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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Business Restructuring

A company pays Rs 4,00,000 to compound an offence under a law in force in India, in order to avoid prosecution. How is this treated for computing business income under the Income-tax Act, 2025?

The Rs 4,00,000 is not deductible. Expenditure incurred for compounding an offence under any law is treated as expenditure for a purpose that is an offence or prohibited by law, and therefore falls outside wholly and exclusively business expenditure under section 34.

  1. ADeductible in full as an ordinary business expense
  2. BDeductible only in five equal annual instalments
  3. CNot deductible, as it is expenditure for a purpose that is an offence or prohibited by law, which includes compounding an offenceCorrect
  4. DDeductible to the extent of 50% as it avoids greater loss

Explanation

Section 34(2)(a) excludes expenditure for a purpose which is an offence or prohibited by law, and section 34(3)(c) expressly includes expenditure for compounding an offence under any law. No instalment or partial deduction rule exists.

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