In ITA No.3218/Mum/2022- ITAT- ITAT (Mumbai) remands Diva Exports' Appeal; directs CIT(A) to consider Delhi High Court's ruling in Northern India Chemical Distributors Ltd. case and Explanations in Section 37(1) of Income Tax Act, in deciding the issueMembers Amit Shukla (Judicial) & Padmavathy S. (Accountant) [08-05-2023]

Read Order: Diva Exports Pvt. Ltd v. Deputy Commissioner of Income Tax9(3)(1)

Chahat Varma

New Delhi, May 10, 2023: The Mumbai bench of the Income Tax Appellate Tribunal while hearing an appeal filed by Diva Exports Pvt. Ltd. (appellant), has remanded the issue back to the CIT(A) to determine under which specific provisions of the US law the violation by the appellant has occurred and to ascertain whether the payments made by the assessee were compensatory or penal in nature. The CIT(A) has further been directed to consider the ratio laid down by the Hon'ble Delhi High Court in the case of Northern India Chemical Distributors Ltd., Delhi v. Commissioner of Income Tax Delhi (Central) [LQ/DelHC/2000/1151] and the provisions of Explanation 1 read with Explanation 3 to section 37(1) of the Income Tax Act while deciding the issue on its merits.Bottom of Form

The appellant had contended that the payment made was not for any violation of law, but rather related to a dispute arising from a copyright issue. They argued that the resulting loss incurred was in the course of business and should be allowed as a deduction under section 37(1) of the Act. However, the CIT(A) held that the payment made by the assessee was penal in nature and not compensatory. According to the CIT(A), penalties paid for violating the law in the course of conducting business cannot be considered deductible expenses. Therefore, the CIT(A) upheld the disallowance made by the Assessing Officer.

The bench of Amit Shukla (Judicial) and Padmavathy S. (Accountant) observed that according to Explanation 1 and Explanation 3 of section 37(1) of the Income Tax Act, if an expenditure is incurred for a purpose that is deemed as an offense or is prohibited by any law in force in India or outside India, it shall not be considered as incurred for the purpose of business or profession and accordingly no deduction shall be allowable.

The bench opined that the lower authorities did not provide a specific finding regarding the provisions of US law under which the appellant had violated, thereby invoking the explanation to section 37(1) of the Income Tax Act.