1984 (1) TMI 53 - HC - Income Tax

Summary

Issues Involved:
1. Nature of the payment of Rs. 4 lakhs by the assessee.
2. Whether the payment is a permissible deduction in arriving at the profits of the business.

Summary:

Issue 1: Nature of the Payment of Rs. 4 Lakhs by the Assessee
The Tribunal was asked to determine if the amount of Rs. 4 lakhs paid by the assessee was a penalty for infractions of municipal laws or bye-laws. The facts revealed that the assessee, a partnership firm, exceeded the permissible floor area during the construction of a building. The New Delhi Municipal Committee (NDMC) initially imposed a penalty of Rs. 4 lakhs but later rescinded the resolution. The assessees paid the amount to get the revised plans approved and avoid demolition. The Tribunal found that the payment was not a penalty but a "compensation" for deviations from the sanctioned plan. The Tribunal concluded that the payment was made on grounds of commercial expediency and was necessary for the business of constructing and selling flats.

Issue 2: Permissible Deduction in Arriving at the Profits of the Business
The Tribunal held that the payment of Rs. 4 lakhs was a permissible deduction u/s 28 of the Income-tax Act, 1961. The Tribunal opined that the payment was not a penalty for infraction of law but a compensation for obtaining revised plan approval. The Tribunal reasoned that the expenditure was incurred wholly and exclusively for the purpose of the business, to preserve the construction business and avoid demolition. The High Court upheld this view, stating that the payment was vital for the assessee's business and was made to save the building from demolition. The Court also noted that the penalty for disobedience u/s 195 of the Punjab Municipal Act, 1911, does not create a penal offence but provides for enforcing statutory restrictions. The Court concluded that the payment was a commercial loss and a permissible deduction, as it was incurred to carry on the business and earn profits.

Conclusion:
The High Court answered the reference in favor of the assessee, stating that the amount of Rs. 4 lakhs was not a penalty for infractions of municipal laws but a permissible deduction in arriving at the profits of the business. The Court emphasized that the expenditure was incurred for the purpose of carrying on the business and was necessary to preserve the business assets. The reference was answered in the affirmative, with costs awarded to the assessee.