Do you know this tax rule!!!

CMA Ankur Pandey (Govt.Job) (4401 Points)

18 November 2011  

While kidnapping is an offense, paying ransom is not an offence and dedutible as business expenditure u/s 37(1).

Facts of the Case:-
The assessee, engaged in manufacture and sale of bidis, sent its whole-time director to a forest area for purchase of tendu leaves. There, the director was kidnapped by dacoits and the assessee paid ransom of Rs. 5.50 lakhs to secure his release. 
The AO disallowed the claim for deduction of the said amount u/s 37(1) though the CIT (A) and Tribunal upheld the claim on the ground of commercial expediency. Before the High Court, the department 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. 

While kidnapping for ransom is an offence u/s 364 A of the IPC, the payment of ransom to secure the release of a kidnapped person is not an offense. The payment of ransom is not prohibited by law. 

Accordingly, the Explanation of to s. 37 (1) is not applicable and the ransom is deductible as business expenditure.