Business expenditure deduction allowed for lottery-related lobbying costs; activities were not shown to be unlawful or prohibited by law.

Commission paid to agents for lobbying and mobilising public opinion to prevent a State ban on lottery tickets was held deductible under section 37(1) because the material did not show that the activities were an offence or prohibited by law. The Tribunal noted that the Lotteries (Regulation) Act, 1998 permits States to conduct lotteries and to prohibit tickets of other States, so efforts to preserve a permitted business were not illegal or contrary to public policy on that record. The Tribunal also held that, after remand, the assessee's challenge to the disallowance revived before the CIT(A), and the CIT(A) had jurisdiction to decide the issue afresh.

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Issues: Whether commission paid to agents for lobbying and mobilising public opinion to prevent a State ban on lottery tickets was allowable as business expenditure under section 37(1) of the Income-tax Act, 1961, and whether the CIT(A), after remand, had jurisdiction to examine the disallowance made in assessment.

Analysis: The expenditure was claimed as being incurred to preserve the existing lottery business, but section 37(1) disallows expenditure only if it is laid out wholly and exclusively for business purposes and, under the Explanation, if it is incurred for any purpose which is an offence or is prohibited by law. The material on record did not show that the agents' activities of making representations or influencing public opinion were an offence or were prohibited by law. The statutory framework under the Lotteries (Regulation) Act, 1998 permitted State Governments to conduct lotteries and also to prohibit the sale of lottery tickets of other States, so efforts aimed at securing continuation of permitted business in the State could not, by themselves, be treated as illegal or against public policy. The Tribunal also held that, after restoration of the matter, the assessee's challenge to the disallowance stood revived before the CIT(A), and the CIT(A) had jurisdiction to adjudicate it afresh.

Conclusion: The expenditure was deductible under section 37(1) and the disallowance was not sustainable; the CIT(A)'s jurisdiction to decide the matter after remand was upheld.

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