TMI Blog1984 (1) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... e Punjab Municipal Act, 1911. The assessees are a partnership firm formed on January 1, 1967, for the purpose of construction of a multi-storeyed building called as " Himalaya House " at 23, Curzon Road, New Delhi, and for the purpose of selling the major portions of the said building in the form of flats to various customers. The construction of the building was started in June, 1967. According to the plan, sanctioned by the New Delhi Municipal Committee, originally the building was to consist of 13 storeys. According to the byelaws of the New Delhi Municipal Committee the floor area of the first floor could cover 50% and from 2nd floor upwards only 35%. The assessees, however, exceeded the permissible floor area of the second floor and in place of 35% covered 50%. On March 9, 1970, the assessees submitted a fresh plan for permission to construct only 12 storeys in place of 13 storeys sanctioned in the original plan on March 24, 1967, in view of the fact that there was excess construction in the second floor. In the revised plan which was submitted on March 9, 1970, the total floor area of 12 storeys amounted to about 1,72,000 sq. ft. which was less than the total floor area of 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruction after that cannot be accepted without a proper check. The only evidence produced by the party is that one N.D.M.C.'s Inspector had reported in July, 1969, that the building was ready except fittings of windows, etc. Considering all the factors carefully, the Plans Sub-Committee recommends that the irregularities (including the additional coverage on the 2nd floor even though the same (is) within the permissible coverage Floor Area Ratio) be condoned and the revised plans be approved subject to (a) payment of an ad hoc penalty of Rs. 4 lakhs; (b) undertaking from the party that they would not claim any additional Floor Area Ratio in lieu of their deletion of the top floor proposed in the original plan. To this the party has also agreed. The occupation certificate has already been sanctioned by the Plans Sub-Committee in its meeting held on March 21, 1970. The case is laid before the Committee for consideration. " On the same date, i.e., April 7, 1970, the assessees were informed about the recommendations of the Plans Sub-Committee. The assessees agreed to pay the composition fee of Rs. 4 lakhs, but claimed that they met the President of the New Delhi Munic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and so it is under a duty to issue completion certificate as well as an occupation certificate. The New Delhi Municipal Committee by compounding the deviation has estopped itself from ordering prosecution of the petitioners. A writ must, therefore, issue restraining them from prosecuting the petitioners in respect of Himalaya House or the deviations therein. With regard to the prayer of the petitioners to issue a similar writ against the Delhi Development Authority, it must be rejected inasmuch as I have already held that the Delhi Development Authority has no power to prosecute in non-development areas." The New Delhi Municipal Committee's Letters Patent Appeal was dismissed by a Division Bench of this court. The first year's accounts were closed on March 31, 1968. The construction period, therefore, falls in account years relevant to assessment years 1968-69 to 1971-72. As the work of construction of the building progressed, the assessee received instalments of the agreed price in advance from the customers who had booked their flats. The flats were finally handed over to the customers in the previous year relevant to the assessment year 1971-72. In the returns filed, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was further urged that in April, 1970, when the penalty of Rs. 4 lakhs had to be paid, the building was complete for occupation and the buyers of the flats were pressing hard for handing over of the possession because, the covered area would fetch a monthly rent of Rs. 3 lakhs. The other alternative for the assessees, it was contended, was to get the entire building demolished because there was an excess floor area of 7,000 sq. ft. on the second floor, according to the original sanctioned plan. If the building had been demolished, the entire business would have been extinguished and instead of earning profits, the assessee would have incurred huge losses in this business and, therefore, it was in the interest of the assessees' business to pay Rs. 4 lakhs to avoid this extinction of business and the resultant loss. The AAC was, however, of the opinion that the penalty imposed for breach of any law in the course of the carrying on of any business could not be described as a commercial or trading loss. If any assessee pays any penalty during the course of the carrying on of his business, he has acted in a manner which has rendered him liable to penalty and, hence, it cannot be cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Sub-Committee of the New Delhi Municipal Committee or any other resolution or communication is a misnomer. It held that the amount of Rs. 4 lakhs was consideration or price for getting the revised plan passed by the New Delhi Municipal Committee which the assessees had to incur during the course of carrying on the business of the assessees as the business was of constructing buildings and selling of parts of the building flatwise to the purchasers. The Tribunal took the view that the assessees are entitled to claim deduction of Rs. 4 lakhs, as in its view, the payment was made on grounds