TMI Blog2012 (8) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... compounding fee paid to GDA. 2. That the ld.CIT(A), erred in not appreciating the fact that the payment of compounding fee was not penal in nature and incurred for business purposes only and also failed to notice the cases relied upon. It is, therefore prayed that the addition of Rs.1,48,234/- as upheld by the ld.CIT(A) may kindly be deleted. 2. The relevant facts of the case are that the assessee is a builder engaged in the construction and sale of flats who returned nil income by way of return dt. 20.3.2006 which after issuance of notice u/s 143(2). resulted in a scrutiny assessment u/s 143(3)wherein the A.O. required the assessee to explain why a sum of Rs.14,8,234/- which has been debited on account of compounding of plot no.42A on 15.10.2004 as per the account of purchase of plots should not be disallowed as per explanation to S.37(1) of the Income Tax Act, 1961. 2.1 In response to the same the assessee claimed that the compounding fees had been paid merely to regularize the extra construction as per the norms of the authority and permissible under the bye laws of the authority as per which subject to certain conditions extra constructions can be regularized. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Corporation Act, and rejected the contention of the assessee that since the Municipal Corporation Act permitted compounding of the offence, once the violation was compounded, there was no offence committed under the eye of law. The High Court held that compounding of the offence cannot take away the rigor of the aforesaid Explanation to section 37(1) in view of the expression shall not be deemed to have been incurred used in that Explanation, and that the assessee s claim was to be rejected. In view of the above, a disallowance of Rs.1,48,234/- is accordingly being made and added back to the income of the firm. (Disallowance of Rs.1,48,234/-). 3. In appeal before the First Appellate authority it was re-agitated that the payment of Rs.1,48,234/- was made to DDA towards the sanctioning of plan with deviations from the original plan as per norms of the GDA. It was urged that the nature of the payment was not penal and the expenditure incurred was not for any offence nor was it prohibited by law. The same was paid due to normal deviations. The argument put forth with was that the authority itself allows and sanctions the plan of extra construction after receipt of such fees. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d vide circular no.772 dt. 23.12.1998 para 20 that the amendment has been resorted so as to disallow expenditure which was in the nature of protection money, extortion, hafta, bribes etc. It was argued that accordingly the amendment has not changed the settled legal position as far as the compounding fee is concerned as it is not an offence in the nature of protection money, Hafta, bribe etc. Reliance was placed upon CIT vs. Chemical Constructions (2000) 243 ITR 858 (MP); Lachman Dass Mathura Dass vs CIT (2002) 254 ITR 799 (SC); CIT vs Hero Cycles Ltd. (2009) 178 Taxman 484 (P H). 3.1. Not convinced with the explanation offered the action of the AO was confirmed by the learned CIT(A) holding as under:- 6. After having carefully considered all relevant facts and circumstances of the case, my conclusions/observations are as under: (1) Regarding compounding fee: The A.O. has correctly relied upon the case law of Mamta Enterprises, which is a case after introduction of explanation to Section 37(1) and which clearly lays down that violation to building laws, may be compounded under Municipal Corporation Act, but penalty levied for such violation would fall under rigours of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed in computing the income chargeable under the head Profits and gains of business or profession . Explanation: For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made In the light of the above provision we are called upon to decide whether the CIT(A) was correct in holding that the payment of compounding fee amounts to an infraction of law or not. The A.O. has placed reliance on the judgment of the Karnataka High Court in the case of CIT vs. Mamta Enterprises (Kar) 266 ITR 356 (Kar.), wherein the Hon ble High Court has held that compounding of the offence cannot take away the rigors of the Explanation to S.37(1) in view of the expression shall not be deemed to have been incurred used in that Explanation. The reliance placed upon the various judgements in assessee s favour by the assessee were held to be not relevant in view of the clear mandate of law. The CIT(A) it is seen has confirmed the action of the A.O. as the assessee could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing into consideration the legal position in the context of the provisions of Karnataka Municipal Corporation Act, 1976 and the building regulations and bye laws thereunder. A perusal of the said judgement shows that their Lordships considering the language employed in Clause (b) of S.483 of the Karnataka Corporation Act which empowered the Commissioner to compound any offence committed in breach of the provisions of the Act, Rules, bye laws or materials which may by rules made by the Government be declared compoundable the Dy. Director of Town Planning who was the delegated authority of the Commission on the request made by the assessee by means of his order dt. 30th September, 1982 permitted the