CPT V24P7-Art1 (Content).pmd - Taxmann

PENALTY CHARGES FOR BREACH OF
LAW CANNOT BE CLAIMED AS AN
EXPENDITURE IN TRADE
4. In Haji Aziz & Abdul Shakoor Bros. 9 , the
Supreme Court observed as follows (para 24):
“An expenditure is not deductible unless
it is a commercial loss in trade and a
penalty imposed for breach of the law
during the course of trade cannot be
described as such. If a sum is paid by an
assessee conducting his business, because
in conducting it he has acted in a manner
which has rendered him liable to penalty
for an infraction of the law, it cannot be
claimed as a deductible expense, as it
cannot be called a commercial loss incurred
in carrying on his business, infraction of
the law is not a normal incident of business.”
EXPENSES INCURRED IN TRANSAC-
TIONS VIOLATING PROVISIONS OF FERA
NOT DEDUCTIBLE
5. It may also be relevant to consider the judgment
of the Hon’ble Supreme Court in the case of
Maddi Venkataraman & Co. (P.) Ltd. v. CIT 10 it
has been observed therein that one can carry
on his trade without violating the law and
section 37 of the Income-tax Act, 1961, presumes
that the trade will be carried on lawfully. The
expenses incurred in transactions carried out
in violation of provisions of the FERA are not
deductible. The Court also observed that it would
be against public policy to allow benefit of
deduction under one statute, of any expenditure
incurred in violation of provisions of another
statute or any penalty imposed under another
statute. It is also to be borne in mind that
evasion of law cannot be a trade pursuit.
PAYMENTS MADE OPPOSED TO PUBLIC
POLICY ADMISSIBLE IN A FEW CASES
ONLY
6. However, payments made opposed to public
policy may also be admissible in a few cases
where it is established as a custom which
could be recognized and the assessee had to
comply with it as part of business. In First,
ITO v. French Dyes & Chemicals (I) (P.) Ltd. 11 ,
it has been held that there are two aspects of
the question. If it was absolutely necessary in
that field of business to make payments to
some employees, whether the documents of
payments were maintained or not, the custom
could be recognized.
NO DISTINCTION NEED TO BE MADE
BETWEEN CIVIL AND CRIMINAL
LITIGATION EXPENSES
7. Section 37(1) does not make any distinction
between civil litigation and criminal litigation.
All that has to be seen is whether the legal
expenses were incurred by the assessee in his
character as a trader ? In other words, whether
the transaction in respect of which proceedings
are taken arose out of and was incidental to
the assessee’s business ? - CIT v. Dhanrajgirji
Raja Narasingirji [1973] 91 ITR 544 (SC).
EXPENDITURE ON DEFENDING AUDITOR
IN DISCIPLINARY PROCEEDINGS
8. When such proceedings were initiated by
shareholders/union in CIT v. Deccan Sugar &
Abkhari Co. Ltd. [1976] 104 ITR 458 (Mad.), it
was held that such expenses incurred by assesseecompany
were not allowable as decision of
such proceedings, one way or other, would
not have affected assessee’s business. Per contra,
expenditure borne by assessee-company to defend
a suit by employees’ union against auditors
appointed by assessee, for certain irregularities
in accounts of employees’ provident fund, was
declared as an allowable expenditure in CIT
v. Ananda Bazar Patrika (P.) Ltd.. 12
LEGAL EXPENSES INCURRED ON
DEFENDING A CLAIM FOR PAYMENT OF
HIGHER COMPENSATION FOR LAND
ACQUIRED BY ASSESSEE ARE NOT
DEDUCTIBLE
August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 27
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