of commercial expediency in the course of the construction activity of the assessees and with a view to preserve the construction business of the assessees and there was no question of any infraction of law in the case. At the outset, we may notice the provisions of the Punjab Municipal Act, 1911, as extended to Delhi (hereinafter referred to as " the Municipal Act ") which has been in force in New Delhi since long and governs the building activities falling within the jurisdiction of the New Delhi Municipal Committee (for short called " the Committee "). The assessees' building called as " Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -erected (a) without sanction as required by section 189(1); or (b) without notice as required by section 189(2); or (c) when sanction has been refused, the Committee may by notice delivered to the owner within six months from the completion of the building require the building to be altered or demolished as it may be deem necessary within the period specified in such notice; and should it be begun or erected (d) in contravention of the terms of any sanction granted; or (e) when the sanction has lapsed ; or (f) in contravention of any bye-law made under section 190 ; or, in the case of a building of which the erection has been deemed to be sanctioned under section 193(4) if it contravenes any scheme sanctioned under section 192; the Committee may by notice to be delivered to the owner within six months from the completion of the building require the building to be altered in such manner as it may deem necessary, within the period specified in such notice: Provided that the Committee may, instead of requiring the alteration or demolition of any such building, accept by way of compensation such sum as it may deem reasonable: Provided also that the Commit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramed and gives teeth to the bye-laws making a breach thereof an offence punishable with fine which may extend to five hundred rupees. Section 219 make the disobedience of any lawful direction or prohibition given by the Committee an offence by statutory fiction if the disobedience or omission is not an offence punishable under any other section and provides for punishment with fine which may extend to five hundred rupees. Section 221 again creates an artificial offence and provides for punishment with fine which may extend to five hundred rupees., Power to compound the offences is conferred by s. 229. There is intrinsic evidence in the Municipal Act drawing a distinction between the offence (and on its conviction imposition of fines) for which a discretion is vested in the Committee to " compound an offence and a disobedience, in which case, the Committee may accept by " way of compensation " such sum as may seem reasonable. The marginal note to s. 195 does mention " penalty for disobedience but cannot be construed as providing for an artificial offence. The marginal note cannot be relied upon for interpreting a section unless there is some ambiguity in the section. The margina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereupon was penalised, the payment of that penalty is not allowable either under s. 28 or s. 37 of the Act. Reliance is heavily placed on Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC), wherein it was held (at p. 359): " A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in von Glehn's case [1920] 2 KB 553 an expenditure is not deductible unless it is a commercial loss in trade and penalty imposed for breach of the law during the course of trade cannot be described as such. 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. It must be a commercial loss and in its nature must be contemplable as such. Such penalties whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a case where the sum of Rs. 5,000 was not an item which was expended for the purpose of enabling the assessee to earn profits in the trade but was imposed as a penalty for the breach of the rules which had been made by the Durbar and which they had under the contract undertaken to observe. The next case is Juggilal Kamlapat Cotton Spg. and Wvg. Co. Ltd. v. CIT [1955] 28 ITR 78 (All) in which composition money was paid in respect of a proposal for prosecution for returning much less income in the return. In that case, the assessee paid the sum to compound the offence and the Inspecting Assistant Commissioner under s. 53(2) of the 1922 Act agreed to the offence being compounded on payment of the amount. The next case is CIT v. Prafulla Kumar Mallik [1964] 51 ITR 65 (Orissa) in which the supply of the paddy was not up to the specified standard and the Government levied penalty. In that case, the payment was a Penalty for committing an act opposed to public policy, a policy that underlay the Essential Supplies (Temporary Prices) Act, 1946, read with the Orissa Foodgrains Control Order, 1951, and the Act left to the Government to enforce public policy. The next case is CIT v. Mathur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Customs Act. Next case is Cineramas v. CIT [1977] 110 ITR 762 (P H) where the amount paid by the assessee by way of penalty to the East Punjab Motion Picture Association was not allowed as revenue expenditure. In that case, a member failing to carry out the directions of the association would be suspended from the membership and would be eligible to be reinstated on payment of a specified amount of penalty in addition to reinstatement charges. It was opined there that the breaches of the obligations are akin to infraction of law and damages paid in connection with