WHETHER RANSOM PAID TO A CRIMINAL GANG TO RESCUE A KIDNAPPED DIRECTOR BE ALLOWED AS BUSINESS EXPENDITURE?

 WHETHER RANSOM PAID TO A  CRIMINAL GANG TO RESCUE A KIDNAPPED DIRECTOR BE ALLOWED AS BUSINESS EXPENDITURE?

Madhya Pradesh HC held ransom paid to save a director’s life be allowed as business expenditure.

CIT vs Khemchand Motilal Jain, Tobacco Products (P) Ltd.

FACTS OF THE CASE

The assessee-company was engaged in manufacturing and sale of bidis. ‘A’ was a whole-time director of the assessee-company and was looking after the purchase, sales and manufacturing of bidis. During his business tour to Sagar for purchase of tendu leaves, ‘A’ was kidnapped by a dacoit for ransom.

The assessee lodged complaint with the police and awaited the action of the police, but the police was unsuccessful to recover ‘A’ from the clutches of dacoit.

Ultimately after 20 days, the assessee paid Rs 50 lacs by way of ransom for release of ‘A’ and got him released. The assessee claimed deduction of that amount as business expenditure.

The Assessing Officer disallowed the claim of the assessee on the ground that the ransom money paid to the kidnappers was not an expenditure incidental to business.

However, the CIT(A) and the Tribunal allowed the assessee’s claim for deduction.

APPEAL

On appeal by the Revenue, the Revenue contended that the amount of ransom could not have been claimed by way of expenditure as the Explanation to s.s(1) of section 37 prohibits such expenditure.

YES BY MADHYA PRADESH HIGH COURT

However, the Madhya Pradesh High Court upheld the decision of the Tribunal.

HIGH COURT OBSERVED THE FOLLOWING

COMMERCIAL EXPEDIENCY

The director was on a business tour for the purpose of purchasing raw materials. Paying for his safety was seen as necessary to preserve the "business asset" (the director's expertise and life) and ensure the continuity of business operations.

SECTION 37 OF THE INDIAN INCOME TAX ACT

Section 37 of the Indian Income Tax Act allows deductions for legitimate business expenses but prohibits deductions for expenses that are personal, capital in nature, or incurred for illegal purposes, fines, bribes, protection money.

NOT AN OFFENCE

While kidnapping is a crime under the Indian Penal Code (Section 364A), the High Court observed that paying ransom to save a life is not prohibited by any law, nor is it defined as an offence.

LAST RESORT:

In the Khemchand case, the Court noted that the company first approached the police and only paid the ransom after official efforts failed.

KEY TAKEAWAY

The court's logic was that "wholly and exclusively for the purpose of business" includes expenses incurred out of commercial expediency. If a director is kidnapped while performing business duties, the company's decision to pay for their release is a business decision to protect its human capital.

R V SECKAR , FCS, LLB 79047 19295