04 August 2011
Penalty paid is not compensatory in nature and cannot be claimed as allowable business expenditure. Explanation to Section 37 of IT Act read as follow "Explanation.—For the removal of doubts, it is hereby declared that any expenditure 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.]”
In your case penalty imposed by Enforcement department is not allowable business expenditure and A/Cting head of an expenditure doesnot change the status of allowability/disallowability.
04 August 2011
Book the amount under the head "penalty" for accounting purpose and disallow under section 37 of the income tax Act,1961 for the purpose of income tax computation.
04 August 2011
Well Shruti, No director will reimburse to Compnay for any penalty paid for Company's busness purpose even though the same has been imposed on directors. Further, there are many items of P & L which is not allowed as allowable expenditure under Income Tax Act. Simply take the example of "Income tax paid". It will be there in profit & Loss Account of the Company. But while calculating the Profit for Income tax purpose we just add the expenditures which are not allowed for IT purpose.
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