Offence settlement cost not allowed as business deduction

MUMBAI: The tax laws are clear that any expenditure incurred by a taxpayer which is an offence, or which is prohibited by law will not be allowed as a deduction from business income. The Budget proposals extend it. Now, any expenditure incurred by a taxpayer to 'settle proceedings initiated in relation to a contravention under any law (as notified)' will not be allowed as a business deduction.
Deduction of an expenditure lowers business profits and consequently results in a lower tax outflow. Rahul Charkha, partner, Economic Laws Practice, said, "In the case of Desiccant Rotors International, the taxpayer-company claimed a business deduction relating to settling a patent infringement dispute with a customer. The Delhi high court held that the payment was compensatory and not a penalty, as it arose from a settlement to compensate for losses incurred by the customer due to patent infringement, and hence was allowable."
"Similarly, courts have held that the decision to settle the dispute is based on commercial expediency and business interests. It is to ensure that the taxpayer is able to carry out its business operations without interruption," added Charkha.