Recently, the ITAT Delhi Bench stated that the offence or prohibition under law referred to in Explanation to section 37(1) should be judged with reference to the ‘purpose’ of the expenditure on a standalone basis. In simple words, the investigation should be carried out to see the object and consideration for the expenditure incurred. If, however, the purpose of the expenditure is neither to commit an offence nor is prohibited by any law, then there can be no question of disallowance. To put it in simple words, if the expenditure is otherwise lawful and neither amounts to offence nor is prohibited by law, but the procedural provisions attached for incurring it are not complied with, no doubt irregularity will creep in, but such irregularity would not make the expenditure itself as unlawful so as to be brought within the scope of the Explanation.Lawful expenditure will not be disallowed U/S 37(1). Facts of the case: The assessee is engaged in the business of manufacture and export of surgical blades. On an observations by auditor, it was been noticed that the Central government approval of contract for sale, purchase of blades and scalpels and for getting job work done from M/s Razormed INC. (a partnership concern in which directors of the company are interested as partners) had expired on 01.04.2007 and the company continued to make transactions their under without renewal approval from Central Government. Subsequent to the closure of financial year the company has got necessary approval from Central Government for the period 06.04.2009 to 31.03.2012 offence relating to the period 01.04.2007 to 05.04.2009 has been compounded by the Company Law Board on an application made by the Company in this respect. On being called upon to explain as to why such job work charges be not disallowed in accordance with the provisions of Explanation to section 37(1) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’), the assessee submitted that the post facto approval for the transactions with the related parties undertaken during the year, was obtained from the Company Law Board on payment of compounding charges for the condonation of delay and hence there was no violation of law. Not convinced with the assessee’s submissions, the AO opined that the facts of post facto approval and the condonation of delay by the Ministry of Corporate Affairs were not relevant because on the day of payment of such expenditure, there was no prior approval to the job charges paid to M/s Razormed Inc., which triggered the Explanation to section 37(1) of the Act. This led to the addition of job work charges amounting to Rs. 41.24 lac and the further disallowance of compounding fee for condonation of delay amounting to Rs. 6,000/-. The ld. CIT(A) echoed the assessment order on this issue. The assessee, thus, went for an appeal before ITAT on the disallowance of job work charges. It was held that: As against that and adverting to the facts of the instant case, ITAT stated that the expenditure which has been instantly disallowed is a sum of Rs. 41.24 lac on account of job work charges paid by the assessee to M/s Razormed Inc.  ITAT explained that “It is not the case of the Revenue and naturally cannot be that the payment of job work charges is an offence or is prohibited by law. What the authorities below have taken into consideration while making the disallowance is that since there was no prior approval from the Central Government, the expenditure of job work charges became disallowable. We fail to understand as to how the payment of job work charges can by any stretch of imagination be construed as offence or prohibited by law simply because the necessary permission from the Central Government was obtained belatedly. It has been noticed above that the inquiry should stop on determining the immediate purpose of expenditure, which in the present case is job work done for the assessee. The first question to be asked is whether such payment of job charges is an offence? The answer is obviously in negative. The second question is whether such payment of job charges is prohibited by law? Again the answer is in negative because no law prohibits the payment of job work charges in a manufacturing unit. When the language of the Explanation is crystal clear and does not encompass the incurring of expenses for a lawful purpose, such as the job charges, within its ambit, it is wholly impermissible to import a further requirement in the language of the Explanation to make the otherwise lawful purpose as unlawful for lack of the prior approval of the Central Government. As the ‘purpose’ of incurring the expenditure of job charges is neither an offence nor is prohibited by law, we fail to comprehend as to how the otherwise lawful purpose would become contingent upon obtaining or not obtaining the prior approval of the Central Government. Since such expenditure in itself is neither an offence nor prohibited by any law and there is a valid and lawful quid pro quo for the same, we are disinclined to uphold the view canvassed in the impugned order.” Thus, the appeal was allowed by the ITAT and judgement was given in favour of the assessee.   ITR filing for F/Y 2013-14 has started. 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