TMI Blog2011 (8) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... K.Shrivastava, Counsel for respondent. Shri G.N.Purohit, the learned Senior Advocate as an amicus curiae. Per Krishn Kumar Lahoti,J. ORDER This is a reference by the Income Tax Appellate Tribunal, Jabalpur in R.A.No.20(Jab)1995 by which the Tribunal has referred following question for the answer of this Court. 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? 2 Facts of the case are that the assessee is a private limited company The main income of the company was from manufacturing and sale of bidis. Sukhnandan Jain was a whole time Director of the assessee company. He was looking after the purchase, sales and manufacturing of bidis. 3. On 5.8.1987 Sukhnandan Jain had gone to Sagar for purchase of tendu leaves. On the same day, he was kidnapped for ransom by a dacoit gang headed by Raju Bhatnagar. Immediately complaint and FIR were lodged with Sagar Police. The assessee awaited the action of the police. The police were unsucc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and brothers (P) Ltd. It is submitted that the reference may be decided in favour of the assessee. They have also placed reliance to the Full Bench Judgement of this Court in Addl. Commissioner of Income-Tax vs. Kuber Singh Bhagwandas 118 ITR 379. 7. To appreciate the rival contentions of the parties, it would be appropriate if the findings recorded by the Income Tax Appellate Tribunal in order dated 19th September, 1990 and the Commissioner of Incometax (Appeal) in order dated 23rd Feb. 1995 are referred. 8. The Commissioner of Incometax(Appeals) in paras 13,14 and 15 of the order considered this question. The CIT(A) in para 18 had considered the contentions and recorded his finding in para 19. We quote paras 13,14,15 and 19 of the order which reads as under: 13. Ground nos.8,9 and 10 relate to a disallowance of a claim for deduction of Rs.5,50,000/- On page 2 of the assessment order, the Ld. Assessing officer has observed that under the head general charges the assessee debited Rs.5,92,274/- While scrutinizing the details of these expenditure, the Ld. Assessing officer found that a sum of Rs.5,50,000/- was spent through a voucher no.1190 dated 24 August, 1987. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years in age. The other Directors were of middle ages. By sheer dint of labour he contributed to a great extent to the performance of the appellant company. The Ld counsel went on to submit that Shri Sukhnandan Jain was incharge of quality control, which required that he personally relects and orders for purchase of different varities of tendu leaves. 15. The Ld counsel and the Director submitted that Shri Bihari lal, the man who asked Shri Sukhnandan Jain for the meeting at M.P. Tourism Establishment at Sagar was a supplier of tendu leaves to the Company. In his capacity of supplier of tendu leaves, he was personally known to Shri Sukhnandan Jain. According to the Ld counsel, during the accounting year, relevant for the assessement years 1987-88, Shri Bihari Lal supplied the company tendu leaves worth Rs. 8.25 lakhs approximate. At that material point of time, Bihari lal was acquainted with different source of tendu leaves traders. According to the Ld counsel when Bihari Lal fixed up an appointment for meeting, Shri Sukhnandan Jain was duty bound to meet him in the interest of the business of the appellant company. As regards the observation of the Ld assessing officer that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reimbursement of the ransom money. The company for its smooth business, decided through the resolution of the Board of Directors to deal in the matter. Identity of the recipient of the ransom money is established. In short, company only discharged the contractual obligation to the Director.Shri Sukhnandan Jain in terms of the agreement and it decided to discharge the liability because the company thought it fit. The principle of commercial expediency urged that the trader or businessman is the best to decide the commercial expediency. It is now a settled law that unless a particular expenditure, incurred for business and commercial expediency, especifically barred by any specific provision of Income Tax Act, such expenditure has to be allowed. The only point is that the assessee has to establish that the expenditure was incurred for the purpose of business. In this particular case, the assessee has been able to establish that dictum. Accordingly, I am of the opinion that the amount of Rs.5,50,000 was spent for the commercial necessity of the company and that it is an allowable expenditure under section 37 of the Income tax Act. As a result, the disallowance of Rs.5,50,000 is dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al for the procurement of quality tendu leaves. During his business tour, he was kidnapped. For a period of nearabout 20 days after lodging a report to the police, the respondent waited the efforts of the police, but ultimately on 27th August, 1987 when all the efforts of the police were unsuccessful, then the respondent had made to make payment of ransom amount of Rs.5,50,000 to the kidnappers and ultimately on 28.8.1987, Sukhnandan Jain was released from the clutches of the dacoits. Both the authorities have found that it was a business expenditure and allowed the claim. 11. The contention of the petitioner is that under Explanation of subsection (1)of Section 37, such expenditure could not have been allowed. We find it appropriate to refer Section 37(1) and Explanation to it for ready reference which reads as under: The 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. To ascertain whether any expenditure incurred by the assessee for any purpose which is an offence or prohibited by law is to be seen. Kidnapping for r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional Commissioner of Incometax vs. Kuber Singh Bhagwandas held that to decide whether a payment of money or incurring of expenditure is for the purpose of the business and an allowable expenditure, the test applied is of commercial expediency and principles of ordinary commercial trading.If the payment or expenditure is incurred to facilitate the carrying on of the business of the assessee and is supported by commercial expediency, it does not matter that the payment is volunatry or that it also enures to the benefit of a third party. 15. In Karam Chand Thapar(supra), the Division Bench of the Calcutta High Court considering the question of death of Chairman while he was on business tour held that the expenditure incurred to have his body flown back by Airways is incidental to business and an allowable deduction under Section 37(1) of the Income Tax. 16. In the present case, Sukhnandan Jain was on business tour and was staying at Govt. Rest House, Sagar from where he was kidnapped . As he was on business tour, to get him released, if the aforesaid amount was paid to the dacoits as ransom money and because of this, Sukhnandan Jain was released, the petitioner claimed it a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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