Business expenditure- S. 37 of I. T. Act, 1961- A. Y. 2003-04- Fines and penalties- Penalty charges paid to Pollution Control Board for failure to install pollution control equipment at factory premises- Is expenditure incurred for compensating damage caused to environment- Payment according to “polluter pays” principle- Compensation for purpose of business

For the A. Y. 2003-04, the assessee debited in the profit and loss account the penalty charges paid to the Pollution Control Board for non installation of pollution control equipment at the factory premises. The Assessing Officer disallowed the expenditure which was upheld by the Tribunal.

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

“i) The payment made by the assessee was for the purpose of compensating the damage to the environment and this compensation was recovered on the “polluter pays” principle adopted by the Organization for Economic Co-operation and Development, which was judicially recognised.
ii)      It was not the case that the business pursued by the assessee was illegal. The compensation was paid because the assessee had failed to install the pollution control device within the time prescribed. Therefore, the penalty payment made by the assessee was not hit by Explanation 1 to section 37 of the Income-tax Act, 1961. The payment was undoubtedly for the purpose of business or was in consequence of business carried on by the assessee and was thus covered by section 37 of the Act. The question is answered in favour of the assessee.”