Any payment for infringement of patent, being purely compensatory in nature, cannot be disallowed

Any payment for infringement of patent, being purely compensatory in nature, cannot be disallowed.

Case: Desiccant Rotors International Pvt. Ltd. vs. CIT, Delhi (Delhi HC)

Facts:

Section 37(1) of the Income-Tax Act-Payment made by the assessee on settlement of dispute with a company of USA being neither a fine or a penalty for a proved offence nor an amount of Compensation of an offence but is merely a sum in settlement of an action charging the assessee was denied and not proved the same cannot be rendered to be inadmissible deduction while determining the assessee’s income from business.

Section 37 of the Income-Tax Act, which is a residuary provision, allows the expenditure as deductable while computing the income on the satisfaction of the following conditions:

“(a) Expenditure must not be governed by the provisions of sections 30 to 36 of the Act;

(b) The expenditure must have been laid out wholly and exclusively for the purposes of the business of the assessee:

(c) The expenditure must not be personal in nature; and

(d) The expenditure must not be capital in nature.”

The appellant relied on the in the case of Prakash Cotton Mills (P.) Ltd  where the Supreme Court held that any payment for infringement of patent, being purely compensatory in nature, cannot be disallowed as per the law settled.

In this case , Delhi High Court was of the view that it was an expenditure which was motivated purely by commercial purpose and would be allowable under Section 37(1) of the Income-Tax Act.