Our unit is located in Jammu and Kashmir. We have to regularly pay money to terrorists to do our business without any problem. Can such amount be claimed as business expenditure in income computation?
The claim can be considered only with reference to the provisions of Section 37 of the Income-Tax Act, 1961.
Section 37 is the residuary provision which provides for the deduction of all expenditures laid out or expended wholly and exclusively for the business or profession, not being expenditure of the nature particularly and specifically described in Sections 30 and 36 and not being in the nature of capital expenditure or personal expenditure of the assessee.
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Thus, expenses not deductible under specific provisions, are deductible under Section 37(1). This view gets support from the decision in the Raison (India) Ltd vs Deputy Commissioner of Income-Tax case, (1998) 60 ITJ (Delhi-tribunal) 451.
The issue can also be examined from the angle of explanation to Section 37(1), inserted by the Finance (No 2) Act 1998 with retrospective effective from April 1, 1962.
This explanation provides 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.
Payment to terrorists is, prima facie, an expenditure, which could be said to be prohibited by law and hence inadmissible.
What is the difference between expenditure and loss?
According to the Indian Molasses Co (P) Ltd vs Commissioner of Income-Tax case, (1959) 37 ITR 66 (SC),