a)The Assessing Officer (‘AO’) noticed that the assessee had made payment of job work charges to a related party without obtaining prior approval of the Central Government in accordance with the provisions of section 297 of the Companies Act, 1956.
b)He, accordingly, made additions on the ground that Explanation to Section 37(1) was triggered as on the day of payment of such expenditure there was no prior approval of Central government.
c)On appeal, the CIT(A) sustained the disallowance. The aggrieved-assessee filed the instant appeal.
The Tribunal held in favour of assessee as under:
1)The offence or prohibition referred to in the Explanation to section 37(1) had to be judged with reference to the 'purpose' of the expenditure on a standalone basis divorced from the fulfillment of procedural formalities attached with it and necessary for the incurring of such expenditure.
2)The Explanation to section 37(1) provided for disallowance of any expenditure incurred for 'any purpose’, which was either an offence or prohibited by law. If, however, the purpose of the expenditure was neither to commit an offence nor any law prohibited it, then there could be no question of disallowance.
3)If the expenditure was otherwise lawful and neither amounted to offence nor any law prohibited it, but the procedural provisions attached to it were not complied with, no doubt irregularity would creep in, but such irregularity would not make the expenditure itself as unlawful so as to be brought within the scope of the Explanation to sec. 37(1). – JAI SURGICALS LTD. V. ACIT  46 taxmann.com 246 (Delhi - Trib.)