2011 (8) TMI 70 - HC - Income Tax

Deductibility of Ransom Payment for Kidnapped Director Upheld as Business Expenditure

Commissioner of Incometax, Jabalpur Versus. M/s Khemchand Motilal Jain, Tobacco Products(P) Ltd., Sagar.

The High Court held that the ransom payment made by a private limited company to secure the release of its kidnapped director was a deductible business ... Payment of ransom money - kidnap of the Director - deduction u/s 37(1) - Held that: - Sukhnandan Jain remained in custody for a period of nearabout 20 days. The police were also informed and after waiting 20 days for the police action, If the respondents to save his life paid the aforesaid amount, then the aforesaid amount cannot be treated as an action which prohibited under the law. No provision could be brought to our notice that payment of ransom is an offence. In absence of which, the contention of the petitioner that it is prohibited under explanation of Section 37 (1) of the Incometax Act has no substance.The entire tour of Sukhnandan Jain was for purchase of tendu leaves of quality and for this purpose,he was on business tour and during his business tour, he was kidnapped and for his release the aforesaid amount was paid. - Deduction allowed. Issues Involved:1. Whether the ransom payment of Rs. 5,50,000/- to kidnappers is an allowable deduction under Section 37(1) of the Income-tax Act, 1961.Comprehensive, Issue-wise Detailed Analysis:1. Allowability of Ransom Payment as a Deduction under Section 37(1) of the Income-tax Act, 1961Facts of the Case:The assessee, a private limited company engaged in the manufacturing and sale of bidis, had a director, Sukhnandan Jain, who was kidnapped while on a business tour for purchasing tendu leaves. The company paid Rs. 5,50,000/- as ransom for his release and claimed this amount under 'General Expenses' as a business expenditure. The Assessing Officer disallowed the claim, but the CIT(A) and ITAT upheld the deduction.Arguments by Revenue:The Revenue argued that the ransom payment could not be claimed as a business expenditure because the Explanation to Section 37(1) prohibits any expenditure incurred for purposes that are an offense or prohibited by law. They contended that the payment of ransom falls under this category and should not be allowed as a deduction.Arguments by Assessee:The assessee, supported by the amicus curiae, argued that the ransom payment was a business expenditure since it was made to secure the release of a director who was on a business tour. They cited various judgments, including those of the Apex Court and High Courts, to support their claim that the expenditure was for commercial expediency and should be allowed under Section 37(1).Tribunal and CIT(A) Findings:Both the CIT(A) and ITAT found that the expenditure was incurred for business purposes. They noted that Sukhnandan Jain was conducting business activities at the time of his kidnapping, and the ransom payment was necessary to secure his release and ensure the continuity of business operations. They emphasized that the expenditure was not of a personal nature and was borne by the company as part of its contractual obligations.Court's Analysis:The High Court examined Section 37(1) and its Explanation, which disallows expenditures incurred for purposes that are an offense or prohibited by law. The Court noted that while kidnapping for ransom is an offense under Section 364A of the IPC, there is no provision that prohibits the payment of ransom to save a life. Thus, the Explanation to Section 37(1) does not apply in this case.The Court also referred to several precedents, including:- Sassoon J. David and Co. P. Ltd. vs. Commissioner of Income-Tax: The Supreme Court held that expenditures incurred voluntarily for business promotion are allowable.- Additional Commissioner of Income-Tax vs. Kuber Singh Bhagwandas: The Full Bench of the Court held that expenditures incurred for commercial expediency are allowable.- Commissioner of Income-Tax West Bengal, Calcutta vs. Karam Chand Thapar and Brothers (P) Ltd.: The Calcutta High Court allowed the deduction of expenses incurred for repatriating the body of a chairman who died on a business tour.Conclusion:The High Court concluded that the ransom payment was a business expenditure incurred for commercial expediency. It affirmed the findings of the CIT(A) and ITAT, holding that the amount was rightly claimed as a business expenditure under Section 37(1) of the Income-tax Act. The reference was answered in favor of the assessee and against the Department.