2006 (1) TMI 540 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of the addition of Rs. 2,60,020.
2. Disallowance of Rs. 2,32,600 paid to BMC to regularize certain constructions.
3. Disallowance of Rs. 21.84 lakhs paid to BMC towards premium for condoning deficiency in joint open space.

Detailed Analysis:

1. Deletion of the Addition of Rs. 2,60,020:

The revenue's appeal challenged the deletion of the addition of Rs. 2,60,020. The facts reveal that the assessee contributed Rs. 2,60,020 towards proportionate charges for laying sewerage along a portion of D.P. Road where the factory premises were located. The Assessing Officer (AO) considered this expenditure as capital in nature, disallowing the deduction. However, the CIT(A) accepted the assessee's claim that the payment was made to the Bombay Municipal Corporation (BMC) for laying sewerage and not for constructing any new asset. The CIT(A) concluded that the expenditure was of a revenue nature and allowed the deduction. The Tribunal upheld this decision, stating that the expenditure was incurred for the smooth and efficient running of the business and did not result in the acquisition of a capital asset. Therefore, the revenue's appeal was dismissed.

2. Disallowance of Rs. 2,32,600 Paid to BMC to Regularize Certain Constructions:

The assessee's appeal challenged the disallowance of Rs. 2,32,600 paid to BMC to regularize the construction of an extension to the existing factory building. The facts indicate that the assessee added two rooms to the existing structure without obtaining the necessary approval from the Municipal Authorities. The BMC regularized the construction upon payment of Rs. 2,32,600, which was considered a penalty for unauthorized construction. The CIT(A) disallowed the claim, holding that the payment was for the infraction of law and was not allowable under Explanation to section 37(1) of the I.T. Act. The Tribunal upheld the CIT(A)'s decision, agreeing that the payment was a penalty and part of the cost of construction, which should be capitalized and not treated as revenue expenditure.

3. Disallowance of Rs. 21.84 Lakhs Paid to BMC towards Premium for Condoning Deficiency in Joint Open Space:

The assessee's appeal also challenged the disallowance of Rs. 21.84 lakhs paid to BMC towards premium for condoning deficiency in joint open space. The background reveals that the factory premises were divided as per an arbitration award, resulting in a deficiency in the open space required by BMC regulations. The BMC regularized the deficiency by charging Rs. 21.84 lakhs. The assessee claimed this amount as a revenue deduction. The AO disallowed the claim, considering it a capital expenditure and a penalty for unauthorized construction. The CIT(A) confirmed the disallowance, holding that the payment was of a penal character. However, the Tribunal disagreed, stating that the payment was compensatory and not a penalty. The Tribunal noted that the payment was made to regularize the construction as per BMC regulations and was necessary for the preservation and protection of the business asset. The Tribunal remanded the matter to the CIT(A) to determine whether the expenditure was capital or revenue in nature, considering all relevant materials and affording both parties a reasonable opportunity to be heard.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal for statistical purposes, remanding the matter to the CIT(A) for further consideration on the nature of the expenditure.