Ransom for executive deductible expense of company

A division bench of the Madhya Pradesh high court has ruled that ransom paid to a dacoit to release a kidnapped director of a company is “general expense” and is deductible in income tax assessment. In this case, CIT vs Tobacco Products Ltd, a director was kidnapped in Sagar who had gone there to buy tendu leaves. The police was unable to give help. So the company paid Rs 5.5 lakh to get him back. In the income tax returns, the company, manufacturer of bidis, showed this as general expense. It was rejected by the authorities. After travelling several ladder of tribunals, the question was referred to the high court. It ruled in favour of the company stating that it was allowable deduction under Section 37(1) of the Income-tax Act. The authorities argued that payment of any amount which is prohibited by law is not business expenditure. The high court rejected this contention and stated that the director was on business tour and was staying in government guest house from where he was kidnapped. No fault could be found in the claim of the company for deducting the ransom money.