assessee to compound the offence of payment of compounding fee. The said order extracted in the judgement of the Karnataka High Court reads as under. In your letters cited above, you requested for compounding of the offences of unauthorized construction of eighth floor in two blocks in the above premises. The administrator in his proceedings under subject No.342 dated September 29,1982, as approved the proposal to compound the offence by levying a compounding fine of Rs.89,960/- (rupee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is clear and unambiguous accordingly it was held that it was not permissible for the Courts to stretch the meaning attached to the provision of law to extend the benefit to a person who violates the law or the regulations/rules made by Corporation or Municipal authorities with impunity. Accordingly they held that the expenditure cannot be treated as a loss in the business to get the benefit. It was further held that the penalty paid has ensured to the benefit of the assessee to save the additional construction put up in violation of the provisions of the Act and the bye laws framed thereunder and also the consequences of the penal provision provided under the Corporation or the Municipal law. 5.5 In view of the above categoric discussion on the position of law the relevance and importance of considering the provisions of the Specific Statute which defines the offence propose compounding etc. cannot be over emphasized. The said exercise evidently has not been undertaken. As such, the issue has to be restored for doing the needful back to the CIT(A). While doing so we consider it necessary to address various other issues which have been addressed by the assessee, namely sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermined by the Commissioner; to the latter extent the amount would partake of the character of penalty. The amount payable under section 8(2) is allowable as business expenditure under section 37(1) of the Income-tax Act, 1961, to the extent that it is compensatory in nature. 5.6.2 Their Lordships, therein after considering the relevant provisions held that the assessee should he have used the raw material for a purpose other than that specified in sub-section (1), must pay an amount to be determined as stated in sub-section (2). That amount cannot be less than the difference between the amount of tax on the sale of such raw material at the full rate and the amount at the lesser rate by reason of sub-section (1). That amount also cannot be more than one and one quarter times the amount of the tax at the full rate. Whether it should be the aforesaid minimum amount or the aforesaid maximum amount or something in between is for the Commissioner to determine, having regard to the circumstances in which such use was made. As such on a perusal of the specific provision it was held that sub-section (2) comprises both the elements of compensation and penalty. Compensation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sanctioned plan, the deciding factor/crucial factor was that such an act was defined as an offence within the meaning of section 436 of the Karnataka Municipal Corporation Act. The assessee was held to have put up the construction in violation of the building bye laws as such he was held to have committed infraction of law u/s 436 of the Karnataka Municipal Corporation Act wherein the language employed in clause (b) of section 483 of the Corporation Act empowered the Commissioner to compound the offence. Under these circumstances even though the statute permitted the assessee to compound the offence committed by it, their Lordships were of the view that Explanation to section 37 defines that the expenditure incurred for any purpose which is an offence or which is prohibited by law is not entitled to deduction. On these facts considering the specific provision it was considered that it is not possible to take a view that the provisions under the Karnataka Municipal Corporation Act allowing the compounding of an offence for the purposes of saving the offender of the law from the consequences of the commission of such an offence or violation of law should also be given the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posed by the said Explanation to the claim of the assessee was not in existence. Their Lordships by the said judgement rendered by three judges held that the amount of fine could not be said to have been paid for salvaging goods but was paid as a penalty in consequence of an illegal act on the part of the assessee and therefore was not an allowable item u/s 10 to 15. 5.11.4 The relevant facts of the case were that the assessee firm was doing the business of importing dates from abroad and selling them in India. During the relevant Accounting Year the assessee imported dates from Iraq. At the relevant time the import of dates by steamers was prohibited by two notifications dt. 12.12.1946 and 4.6.1947 but they were permitted to be brought by country craft. Goods which had been ordered by the assessee were received partly by steamers and partly by country craft. Consignments which were imported by steamers were confiscated by Customs Authorities. However the assessee was given an option to pay fine and get released the confiscated goods. The assessee paid fine and got released the goods. In its return the assessee claimed the amount of fine as a deduction on the ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 167(8) it was a penalty. Relying upon various English decisions and some High Court Judgments incorporating the principle of against the public policy , the claim of the assessee was rejected. 