All India Bar Examination (AIBE) 2-II Previous Year Question Papers with Answers

Practice Mode:
92.

A is late in paying the tax for income earned in his business in a particular year, and is charged interest for the period of delay. A had evaded paying tax for 2 years before that year, and a penalty is levied on him for tax evasion. A claims that he is entitled to deduction of the penalty and the interest paid when computing income from business and profession as it was an expenditure incurred wholly because of the business. Is A entitled to deduction of the penalty and interest paid by him.


Principle :

Any revenue expenditure, incurred wholly and exclusively for the purposes of business or profession, is deductible when computing income from business and profession. However, an expenditure incurred by an assessee for a purpose which is either an offence or prohibited by law is not deductible.

A: A is entitled to the deduction of the interest paid when computing his total income but not for the penalty paid.
B: A is not entitled to a deduction of either the penalty or the interest.
C: A is entitled to a deduction of both the penalty and the interest when computing his total income.
D: A is entitled to the deduction of the penalty paid when computing his total income but not for the interest paid.
E: None of the above.

The answer is: B

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Explanation

The correct option is B: A is not entitled to a deduction of either the penalty or the interest.

Explanation:

The principle mentioned in the question states that any revenue expenditure incurred wholly and exclusively for the purposes of business or profession is deductible when computing income from business and profession. However, an expenditure incurred by an assessee for a purpose which is either an offence or prohibited by law is not deductible.

In this scenario:

• A had evaded paying tax for 2 years, which is an offense and prohibited by law.
• A was charged interest for the late payment of tax, which is a result of A's failure to fulfill his tax obligations on time.


Given these facts and the principle, the penalty and interest incurred by A are not deductible because they arise from A's illegal actions (tax evasion and late payment of taxes). Expenditures related to illegal activities or offenses are not considered legitimate business expenses and are therefore not eligible for deduction.

Option B correctly reflects this principle and the situation described in the scenario.