Scope of “expenditure incurred for any purpose, which is an offence or which prohibited by law’ as per Section 37 of the Income Tax Act, 1961

Scope of “expenditure incurred for any purpose, which is an offense or which prohibited by law’ as per Section 37 of the Income Tax Act, 1961″

Explanation 1 of Section 37(1) of the Income Tax Act, 1961 (the Act) provides that if any expenditure is incurred by an assessee for any purpose, which is an offence or which is prohibited by law, shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure while computing the income chargeable under the head Profit and Gains of Business or Profession”.

By Finance Bill, 2022, Section 37(1) is sought to be amended by insertion of new Explanation 3 to further clarify that the expression “Expenditure incurred by an assessee for any purpose, which is an offence or which is prohibited by law” under Explanation 1 shall include and shall be deemed to have always included the expenditure incurred by an assessee either for any purpose which is an office under or which is prohibited by any law for the time being in force, in India or outside India or to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct of such person; or to compound an offense under any law for the time being in force, in India or outside India.

Appreciably, proposed amendment seek to amplify the scope of “expenditure incurred for any purpose, which is an offense or which prohibited by law”. Recently, the Hon’ble Supreme Court of India while disposing off Special Leave Petition (Civil) No. 23207 of 2019 inter alia drawing reference from various statues held that the terms ‘offense’ or ‘prohibited by law’ as used under section 37 of the Act, contain within their ambit all such activities that are illegal, prohibited by law and punishable.