5.12 We may at the juncture refer to certain land mark judgments which need a mention. The words " for the purpose of such business " have been construed in Inland Revenue Commissioners v. Anglo Brewing Co. Ltd. (1925) 12 Tax Laws 803, 813 to mean " for the purpose of keeping the trade going and of making it pay ". The essential condition of allowance is that the expenditure should have been laid out or expended wholly and exclusively for the purpose of such business. 5.13 Similarly a mention has necessarily to be made of the decision in Commissioners of Inland Revenue v. Warnes Co. (1919) 2 KB 444 therein the assessees who carried on the business of oil exporters were sued for a penalty on an information exhibited by the Attorney General under the Sea Customs Consolidation Act for breach of orders and proclamations. The matter was settled by consent on the assessee agreeing to pay a mitigated penalty of 2,000 pounds. All imputations on the moral culpability of the assessees w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no moral obliquity was attributed to them and that it did not matter whether the expenditure was incurred in consequence to an infraction of law or whether it was a penalty for doing an illegal was held to be not relevant. In the words of Lord Sterndale in the said judgement at page 65 the following observation was made:- " Now what is the position here ? This business could perfectly well be carried on without any infraction of the law. This penalty was imposed because of an infraction of the law, and that does not seem to me to be, any more than the expense which had to be paid in Strong Co. v. Woodifield appeared to Lord Davey to be, a disbursement or expense which was laid out or expended for the purpose of such trade. 5.17 In the very same judgement, Warrington Lord Justice at page 569 held as under:- "It is a sum which the persons, conducting the trade have had to pay because in conducting it they have so acted as to render themselves liable to this penalty. It is not a commercial loss, and I think when the Act speaks of a loss connected with or arising out of such trade it means a commercial loss connected with or arising out of the trade." 5.18 Reference may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n expenditure falling within section 10(2)(xii). 5.21 The Madras High Court in Snethikumara Nadrar Sons vs CIT (1957) 33 ITR 138 held that payments of penalty for an infraction of law fell outside the scope of permissible deductions u/s 10(2)(xv). In that case the assessee had to pay liquidated damages which was akin to penalty incurred for an act opposed to public policy, a policy underlying the Coffee Market Expansion Act, 1942, and which was left to the Coffee Board to enforce. 5.22 Reference may also be made to the judgement of Apex Court in the case of CIT vs. Hirjee (1953) 23 ITR 427 (S.C.) which was rendered by four Judges. 5.22.1 The facts of that case would show that the assessee was prosecuted under the Hoarding and Profiteering Ordinance and was finally acquitted. The expenses spent on defending himself were claimed u/s10(2)(xv) in his assessment. It was held that the distinction between the legal expenses on a successful and unsuccessful defense was not sound and that the deductibility of such expenses under section 10(2)(xv) must depend on the nature and purpose of the legal proceedings in relation to the business whose profits are in computation and are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business. 5.24 In the judgment of the Apex Court rendered by Three Judges in the case of Abdul Aziz Shakout Brothers referred to earlier the argument was advanced that unless the penalty is of a nature which is personal to the assessee, it may be disallowed but where it is merely ordered against the goods imported it is an allowable deduction was held by their Lordships as an erroneous distinction because disbursement it was held could be deductible only if it falls within section 10(2)(xv) of the Income tax Act. Expenses which are permitted as deductions are such as are made for the purpose of carrying on the business and if a sum is paid by an assessee conducting his business because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. Their Lordships were of the view that unless it falls within the test laid down in the cases discussed by them as such they were categorically of the view that it cannot be said to be expenditure wholly and exclusively laid for the purpose of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee received the full floor price from the Singapore party and paid a sum of Rs.2,88,000/- to Mr.S who remitted the equivalent amount in Singapore Currency to the Singapore party. 5.25.2 The claim of the assessee that it had no alternative but to enter into such a transaction with a firm to dispose of the said unsold stock of inferior quality tobacco an amount of Rs.2,88,000/- was paid to Mr.S was claimed as a business expenditure was not accepted by the AO. 5.25.3 However the Tribunal allowed it. Hon ble High Court was of the view that the amount had not been repatriated in a straight forward manner but had been sent to Singapore through an illegal channel as such it was concluded that the agreement being illegal and contradictory to law could not be recognized by a Court of law and could not be treated as a transaction to be a normal incidence of carrying on the business. 