Background
of the case
Owners of businesses can avail deductions from their
income in respect of certain expenses. However, expenses incurred by an
assessee for any purpose which is an offense or which is prohibited by law
shall not be deemed to have been incurred for the purpose of business or
profession and no deduction or allowance shall be made in respect of such
expenditure. In the case of CIT Vs.
Hoshiari Lal Kewal Krisan, the assessee (Hoshiari Lal Kewal Krisan) claimed
a deduction of Rs. 31,433 in respect of the payment of fine for belated payment
of excise duty installments. The Assessing Officer (AO) and the appellate
authority disallowed the expense, however, the Tribunal allowed it.
Issue
The issue of the case was to examine if the fine paid
for belated payment of excise duty is allowable business expenditure.
Rules
In order to reach a conclusion regarding the
aforementioned matter, we need to know the provisions of section 37 of the
Income tax Act 1961 (hereinafter the act).
As per section 37 of the act, any expense, not being
expenditure of the nature described in sections 30 to 36 comes under the
head of this section. However, the personal expense of the assessee and the
capital expenses are to be excluded from the periphery of section 37. In this
context, it is important to note that the expenditures that have been incurred
wholly or exclusively for the purpose of the business or profession can only be
claimed for deduction under section 37 of the act. Another condition for
claiming a deduction under this section is that the expenditures should have
been incurred in the previous year.
In Prakash
Cotton Mills Pvt. Ltd. Vs.CIT (1993), it was held by the Supreme Court held
that the payment of statutory impost by an assessee by way of penalty, damage
or interest is to be claimed as allowable income under section 37(1) of the
Income Tax Act 1961. Therefore, the assessing authority is to examine the provision
of the statute providing for payment of such impost. Payment of impost in the
nature of punishment is to be treated under the stated act; however, payment of
impost as compensation is to be allowed under section 37(1) of the act.
Application
In the given case, High Court observed that the
payment of fine for belated payment of exercise duty is statutory impost.
Therefore, the concerned impost is purely compensatory in nature. In other
words, it can be stated that the payment of a fine is not a punishment, but a
compensatory payment.
Conclusion
In the discussed case, it was held by the High Court
that although the payment is termed as fine; however, the nature is
compensatory. Hence, the assessee has the right to claim such an expense as an allowable expense under section 37(1) of the Income Tax Act 1961.
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