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TMI Blog2012 (8) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... uction 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 was stated that compounding is not in the nature of penalty and as such not disallowable. 2.1.1 It was further contended that compounding fee is a necessary business expenditure in the case of the assessee since the business of the assessee is construction of flats and without regularizing the construction of the flats the same will not be sold. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake 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. The payment it was stated was as per the trade practice and is very much for the purpose of business itself. It was further contended on behalf of the assessee that the factum of payment is not in doubt; it is made as per bye-laws of the government authority; payment is merely to allow deviat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpounding 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 explanation to Section 37(1). The appellant has failed to explain as to how appellant's facts are distinguishable from facts of Mamta Enterprises. The case relied upon by appellant are based on different set of facts. Thus, addition of Rs.1,84,234/- is upheld. Most importa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 explain before him how the facts of CIT vs. Mamta Enterprises 266 ITR 356 (Kar.) relied upon by the A.O. were distinguishable. It was also observed by him that the assessee had not discharged its onus by leading any evidence or material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement 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/- (rupees eighty nine thousand nine hundred sixty only). Please remit the above mentioned compound fine by means of challan for issuing the orders on the compounding of the offence." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 since the payment as per Circular No.772 by virtue of Explanatory Note to the Amendment of section 37 is neither Hafta, protection money nor bribe as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racter 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 so far as payment of tax at the full rate is obl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch. No doubt therein extra floor was constructed without there being 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponds to S.37(1) of the Act wherein evidently the benefit of explanation to S.37(1) was not available to the Revenue or in contrast the hurdle 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 relea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be imposed. Therefore, when the appellants incurred the liability they did so as a penalty for an infraction of the law; but it cannot he said that the money which they had to pay was not paid as a penalty and in fact under 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 Cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the opinion that it was immaterial whether technically the proceedings were criminal or not. The money that was paid was paid as a penalty and it did not matter if in the information it was called a forfeiture. 5.16 The argument that there was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that as the assessee had disregarded the undertaking given and his conduct was palpably dishonest it did not constitute an allowable expenditure. Sir Lionel Leach, C.J. after ;referring to Warnes case and von Glehn's case held that the amount did not constitute an 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 disti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Courts have held that they cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which are for the purpose of enabling 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be exported it was sold at the floor price fixed by the Govt. of India. It was claimed by the assessee that it had no alternative but to sell tobacco at 20% discount. On paper the full sale price was paid by the Singapore party without any discount. The 20% of the price paid by the party was remitted back to the assessee through one Mr.S. In pursuance of the agreement the 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t regularize its extra construction and could not make any sale of the property may not be a valid argument for deciding the issue what is relevant is the wording of the specific Act the Rules and Regulations and building bye-laws of the Specific Act which denote the penalty as an infraction of law for deciding whether it is a penal offence or merely compensatory. As such the mode of recovery laid down in the Specific Act which empowered the GDA receive compounding fee would be a relevant and necessary 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under Chapter XV of the Act is not feasible without affecting structural stability, he may regularize such violations/deviations after recording detailed reasons for the same. (ii) Violation/deviation as at 6.0(i) above may be regularized only after sanctioning the modified plan recording thereon the violations/deviations and after the levy of fee prescribed by the corporation from time to time." 6. Therefore, the learned counsel submits that the authorities below have committed an error in law in understanding that the payment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that it has been described as compounding fee cannot, in any way, alter the character of the payment which payment is in the nature of penalty. 11. As it is in the nature of penalty, the law too is wellsettled to hold that it can never be an amount in the nature of expenditure which can qualify for deduction under s. 37 of the IT Act and it is for this reason, we have to dismiss this appeal. If an answer is warranted in respect of the questions referred above, we answer the same against the assessee and in favour of the Revenue. 12. The appeal is dismissed." 5.29. In the 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where facts are substantially the same. In the facts of the present case the specific provisions of the Specific Act which empowers the G.D.A. to receive compounding fee necessarily needs to be taken into consideration as such the principle laid down by the consistent judgements of the Hon'ble Karnataka High Court in the light of the provisions of KM Corporation Act need to be considered in the light of the Specific Act applicable to G.D.A. A decision is an authority for what it decides and no more. The words in a judgement are not used after weighing the pros and cons of all 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 stan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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