5.25.4 The Apex Court held that the assessee had involved in transactions in violation of provisions of Foreign Exchange Regulate Act ( FERA for short) as such the claim of the assessee that it would have incurred a loss was held to be not a valid justification for contravention of law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary area of consideration. The legal position for payment of an amount be it termed as compounding fee or penalty is very clear, if it is an offence under the Specific Statute then the mode of regularizing the same may be held to be valid for the purpose of sale of that property but by virtue of being termed as an offence under the Income Tax Act deduction thereof cannot be claimed and if claimed cannot be allowed. The payment of compounding fee of an offence cannot be incidental to the business but if it is not an offence and is compensatory then the claim has to be allowed. In the facts of the present case this enquiry has not been done. 5.27 We may also refer to the judgment of the Apex Court in the case of Lachman Dass Mathura Dass V. CIT, 254 ITR 799 (SC) which has been heavily relied upon by the assessee wherein the decision of the Allahabad High Court in CIT vs. Lachman Dass Mathura Dass, 124 ITR 411 (Alld.) was reversed which had relied upon Saraya Sugar Mills vs CIT 116 ITR 387 (Alld.) as the said judgment had been reversed by a larger Bench of the Allahabad High Court in the case of Triveni Engineering Works Ltd. Vs. CIT 144 ITR 372 (Alld.). 5.27.1 In all thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was in the nature of a penalty. The further submission is that, the ruling of this Court rendered in the case of Mamta Enterprises (supra) is not attracted to the present case for the reason that in the case of Mamta Enterprises (supra), on facts it was found that the builder/assessee had put up 8th floor of the building without obtaining any approved plan at all. Whereas in the present case the assessee had put up construction on obtaining an approved plan from the municipal authorities and compounding fee was paid only in respect of deviations within the permissible limits upto 5 per cent of the sanctioned plan. In the light of enabling provisions of regularising such deviations had paid regularisation fee, applying the said ruling to the present facts of the case was not called for and therefore the authorities below have committed an error in law in holding that ruling covers this case also. 5.28.2 Rejecting the argument their Lordships decided the issue against the assessee on the following reasoning:- 7. We have bestowed our consideration to the submissions made at the Bar and perused the orders of the assessing authority, first and second appellate authority. 8. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the present case it is pleaded that there is a slight deviation from the original plan. The evidence in regard thereto needs verification along with the provisions of the Specific Act which empowered the Ghaziabad Development Authority to compun the offence. 5.30 Before parting we deem it necessary to mention that the above case law has been referred so as to address its applicability and relevance in the present proceedings. It is seen that the assessee has placed reliance before the authorities below and also before us on the judgements of the Delhi High Court in CIT vs Loknath Co. 146 ITR 624 (Delhi) stating that it is the judgement of the Jurisdictional High Court as such binding on us. On consideration it is seen that in view of the fact that the assessee is situated at Ghaziabad, the Jurisdictional Court would be the Hon ble Allahabad High Court and not the Hon ble Delhi High Court. Apart from that the said judgment was prior to the insertion of Explanation to section 37 as such to observation therein would even otherwise have no relevance as settled by the Apex Court in CIT vs. Sun Engineering Pvt. Ltd. 198 ITR 297 (SC), which already mandates that the judgment mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conceivable situations that may arise. They constitute just the reasoning of the Judges in a particular case, tailored to a given set of facts and circumstances. What is made relevant and binding is only the ratio decidendi. One may doubt the wisdom of attempting to trace a common ratio decidendi from divergent views expressed by different judges in support of a conclusion but it seems equally illogical to altogether ignore a clear conclusion arrived at by the majority of judges only because they arrived at that conclusion by different processes of reasoning. One would rather have though that a conclusion stands more fortified when it can be supported not on one but on several lines of reasoning. At least for an identical problem, the final answer should be the same [Ramesh Birch v. Union of India, AIR 1990 SC 560, 5821]. Similarly the argument that judgement of the Karnataka High Court should be ignored also on the ground that it is of a nonjurisdictional High Court to our minds cannot be accepted as judicial discipline demands that a judgment of a High Court being a superior forum qua the Tribunal necessarily needs to be followed and cannot be ignored. 6. Accordingly for the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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