a) Assessee was using pirated version of Microsoft software. This resulted in violation of Copyright Act and loss of business of Microsoft Corporation. Microsoft filed civil suit against assessee.
b) The suit was settled in lieu of payment of compensation to Microsoft Corporation and assessee debited the compensation amount as business expenditure.
c) Assessing Officer (AO) rejected such claim stating that expenditure was incurred in violation of Copyright Act thus, explanation to section 37(1) would be attracted.
d) The Commissioner (Appeals) affirmed the order of the AO. Aggrieved-assessee filed instant appeal before Tribunal.
The Tribunal held in favour of assessee as Under:
1) Use of pirated software by the assessee which is the property of Microsoft Corporation admittedly, resulted in loss of business of Microsoft Corporation.
2) There was compromise entered into between the parties for payment of compensation for loss of business and also covering the cost of litigation.
3) The question which arises before the Tribunal was whether the payment made pursuant to the said compromise was for infraction of law or whether it was wholly and exclusively incurred for the purpose of business.
4) The amount which had been agreed to be paid to Microsoft Corporation was on account of contractual liability and was not the case of payment of any penalty.
5) Payment of penalty could not arise when there was an understanding between two private parties. As far as payment which is prohibited by law is concerned, then the same refers to speed money, hafta money, etc., but the same is not to be applied in cases where one party agreed to compensate the other party for loss of its business
6) Since, impugned amount paid to Microsoft was not penalty but it was on account of contractual liability, same would be allowed as business expenditure.  77 taxmann.com 284 (Pune - Trib.)