Business expenditure – Section 37(1) – A. Y. 2001- 02 – Payment to Port Trust by way of compensation for encroachment of land by assessee – Is business expenditure allowable u/s. 37(1)

The assessee had acquired a plot of land by way of lease from CPT. By a letter dated 28/06/2000, CPT informed the assessee that about 855.7 sq. mtrs. of land belonging to the trust adjacent to the demised plot had been encroached by the assessee, in violation of the terms and conditions of the lease agreement. The assessee paid an amount of Rs. 6,67,266/- by way of damages to the CPT, in respect of such additional land. The assessee claimed this amount as business expenditure. The Assessing Officer disallowed the claim relying on Explanation to section 37(1). The Tribunal upheld the disallowance.

On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:

“i) Payment was made by assessee, to compensate the loss suffered by port trust due to occupation of land in excess of what was demised to the assessee. Therefore, the payment did not partake the character of penalty.

ii) The payment could not partake the character of a capital expenditure, because the contention of the port trust was that the prayer for lease of the land unauthorisedly occupied could not be examined before payment of the compensation. Therefore, the payment was altogether compensatory for the benefit already received by the assessee by user of the land.

iii) Payment was an expenditure incurred wholly and exclusively for the purposes of the business and therefore, allowable as deduction u/s. 37(1). Explanation to section 37(1) was not applicable.”