penalty' is the wordplay.
'looking embarrassed' becomes 'red' (I've seen this before).
'about' means one lot of letters goes inside another.
'penalty' becomes 'fine' (fine is a kind of penalty).
'red' enclosing 'fine' is 'REFINED'.
(Other definitions for refined that I've seen before include "Polished" , "Not coarse" , "Just like the cultured" , "Free from vulgarity" , "Elegant, cultured" .)