such infraction and breaches are not expenditure laid out or expended wholly and exclusively for the assessee's business. Next case is Raghubir Prasad Gupta v. CIT [1979] 120 ITR 789 (Cal), wherein an amount paid to the Customs authorities by way of fine in lieu of confiscation of goods imported without licence was disallowed. In that case, it was imposed because of an infraction of law entailing a Penal consequence by way of Payment of fine either for the release of the confiscated goods or for the personal penalty imposed upon the assessee. Next case relied upon is CIT v. Malwa Vanaspati and Chemical Co. Ltd. [1982] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpleted the building, according to the plans, lawfully. The payment was vital for the assessees' business which consisted in the construction of the building and its sale flat-wise. The expenditure was for saving of the losses of the alteration of the closing stock of the assessees. The expenses incurred were to preserve or in other words to save it from extinction. The courts have considered claims for deduction, whether allowable or not, in several cases cited at the Bar. In CIT v. Prafulla Kumar Mallick [1969] 73 ITR 119 (Orissa), the question arose before the Orissa High Court as to whether penalties levied for supply of foodgrains not conforming to contract quality was a permissible deduction under s. 10(1) of the 1922 Act. It was held that it was an inevitable consequence of the assessee's business as a paddy procuring agent that as a result of the goods delivered not being of contract quality, breach of guarantee, with the risk of liability to pay damages, should at times be committed and payment of such damages as a result of the breach of guarantee in the course of or as a consequence earning profits and gains was incidental to the carrying on of the assessee's business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of building contracts, it was not unusual that in the performance of such contracts, delay might occur for several reasons and if delay occurred there was breach of the conditions relating to the completion of the contract work within the stipulated time and such failure if it occurred, was clearly incidental to the business of the assessee. It was observed that though the amount of deduction was described as a penalty, yet, in fact, it was really a compensation payable by the assessee to the Government and the nature thereof was wholly different from a penalty which arose from a breach of statutory provision. The assessee was held entitled to the deduction of the amount paid to the Government. In CIT v. Vasantha Mills Ltd. [1979] 120 ITR 321 (Mad), the assessee there, a textile mill, was directed under cl. 21A(1) of the Cotton Textiles (Control) Order, 1948, to produce a particular variety of cloth but it did not comply with those directions but paid a sum of Rs. 30,872 in lieu thereof as provided in cl. 21A(1)(b) of the said Order. The Tribunal took the view that as the assessee was given an option either to produce cloth or to make the payment, there was nothing wrong i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cter, the possession of which is condition of carrying on of a business, the expenditure may be regarded as a revenue expenditure. In India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC), the assessee obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets and in that connection it spent a sum of Rs. 84,633 towards stamp duty, registration fee, lawyer's fee, etc., and claimed this amount as business expenditure. The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or advantage of enduring nature and thus the expenditure made for securing the use of money for a certain period is deductible from the receipts of the business to ascertain the taxable income. It was an outgoing by means of which the assessee procured the use of a thing/by which he makes a profit. In Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207 (SC), it was held that the deductibility of the expenditure incurred in prosecuting a civil proceeding depends upon the nature and purpose of the legal proceeding in relation to the assessee's business and cannot be affected by the final outcome of that proceeding. Howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the sanction had lapsed by accepting by way of compensation such sum as it may deem reasonable. It is at that stage that the assessees had to consider the question of payment on the principles of ordinary commercial trading or on grounds of commercial expediency. Seen in the light of the law noticed above, the assessees had the desire to preserve the building and to save a part of it from demolition. The expenditure was for saving of the loss on the alteration of the closing stock of the assessees. Such an expenditure has to be permitted as a deduction made for the purpose of carrying on of business. The question whether particular expenditure is a revenue expenditure incurred for the purpose of business must be viewed in the larger context of the assessees' business, necessity or expediency. The expenditure of payment of compensation incurred by the assessees has to be regarded as an integral part of the profit-earning process of the assessees. The portion of the buildings thus saved from alteration or demolition remained as a business stock available for sale flat-wise. The assessees by this outgoing of Rs. 4 lakhs procured the portion of the building by which the assessees m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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