Law: Income Tax Act, 1961

Section: 37

Income-tax----Business expenditure---Fines and penalties---General principles--¬Expenses incurred in transactions carried out in violation of provisions of Foreign Exchange (Regulation) Act---Not deductible---Indian Income Tax Act, 1961, S.37. One can carry on his trade without violating the law. In fact, section 37 of the Income Tax Act, 1961, presumes that the trade will be carried on lawfully. The English Courts have consistently held that a penalty or fine or money paid to compound an offence under another statute cannot be allowed as a deduction under the Income Tax Act. In Haji Aziz and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350, a Bench of three Judges of the Supreme Court held that the expenses which were permitted as deduction were such as were made for the purpose of carrying on the business. It was not enough that the disbursements were made in the course of, or arose out of, or were connected with, the trade. No deduction can be allowed if the expenditure fell on the assessee in some character other than that of a trader. If a sum has to be paid by an assessee because in conducting his business, he had acted in a manner which had rendered him liable for penalty for infraction of law, it could not be claimed as a deduction. Infraction of law is not a normal incidence of business. It is only if it could be shown that it was spent for the purpose of the trade that the deduction can be permitted unless the entire trade was unlawful. In the case of Haji Aziz and Abdul Shakoor Bros. (1961) 41 ITR 350 (SC), it was categorically held that no distinction can be made in this regard between a personal liability and a liability of any other kind. The assessee-company carried on the business of exporting tobacco. In its return for the assessment year 1970-71, it claimed deduction of Rs.2,95,000 as business expenditure/loss. According to the assessee, in the course of carrying on its business, by the year 1968, it had accumulated 329.2 tonnes of substandard quality tobacco which it could not export over the last three years. Since the accumulated stock of tobacco was of substandard quality, it could not be sold at the floor price fixed by the Government of…

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