Business expenditure: Section 37(1) While on business tour, the whole-time director of assessee-company was kidnapped by a dacoit: Ransom money paid to dacoit for releasing the director is allowable business expenditure.

The assessee-company was engaged in manufacturing and sale of bidis. ‘S’ 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, ‘S’ 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 ‘S’ from the clutches of dacoit. Ultimately after 20 days, the assessee paid certain amount by way of ransom for release of ‘S’ 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. The CIT(A) and the Tribunal allowed the assessee’s claim for deduction.

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.

The Madhya Pradesh High Court upheld the decision of the Tribunal and held as under:

“(i) Section 364A of the Indian Penal Code, 1860, provides that kidnapping a person for ransom is an offence and any person doing so or compelling to pay is liable for the punishment as provided in the section, but nowhere it is provided that to save a life of the person if a ransom is paid, it will amount to an offence. There is no provision that payment of ransom is prohibited by any law. In the absence of it, the Explanation to s.s(1) of section 37 will not be applicable in the instant case.

(ii) In the instant case, ‘S’ was on business tour and was staying at a Government rest-house, from where he was kidnapped. As he was on business tour, to get him released, if the aforesaid amount was paid to the dacoits as ransom money and because of this, he was released, the assessee claimed it a business expenditure.

(iii) The entire tour of ‘S’ was for purchase of tendu leaves of quality and for this purpose, he was on business tour and during his business tour, he was kidnapped and for his release the aforesaid amount was paid.

(iv) In these circumstances, the reasoning of the Commissioner (Appeals) and the Tribunal allowing the aforesaid expenditure as business expenditure is to be confirmed.”