The assessee paid compensation to a foreign company for the settlement of a patent infringement dispute through an out-of-court settlement. The Tribunal held that the payment was neither a penalty nor for any purpose prohibited by law, but was incurred for commercial expediency to settle a bona fide civil dispute. Explanation 3 to section 37(1), inserted by the Finance Act, 2022, enlarging the scope of “prohibited by law”, is prospective and cannot be applied to AY 2014-15. Accordingly, the disallowance was deleted. (AY. 2014-15)