Disallowing damages u/s 37 of the Income Tax Act applies only to legal infringements, not applicable here.

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....Disallowance of damages u/s 37 - only those payments which have been made for infringement of law shall not be allowed as revenue expenditure. Since, the said payment/deduction was not towards any offence or infringement of law therefore the disallowing the same is not tenable on part of the AO.....