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TMI Blog2014 (7) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... en the cases where the purpose of the expenditure incurred itself is unlawful on one hand and the cases where the purpose of expenditure is lawful but there is some lapse in complying with the procedural provisions for incurring such expenditure on the other. Relying upon CIT v. Dhanpat Rai & Sons [2014 (1) TMI 1086 - PUNJAB & HARYANA HIGH COURT] - the expenditure has been instantly disallowed on account of job work charges paid by the assessee to M/s Razormed Inc. - when the language of the Explanation is crystal clear and does not encompass the incurring of expenses for a lawful purpose, such as the job charges, within its ambit, it is wholly impermissible to import a further requirement in the language of the Explanation to make the otherwise lawful purpose as unlawful for lack of the prior approval of the Central Government - the 'purpose' of incurring the expenditure of job charges is neither an offence nor is prohibited by law, we fail to comprehend as to how the otherwise lawful purpose would become contingent upon obtaining or not obtaining the prior approval of the Central Government - such expenditure in itself is neither an offence nor prohibited by any law a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unding charges for the condonation of delay and hence there was no violation of law. Not convinced with the assessee's submissions, the AO opined that the facts of post facto approval and the condonation of delay by the Ministry of Corporate Affairs were not relevant because on the day of payment of such expenditure, there was no prior approval to the job charges paid to M/s Razormed Inc., which triggered the Explanation to section 37(1) of the Act. This led to the addition of job work charges amounting to Rs. 41.24 lac and the further disallowance of compounding fee for condonation of delay amounting to Rs. 6,000/-. The ld. CIT(A) echoed the assessment order on this issue. The assessee is in appeal before us only on the disallowance of job work charges and not on the disallowance of compounding fee for condonation of delay. 4. We have heard the rival submissions and perused the relevant material on record. It is observed that the disallowance of Rs. 41.24 lac under consideration has been made in the light of the Explanation to section 37(1) of the Act, which came to be inserted by the Finance (No.2) Act, 1998 with retrospective effect from 01.04.1962. The disallowance has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as aforesaid. (3) Notwithstanding anything contained in sub-sections (1) and (2) a director, relative, firm, partner or private company as aforesaid may, in circumstances of urgent necessity, enter, without obtaining the consent of the Board, into any contract with the company for the sale, purchase or supply of any goods, materials or services even if the value of such goods or cost of such services exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract; but in such a case, the consent of the Board shall be obtained at a meeting within three months of the date on which the contract was entered into. (4) . (5) If consent is not accorded to any contract under this section, anything done in pursuance of the contract shall be voidable at the option of the Board. (6) .. 5. Admittedly, the assessee's paid up share capital is more than Rs. 1 crore. As such, the case falls within the purview of the proviso to sub-section (1), which prescribes that no payment to related persons etc. can be made except with the previous approval of the Central Government. However, it is significant to note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view point of the Revenue that the case of the assessee is caught within the mischief of the Explanation to section 37(1) of the Income-tax Act, 1961. At this juncture, it would be befitting to note the prescription of the Explanation to section 37(1), as under : - 'Explanation. - For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.' 7. A cursory look at the above Explanation to section 37(1) of the Act makes it palpable that any expenditure incurred by the assessee, for any purpose which is an offence or is prohibited by law, shall not be deemed to have been incurred for the purpose of business and resultantly no deduction shall be allowed. 8. Reverting to the facts of the extant case, it is noticed that the authorities below have proceeded to make and uphold the disallowance in terms of Explanation to section 37(1) of the Act by observing that since the payment of job work expenses was made w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee sold the flat and invested the net sale proceeds in a scheme eligible u/s.54E of the Act and accordingly declared Nil income under the head 'Capital gains'. The Assessing Officer opined that since the block of building ceased to exist on account of sale of flat during the year, the written down value of the flat was liable to taken as cost of acquisition u/s.54E of the Act. He further held that since the assessee had availed depreciation on such asset which was otherwise long term capital asset, the deeming provision u/s.50 would apply and it would be treated as capital gain on the sale of short term capital asset and resultantly no benefit u/s.54E could be allowed. When the matter came up before the Hon'ble Bombay High Court, it noted that sub-sections (1) and (2) of section 50 contain a deeming provision and such fiction is restricted only to the mode of computation of capital gain contained in sections 48 and 49 and hence it did not apply to other provisions. Consequently the assessee was held to be eligible for exemption u/s.54E in respect of capital gain arising out of the capital asset on which depreciation was allowed. On an appraisal of the above judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing its scope to also bring within its sweep the cases where the purpose of expenditure is neither an offence nor is prohibited by law, but there is a breach of some procedural provision necessary for incurring such otherwise lawful expenditure. What, therefore, turns out is that it is the expenditure alone which should be tested on the touchstone of the mandate of Explanation to section 37(1) and nothing more than that. If the expenditure itself is for a valid and lawful purpose, then, there can be no question of any disallowance. The words 'for any purpose' set in place by the legislature with the 'expenditure' on the one hand and 'which is an offence or which is prohibited by law' on the other, make it abundantly clear that if the purpose of expenditure, which is sought to be disallowed is not an offence or not prohibited by law, the same cannot be brought within the scope of Explanation to section 37(1) of the Act. If, on the other hand, the purpose of expenditure is an offence or is prohibited by law, the same cannot escape the clutches of the Explanation. The natural corollary which thus follows is that if the 'purpose' of expenditure is not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by law, the same is hit by Explanation to section 37(1). 12. As against that and adverting to the facts of the instant case, we find that the expenditure which has been instantly disallowed is a sum of Rs. 41.24 lac on account of job work charges paid by the assessee to M/s Razormed Inc. It is not the case of the Revenue and naturally cannot be that the payment of job work charges is an offence or is prohibited by law. What the authorities below have taken into consideration while making the disallowance is that since there was no prior approval from the Central Government, the expenditure of job work charges became disallowable. We fail to understand as to how the payment of job work charges can by any stretch of imagination be construed as offence or prohibited by law simply because the necessary permission from the Central Government was obtained belatedly. It has been noticed above that the inquiry should stop on determining the immediate purpose of expenditure, which in the present case is job work done for the assessee. The first question to be asked is whether such payment of job charges is an offence? The answer is obviously in negative. The second question is whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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