IT : The offence or prohibition under law referred to in Explanation to section 37(1) should be judged with reference to the 'purpose' of the expenditure on a standalone basis divorced from the fulfilment or otherwise of the procedural formalities ( for example requirements of Companies Act like Board's consent, general body approval, Central Govt's approval) attached with and necessary for the incurring of such expenditure.
• When we turn to the language of the Explanation to sec. 37(1), which is a deeming provision, it is amply borne out that it talks of disallowing any expenditure incurred by an assessee for 'any purpose' which is either an offence or prohibited by law.
• So what is contemplated for disallowance is an 'expenditure' incurred 'for any purpose which is either an offence or which is prohibited by law'.
• When we consider the mandate of the Explanation in the light of the fact that it is a deeming provision, there remains no doubt whatsoever that the inquiry to determine the applicability or otherwise of the Explanation is restricted to ascertaining the purpose of the expenditure.
• In simple words, the investigation should be carried out to see the object and consideration for the expenditure incurred.
• If the purpose of the expenditure is either an offence or is prohibited by law, then it would suffer disallowance.
• If, however, the purpose of the expenditure is neither to commit an offence nor is prohibited by any law, then there can be no question of disallowance.
• It means that the offence or prohibition under law should be judged with the 'purpose' of the expenditure on a standalone basis divorced from the fulfilment or otherwise of the procedural formalities attached with and necessary for the incurring of such expenditure.
• To put it in simple words, if the expenditure is otherwise lawful and neither amounts to offence nor is prohibited by law, but the procedural provisions attached for incurring it are not complied with, no doubt irregularity will creep in, but such irregularity would not make the expenditure itself as unlawful so as to be brought within the scope of the Explanation.
• At the cost of repetition, the Explanation, being a deeming provision, is required to be strictly followed as per its express language and not beyond that.
• As its language talks of disallowing any expenditure for any purpose which is an offence or which is prohibited by law', we cannot do violence to the language by expanding its scope to also bring within its sweep the cases where the purpose of expenditure is neither an offence nor is prohibited by law, but there is a breach of some procedural provision necessary for incurring such otherwise lawful expenditure.
• What, therefore, turns out is that it is the expenditure alone which should be tested on the touchstone of the mandate of Explanation to section 37(1) and nothing more than that.
• If the expenditure itself is for a valid and lawful purpose, then, there can be no question of any disallowance.
• The words 'for any purpose' set in place by the legislature with the 'expenditure' on the one hand and 'which is an offence or which is prohibited by law' on the other, make it abundantly clear that if the purpose of expenditure, which is sought to be disallowed is not an offence or not prohibited by law, the same cannot be brought within the scope of Explanation to section 37(1) of the Act. If, on the other hand, the purpose of expenditure is an offence or is prohibited by law, the same cannot escape the clutches of the Explanation.
• The natural corollary which thus follows is that if the 'purpose' of expenditure is not to commit an offence or is otherwise not prohibited by law, then any breach of some procedural statutory provision necessary to be complied with before incurring such expenditure, would not per se convert the otherwise lawful purpose into an offence or prohibition under law so as to attract the wrath of the Explanation. A line of distinction needs to be drawn between the cases where the purpose of the expenditure incurred itself is unlawful on one hand and the cases where the purpose of expenditure is lawful but there is some lapse in complying with the procedural provisions for incurring such expenditure on the other.
• Whereas the disallowance will be called for in terms of the Explanation to section 37(1) in the first set of cases where the very 'purpose' of the expenditure incurred is unlawful, the second set of cases will escape the mischief of the Explanation because the 'purpose' of the expenditure is not unlawful.
• The crux of the matter is that the 'purpose' of the expenditure incurred should be viewed in isolation unbothered by anything else for determining whether or not the Explanation is attracted.
Prarthana Jalan
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