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August 30, 2011
All Articles by: C.A. DEV KUMAR KOTHARI       View Profile
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Relevant references and links:

Secrion 37 of Income tax act, 1961.

 CIT Vs. Khemchand Motilal Jain  Tobbaco Products P. Ltd  (2011 -TMI - 205320 - MADHYA PRADESH HIGH COURT)

Firoti or ransom- purpose in paying:

When any other person has kidnapped your employee , director or relative, the kidnapper has committed an offence. To protect the kidnapped person, you have to make efforts to get released him from the clutches of kidnapper and to save his life and protect from any harm and damages which kidnapper may cause. For this purpose one take help of police and other administration , own people and still sometime one is required to pay firoti or ransom money to kidnapper. The payment of firoti is to protect the person and not to commit a crime. When it concerns any employee or director of company, it also becomes a  moral and commercial obligation to try to get release of employee or director. This is very much necessary to keep, maintain and improve  confidence of other employees. If the employer does not take steps there can be greater degree of dissatisfaction amongst employees. Therefore, there is also commercial expediency.

Why Ransom becomes necessary:

Theoretically we  can say that why to pay ransom rather than to depend on police and administration for release of kidnapped. However, it is ground reality that relying on police and administration may not be sufficient and if one rely on them, they run risk of losing the kidnapped. We find in many situations police asked to provide for own security.

One of the reason for this sort of happening is that police is really very much busy in pursuing petty crimes or crimes based on technical or financial lapses. The police can get easily hold of a person who has committed some sort of financial irregularity than a person who has committed hard core crime like theft, decoity, murder etc. Because whereabouts of such persons are not known and they are difficult to be found. Whereas an offender who has committed an economic offence is one day arrested by almost surprisingly. For example, director of a company may be arrested if he failed to file annual report on time or to hold annual general meeting of company on time.    The director can be found easily whereas a decoit may not be found easily. Furthermore, police is not afraid of economic offenders, but when a matter of hardcore criminal comes, the police may himself be afraid. In such circumstances paying ransom or firoti  to kidnapper becomes inevitable.

Recent ruling of Madhya Pradesh high Court: 

In case before High Court namely CIT Vs. Khemchand Motilal  Jain Tobbaco Products P. Ltd (2011 -TMI - 205320 - MADHYA PRADESH HIGH COURT)  the assessee, carried business of  manufacture and sale of bidis. For this purpose assessee purchased tendu leaves (raw material) from forests.. Whole-time director of assessee went  to a forest area for purchase of tendu leaves and got  kidnapped by dacoits. The  assessee had to pay as ransom of Rs. 5.50 lakhs to secure release of kidnapped director.

The question before the High Court was as follows:

“Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs.5,50,000/- paid as ransom money to the kidnappers of one of

the Directors was an allowable deduction under Section 37(1) of the Income-tax Act,1961?”

 Facts of the case are that the assessee is a private limited

Applying Explanations to section 37(1) the AO disallowed the claim for deduction of the said amount u/s 37(1) as opposed to public policy. However, the CIT (A) and Tribunal  allowed the claim on the ground of commercial expediency.

The revenue challenged the order of Tribunal and  relied on the Explanation to s. 37(1) and argued that expenditure incurred for any purpose which is an offence or which is prohibited by law is not allowable as a deduction.  High Court dismissed the appeal with the following observations and order on the following lines:

  1. The Explanation of s. 37(1) provides that 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.
  2. We have to see  whether the expenditure is incurred for any purpose which is an offence or prohibited by law.
  3. Kidnapping for ransom is an offence u/s 364 A of the Indian Penal Code (IPC) ,
  4. The payment of ransom to secure the release of a kidnapped person is not an offense.
  5. The payment of ransom is not prohibited by law.
  6.  Accordingly, the Explanation of to s. 37 (1) is not applicable and the ransom is deductible as business expenditure.

Ground realities and commercial expediency:

It is true that paying ransom, paying bribes, paying to local goons to secure peaceful living  and to avoid harassment is not at all desirable. However, it is a ground reality that many times such payments have to be made to avoid risks to life, risk to property, risk to peaceful living and risk of not having the desirable work done on time.

 Such payments are made to avoid harassment (in form of delays and illegal actions of authorities) to which the recipient of such money  may put if such money is not paid by the other person.  It need to be understood that at operational levels bribes are paid as speed money and to avoid illegal harassment to which one can be placed unless he gives some bribe to officers at operating level. Bribes are not paid to get any illegal benefit or advantages but to secure lawful relief. This is because in hands of officers saying ‘there is no merit’ is very easy  and he can say so  in totally illegal and wrong manner, and no one will say him that he has done it wrongly , deliberately and to harass the concerned public.  Even when there is considerable merit, officer can say ‘there is no merit without any basis and by wrongly presenting facts or hiding necessary facts. For such wrongs he is not called to explain. This is the reason that even to say the truth that there is merit, Officer can ask for bribe and people can be compelled to pay bribes to avoid illegal demands which a wrong order will cause.

Therefore, it is necessary to curbs powers to harass the public if we want to reduce corruption. Considering such ground realities, one can say that bribes are also paid out of commercial expediency. However, he have to be cautioned that once you declare that you paid a bribe to get some work done, the first action against you will be that the order or work procured by you will be cancelled, you will be asked to explain source of such money, such payment shall be disallowed, and the officer will make a counter claim on you that you have made a false claim of paying bribes, because you do not have an evidence. This is why corruption is progressing rapidly.


By: C.A. DEV KUMAR KOTHARI - August 30, 2011