TMI Blog2012 (10) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained in Rule 8D(2)(ii) cannot be invoked Disallowance of misuse charges - assessee constructed commercial space in the basement which was not permissible as per master plan - misuse charges were paid in respect of the aforesaid space – Held that:- Misuse charges were also paid for illegally using the space for a period of time till the infraction was noticed by the DDA and it ordered the removal of the infraction - nature of interest on misuse charges is the same as misuse charges - Explanation-1 to section 37(1) provides inter-alia that any expenditure incurred for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business and no deduction or allowance shall be made in respect of such expenditure - this provision is clearly applicable to the case of the assessee – in favor of revenue - IT APPEAL NO. 3571 (DELHI) OF 2011 - - - Dated:- 2-3-2012 - Rajpal Yadav And K. G. Bansal, JJ. R. S. Negi for the Appellant V. K. Aggarwal for the Respondent ORDER K. G. Bansal, Accountant Member Two points have been taken by the revenue in this appeal regarding disallowance u/s 14A and disallowance of misuse charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e finding of the ld. CIT (Appeals) is that this does not mean that such companies will not declare dividend in future. For making disallowance u/s 14A, it is not necessary that all the investments must yield income in the year under consideration. The relevant consideration is the potentiality of earning income in future years. Therefore, rejecting this argument, the disallowance under Rule 8D(2)(iii), amounting to ₹ 35,97,079/-, has been sustained. 4. Before us, the ld. senior DR referred to the findings of the AO and the ld. CIT (Appeals). These findings have already been summarized by us. Our attention has been drawn towards page nos. 6, 18 and 22 of the paper book. Page 6 shows the investments made in the unquoted shares and units of the companies and mutual funds and income received therefrom. These details are reproduced below:- Name of the Company Opening Balance Closing Balance Dividend received (Rs.) (Rs.) (Rs.) Foremost Factors Ltd. (FFL) 69,146,235.00 69,146,235.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessed u/s 143(1). The ld. CIT (Appeals) has examined the bank account to ensure that there is no nexus between investment made in this year and the borrowed funds. Therefore, it is argued that no amount could be disallowed under Rule 8D(ii). It may be mentioned here that the assessee has not filed appeal against the disallowance upheld by the ld. CIT(Appeals) by invoking the provision contained in Rule 8D(2)(iii). 6. We have considered the facts of the case and submissions made before us. There is no evidence on record to suggest that any investment in shares or units has been made in this year out of borrowed funds on which interest is payable by the assessee. The ld. CIT (Appeals) has given a very specific finding that the examination of the bank account shows that such investments are out of interest-free funds available with the assessee-company. Rule 8D(2)(ii) deals with a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt in terms of the decision in the case of Maxopp Investments Ltd. (supra). The lower authorities were expected to examine whether the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee purchased two commercial plots in public auction in March, 1978. The master plan envisages that the residential premises will be constructed on second and third floors. The assessee-company protested against this policy. In the mean time, the assessee constructed the commercial centre on the plots and the space so constructed was also used for commercial purposes. The assessee accepted the demand from the DDA as finding equivalent commercial space in the vicinity would have cost more than the charges paid to the DDA. Therefore, it is argued that the expenditure was incurred for the purpose of business. The AO considered the submissions of the assessee. It has been held that the expenditure does not pertain to this year. Further, it has been held that commercial space has constructed been without the permission of the DDA which amounts to unauthorized construction. On noticing this, the DDA levied misuse charges and ordered demolition of the unauthorized construction. This point was contested for a long time. The assessee has paid the misuse charges and interest thereon in this year. There is no value addition to the building. The expenditure is also not revenue expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been held that this amount is also deductible in computing the total income. 8. In regard to the finding that the expenditure does not pertain to this year, the ld. senior DR referred to page nos. 29 and 30 of the paper book. Page no. 29 is a letter dated 08.05.2007 from the DDA. It gives the break-up of a sum of ₹ 36,58,530/- in terms of misuse charges, and interest on belated payment of conversion charges and ground rent for the two plots of land. This letter has been written in reference to assessee's letter dated 17.02.2007. On the basis of this date, it is argued that the amount had been computed prior to 17.02.2007 as the assessee had sought further clarification in its letter dated 17.02.2007. Page no. 30 is a letter dated 18.12.2007 from the DDA regarding execution of lease deed. In this letter, interest on misuse charges has been computed at ₹ 33,87,926/-. On the basis of these documents and aforesaid submissions, it is argued that the expenses are in respect of earlier period on which interest has also been levied in this year. It is argued that both these expenses are not deductible in computing the income. 9. In reply, the ld. counsel also ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is a builder and is carrying on the business of building apartments and selling them. It claimed deduction of a sum of ₹ 89,960/- paid as compounding fine to Bangalore City Corporation. The AO disallowed the same. The CIT (Appeals) allowed the deduction by holding that it is incurred in the course of business. The Tribunal upheld this order by relying on the decision in the case of CIT v. Loke Nath Co. (Construction) [1984] 147 ITR 624/17 Taxman 209 (Delhi), in which it had been held that compounding find paid by the assessee to regularize the construction of the building made in violation of building regulation is an integral part of profit earning process of the assessee. The Hon'ble Court considered the decision in the case of Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC) and Maddi Venkataraman Co. (P.) Ltd. v. CIT [1998] 229 ITR 534/96 Taxman 643 (SC). In the latter case, the Hon'ble Supreme Court observed that the assessee had indulged in transactions in violation of the provisions of the Foreign Exchange (Regulation) Act. The plea that unless it entered into such a transaction, it would have been unable to dispose off the unsold st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever came to the conclusion that the amount paid was compensation and not penalty. Thus, the deduction was allowed. The matter was agitated before the Hon'ble High Court, which mentioned that section 195 of Punjab Municipal Act ensured that the restrictions were observed by the builder. Such restrictions were enforceable by alteration, demolition or accepting a sum by way of compensation. This section does not create any penal offence. Therefore, the payment is not occasioned by infringement of any law or it is not against public policy. Therefore, the payment could not be held to be illegal. Accordingly, the deduction has been allowed. 10.3 In the case of Goldcrest Capital Markets Ltd. v. ITO [2010] 130 TTJ (Mum.) 446, it has been held that fines and penalties levied for violation of unfair trade practice specified in regulation 4.6 and rule IV(4)(e) of the NSE Rules cannot be equated with violation of a statutory rule or law. Although the working of the stock exchange is regulated by the SEBI and the Board of Directors of the NSE has nominees of the SEBI, yet violation of rules and regulations framed by such stock exchange cannot per se be considered as in violation of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... space, therefore, it can be said that the misuse charges were also paid for illegally using the space for a period of time till the infraction was noticed by the DDA and it ordered the removal of the infraction. Thus, the payment of misuse charges is for violation of master plan drawn for the development of areas under the control of DDA. The ld. counsel has admitted that the nature of interest on misuse charges is the same as misuse charges. Such conclusion is obvious for the reason that the payment to be made for misuse charges was not the expenditure incurred in the normal course of business. Explanation-1 to section 37(1) provides inter-alia that any expenditure incurred for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business and no deduction or allowance shall be made in respect of such expenditure. To our mind, this provision is clearly applicable to the case of the assessee. We also find that the decision in the case of Goldcrest Capital Markets Ltd. (supra) was rendered on totally different facts. The main distinction is that the stock exchange has not been invested with any sovereign power and, therefore, any violati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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