Redemption fine is an allowable expenditure
THE question before the Delhi High Court in a Revenue appeal was "Whether the Income-tax Appellate Tribunal was justified in holding that the sum of Rs.45 lacs paid by the assessee to the Customs authorities on account of redemption fine was an allowable expenditure u/s 37 of the Income Tax Act?"
The counsel for the Revenue submitted that the expenditure in question would be barred under the Explanation to Section 37 as redemption fine was paid by way of penalty and as per Section 111(d) of the Customs Act the goods in question were prohibited goods.
The explanation reads -
Explanation- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence 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.
The High Court while dismissing the Revenue appeal observed -
++ The requirement of Explanation is that payment in form of expenditure should not be made for the purpose, which is prohibited by law.
++ The fault or defect in the REP licence was not attributable to the respondent-assessee as the licenses were issued to India Craft. The respondent-assessee was not to be blamed and had not indulged in any offence or incurred any expenditure for the purpose, which was prohibited by law.
++ The respondent-assessee had to pay redemption fine in order to save and protect themselves and in terms of the order passed by the Supreme Court they had received the balance consideration from the auction proceeds.
++ In fact, the respondent-assessee had only received the net amount after adjustment of the redemption fine.
See 2014-TIOL-1374-HC-DEL-IT.
Also see where the High Court held that ransom money paid to kidnappers for release of a whole time Director was an allowable deduction u/s 37(1) of the Act.