Compensatory CRR and SLR shortfall payments were held deductible as business expenditure, despite being booked as a provision.

Payment made to the Reserve Bank of India for shortfall in Cash Reserve Ratio and Statutory Liquidity Ratio was treated as compensatory rather than penal, so it qualified as deductible business expenditure. The tribunal relied on jurisdictional precedent and held that the liability had arisen and crystallised during the year. The fact that part of the claim was booked as a provision did not affect deductibility. The disallowance was therefore not sustainable.

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Issues: Whether the amount paid to the Reserve Bank of India for shortfall in maintenance of Cash Reserve Ratio and Statutory Liquidity Ratio, including the provision created for that liability, was deductible as business expenditure and not disallowable as a penalty.

Analysis: The liability for non-maintenance of Cash Reserve Ratio and Statutory Liquidity Ratio was treated as compensatory in nature and not as a penalty for infraction of law. The claim was supported by jurisdictional precedent holding such payment to be allowable as business expenditure. The fact that part of the amount was reflected as a provision did not detract from the allowance where the liability had arisen and crystallised during the year.

Conclusion: The deduction was allowable and the disallowance was not sustainable.

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