9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2003 (10) TMI 26 - HC - Income TaxPayment of the compounding fees claim for exemption u/s 37 - Tribunal is not right in law in holding that the payment of the compounding fees is not a penalty for infraction of law and hence allowable - we are clearly of the opinion that deduction permitted by the Commissioner as well as the Tribunal is totally unsustainable in law Revenue appeal accepted
Issues Involved:
1. Whether the payment of compounding fees is a penalty for infraction of law and hence allowable under section 37 of the Income-tax Act, 1961. Detailed Analysis: Issue 1: Payment of Compounding Fees as a Penalty for Infraction of Law The primary question for consideration was whether the compounding fees paid by the assessee to the Bangalore City Corporation could be treated as an allowable expenditure under section 37 of the Income-tax Act, 1961. The assessee, a builder, claimed Rs. 89,960 paid as compounding fine as an expenditure. The Assessing Officer disallowed this claim, but the Commissioner of Income-tax (Appeals) allowed it, treating it as a business expenditure. The Tribunal upheld the Commissioner's decision, relying on the Delhi High Court judgment in CIT v. Loke Nath and Co. (Construction) [1984] 147 ITR 624. The Revenue argued that the Tribunal's conclusion was erroneous, emphasizing that the construction of the eighth floor without a sanctioned plan violated section 300 of the Karnataka Municipal Corporation Act, 1976, and constituted an offense under section 436 of the Corporation Act. The Revenue cited the Explanation to section 37 of the Income-tax Act, which excludes expenditures incurred for purposes that are offenses or prohibited by law from being deemed as incurred for business purposes. The Supreme Court decisions in Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 and Maddi Venkataraman and Co. (P.) Ltd. v. CIT [1998] 229 ITR 534 (SC) were also referenced to support this argument. The court found merit in the Revenue's submission, rejecting the assessee's argument that once an offense is compounded, it is wiped out in the eyes of the law. The court noted that section 300 of the Corporation Act prohibits construction without permission, and section 436 makes such construction an offense. Section 483(b) allows for the compounding of offenses, but this does not negate the fact that an offense was committed. The court emphasized that the Explanation to section 37 of the Income-tax Act clearly states that expenditures incurred for purposes that are offenses or prohibited by law are not deductible. The court referred to the Deputy Director of Town Planning's order, which explicitly stated that the assessee was permitted to compound the "offenses of unauthorized construction" upon payment of a compounding fine. The court concluded that the compounding of the offense did not remove the infraction of law, and the expenditure incurred for compounding the offense could not be allowed as a deduction under section 37 of the Act. The court also addressed the Delhi High Court's observation in Loke Nath's case, noting that it was rendered before the amendment to section 37 by the Finance (No. 2) Act, 1998, which introduced the Explanation with retrospective effect from April 1, 1962. The court held that the clear and unambiguous language of the Explanation precluded the deduction of expenditures incurred for offenses or prohibited activities, regardless of whether the offense was compounded. The court cited the Supreme Court's observations in Haji Aziz and Abdul Shakoor Bros. and Maddi Venkataraman and Co. (P.) Ltd., which held that penalties for infractions of law could not be considered commercial losses or business expenditures. The court concluded that the penalty paid by the assessee was to save the unauthorized construction and avoid the consequences of the penal provisions, and thus could not be treated as a business loss. In conclusion, the court held that the deduction allowed by the Commissioner and the Tribunal was unsustainable in law. The question referred to the court was answered in favor of the Revenue and against the assessee, thereby disallowing the deduction of the compounding fees as a business expenditure.
|
