Compounding fee for fire safety violations is not deductible where the payment compounds a statutory offence.

Compounding fee paid to the West Bengal Fire Services Department for violation of fire safety provisions was held not allowable as a deduction under section 37 of the Income-tax Act, 1961. The payment was made after detection of non-compliance and on pleading guilty before the competent authority, and the compounding order recorded that it related to offences under the West Bengal Fire Services Act, 1950. Because expenditure incurred for an offence or for conduct prohibited by law is barred by Explanation 1 to section 37, the payment retained its penal character and could not be treated as ordinary business expenditure. The disallowance was sustained.

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Issues: Whether the amount paid as compounding fee to the West Bengal Fire Services Department for violation of fire safety provisions was allowable as a deduction under section 37 of the Income-tax Act, 1961.

Analysis: The payment was shown from the record to have been made after detection of non-provision of fire safety measures and on pleading guilty before the competent authority. The compounding order itself recorded that the amount was payable for compounding offences under the West Bengal Fire Services Act, 1950. Expenditure incurred for the purpose of an offence or for conduct prohibited by law is barred from deduction by Explanation 1 to section 37 of the Income-tax Act, 1961. A payment made to compound a statutory offence remains penal in character and cannot be treated as ordinary business expenditure.

Conclusion: The payment was not allowable as a deduction under section 37 and the disallowance was sustained in favour of the Revenue.

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