|DATE:||(Date of pronouncement)|
|DATE:||July 6, 2014 (Date of publication)|
|Click here to download the judgement (jai_surgicals_expl_37.pdf)|
Expl to s. 37: If the purpose of the expenditure is not an offense/ prohibited by law, fact that prior approval of the Govt. was not obtained cannot be the basis of disallowance
The Explanation to s. 37(1) is a deeming provision and disallows expenditure incurred by an assessee for ‘any purpose’ which is either an offence or prohibited by law. The inquiry to determine the applicability or otherwise of the Explanation is restricted to ascertaining the purpose of the expenditure. In simple words, the investigation should be carried out to see the object and consideration for the expenditure incurred. If the purpose of the expenditure is neither to commit an offence nor is prohibited by any law, then there can be no question of disallowance. It means that the offence or prohibition under law should be judged with the ‘purpose’ of the expenditure on a standalone basis divorced from the fulfillment or otherwise of the procedural formalities attached with and necessary for the incurring of such expenditure. To put it in simple words, if the expenditure is otherwise lawful and neither amounts to offence nor is prohibited by law, but the procedural provisions attached for incurring it are not complied with, no doubt irregularity will creep in, but such irregularity would not make the expenditure itself as unlawful so as to be brought within the scope of the Explanation. On facts, the payment of job work charges is not an offence or prohibited by law. The fact that there was no prior approval from the Central Government u/s 297 of the Companies Act does not make the expenditure of job work charges disallowable (CIT vs. Dhanpat Rai & Sons (2014) 98 DTR (P&H) 209 distinguished).