The main legal point established in the judgment is that the payment of ransom can be considered a business expenditure under Section 37(1) of the Income-tax Act, 1961 if it is incurred for commercial expediency and to facilitate the carrying on of the business of the Assessee.

Krishn Kumar Lahoti, J.

1. This is a reference by the Income Tax Appellate Tribunal, Jabalpur in R.A. No. 20(Jab)1995 by which the Tribunal has referred following question for the answer of this Court.

Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 5,50,000/-paid as ransom money to the kidnappers of one of the Directors was an allowable deduction under Section 37(1) of the Income-tax Act, 1961

2. Facts of the case are that the Assessee is a private limited company The main income of the company was from manufacturing and sale of bidis. Sukhnandan Jain was a whole time Director of the Assessee company. He was looking after the purchase, sales and manufacturing of bidis.

3. On 5.8.1987 Sukhnandan Jain had gone to Sagar for purchase of tendu leaves. On the same day, he was kidnapped for ransom by a dacoit gang headed by Raju Bhatnagar. Immediately complaint and FIR were lodged with Sagar Police. The Assessee awaited the action of the police. The police were unsuccessful to recover Sukhnandan Jain from the clutches of dacoit. Ultimately a sum of Rs. 5,50,000 was paid by way of ransom for the release of Sukhnandan Jain on 27.8.1987. On 28.7.1987 itself Sukhnandan Jain was released by the dacoits.

4. The Assessee claimed this amount of Rs. 5,50,000 under the head of 'General Expenses' and claimed deduction thereof. 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. On appeal, the C.I.T.(A) allowed the claim of the Assessee. The department preferred second appeal before the I.T.A.T. The I.T.A.T confirmed the finding of the C.I.T.(A) and dismissed the appeal of the Department. Thereafter the Department moved an application before the Income Tax Appellate Tribunal, Jabalpur for referring the matter under Section 256(1) of the Income tax Act to this Court which was allowed by the Tribunal and present reference has been made on 8th January,1998.

5. The learned Counsel appearing for the Revenue submitted that amount of ransom could not have been claimed by way of expenditure as the Explanation of Sub-section (1)of Section 37 of the Income-tax Act, 1961 prohibits such expenditure. It is submitted that the payment of any amount which is prohibited by law is not a business expenditure and it cannot be allowed as an expenditure.

Stating aforesaid, it was submitted by Shri Lal, appearing for the Department, that this reference may be answered in favour of Revenue.

6. Shri J.N. Purohoti, the learned Senior Advocate, appearing as amicus curiae, and Shri A.K. Shrivastava supported the orders passed by the CITA and ITAT and submitted that payment of ransom is an expenditure. If the aforesaid amount was paid to the dacoits to get Sukhnandan Jain released, who was on business tour, working as Director of the Company, the aforesaid amount was rightly claimed as an expenditure of business. It is insisted that at the relevant time, Sukhnandan Jain was on a business tour and for this purpose, he was staying at a Govt. Rest House at Sagar from where he was kidnapped..

Reliance is placed to the Apex Court judgment in Sassoon J. David and Company P. Ltd. v. Commissioner of Income-Tax, Bombay 118 ITR 261 and 157 ITR 212 Calcutta High Court in the case of Commissioner of Income-Tax West Bengal, Calcutta v. Karam Chand Thapar and brothers (P) Ltd. It is submitted that the reference may be decided in favour (3) of the Assessee. They have also placed reliance to the Full Bench judgment of this Court in Addl. Commissioner of Income-Tax v. Kuber Singh Bhagwandas 118 ITR 379.

7. To appreciate the rival contentions of the parties, it would be appropriate if the findings recorded by the Income Tax Appellate Tribunal in order dated 19th September, 1990 and the Commissioner of Income tax (Appeal) in order dated 23rd Feb. 1995 are referred.

8. The Commissioner of Income tax (Appeals)