|DATE:||(Date of pronouncement)|
|DATE:||August 29, 2011 (Date of publication)|
|Click here to download the judgement (khemchand_ransom_expl_37_1.pdf)|
While kidnapping is an offense, paying ransom is not; Bar in Explanation 1 to s. 37(1) not attracted
The assessee, engaged in manufacture and sale of bidis, sent its whole-time director to a forest area for purchase of tendu leaves. There, the director was kidnapped by dacoits and the assessee paid ransom of Rs. 5.50 lakhs to secure his release. The AO disallowed the claim for deduction of the said amount u/s 37(1) though the CIT (A) and Tribunal upheld the claim on the ground of commercial expediency. Before the High Court, the department relied on the Explanation to s. 37(1) and argued that expenditure incurred for any purpose which is an offence or which is prohibited by law is not allowable as a deduction. HELD dismissing the appeal:
The Explanation of s. 37(1) provides that expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business. It has to be seen whether the expenditure is incurred for any purpose which is an offence or prohibited by law. While kidnapping for ransom is an offence u/s 364 A of the IPC, the payment of ransom to secure the release of a kidnapped person is not an offense. The payment of ransom is not prohibited by law. Accordingly, the Explanation of to s. 37 (1) is not applicable and the ransom is deductible as business expenditure.
As is seen from the text of the reported judgment, the Revenue has made an attempt to hang its hat, for the first time/obviously as an after-thought before the HC, on the deeming provision of the Explanation u/s 37(1). The view held by the HC is to the effect that in order to attract the mischief of the provision, the purpose for which expenditure is incurred, essentially from the viewpoint of the assessee, must be an ‘offence’ or one ‘prohibited by law’. If clinically looked at, therefore, it seems illogical to apply the provision to any such instance, in which, as in this case, the assessee cannot be held, strictly so, to have committed an offence or been guilty of any illegality. To illustrate, both payment and acceptance of ‘bribe’ being an ‘offence’, may be caught. Whereas, in the light of the view the HC has taken, payments such as, of ‘protection money’ or ‘extortion money’ might not.
For detailed discussion /related viewpoints on the scope of the subject provision, one may care to read through the published articles:
(2004) 270 ITR 33
(2007) 160 TAXMAN 145
In a different vein, though not directly in relation to income-tax or necessarily involving any monetary outgoing, one is provoked to recall the gruesome circumstances in which the men in governance were left with no alternative but yield to the pressure tactics and illegal demands of hijackers, for release of hostages,ostensibly on humanitarian grounds; despite strong public protests.