Law: Income Tax Act, 1961

Section: 37(1)

(a) Income-tax-----Business expenditure---Statutory impost---Method for allowance---Scheme of statute to be studied to find whether impost is compensatory or penal or composite---Deduction to be allowed where wholly compensatory---When composite only that part which is compensatory to be allowed---Income Tax Act, 1961, S.37(1)---Bombay Sales Tax Act, 1959---Employees' State Insurance Act, 1948. Whenever any statutory impost paid by an assessee byway of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income Tax Act, 1961, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities have to bifurcate the two components of the impost and give deduction of that component which is compensatory in nature and refuse to give deduction of that component which is penal in nature. Mahalakshmi Sugar Mills Co. v. CPT (1980) 123 ITR 429 (SC) and CPT v. Hyderabad Allwyn Metal Works Ltd. (1988) 172 ITR 113 (AP) fol. Organo Chemical Industries v. Union of India (1979) 55 FJR 283 and AIR 1979 SC 1803 ref. [The Supreme Court accordingly remanded the case to the Appellate Tribunal for deciding the claims for deduction (i) of interest for delayed payment of sales tax under the Bombay Sales Tax Act, 1959, and (ii) of damages paid under the Employees' State Insurance Act, 1948, for delayed payment of contribution, after examining the schemes of those Acts.] (b) Income-tax-- ----Business expenditure---Entertainment expenses---Allowance of only part of claim decided on relevant material---No question of law arises---Income Tax Ad, 1961, Ss37(2) & 256. As to what portion of the miscellaneous expenses claimed by a company, relating to expenses…

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