2014 (12) TMI 1155 - AT - Income Tax

Payment of BMC charges - disallowance as enal in nature as per Explanation to section 37(1) of the Act - Held that - There are series of decisions on the point wherein distinction has been carved out between the penalty paid for infraction and for irregularities. Accordingly, in the facts and circumstances of the case, we find that the payment in question does not fall under the category of a penalty for an offence which is prohibited by law. Hence the disallowance made by the Assessing Officer is deleted. - Decided in favour of assessee.

Summary

Issues: Disallowance of BMC charges under section 37(1) of the Income Tax Act

Detailed Analysis:

Issue 1: Disallowance of BMC charges by Assessing Officer
During the assessment proceedings, the Assessing Officer disallowed the payment of BMC charges amounting to Rs. 34.39 lakhs, treating it as a penalty under Explanation to section 37(1) of the Act for violation of law. The Assessing Officer held that the payment made by the assessee was a penalty for breaching statutory provisions.

Issue 2: CIT(A) Confirmation of Disallowance
The assessee challenged the Assessing Officer's decision before the Commissioner of Income Tax (Appeals) (CIT(A)), arguing that the payment was not a penalty for regularization of occupancy certificate. However, the CIT(A) upheld the disallowance made by the Assessing Officer in the impugned order.

Issue 3: Tribunal's Decision
The Tribunal considered the submissions of both parties and examined the relevant material on record. It noted that the occupancy certificate was initially issued by the Municipal Corporation in accordance with the approved plan. The withdrawal of the certificate was due to a dispute involving legal heirs of the original landowner, not a violation of building by-laws. The Tribunal observed that the payment was made to bridge the gap between the revoked and restored occupancy certificate, not for regularization of unauthorized construction.

Issue 4: Legal Precedents
The Tribunal referred to various legal precedents, including the Supreme Court and High Court judgments, emphasizing that expenses laid out for business purposes are allowable deductions. It highlighted the distinction between penalties for infractions and irregularities, concluding that the payment in question did not constitute a penalty for an offense prohibited by law.

Issue 5: Tribunal's Decision and Disallowance Deletion
Based on the facts and circumstances of the case, the Tribunal concluded that the disallowance made by the Assessing Officer was unwarranted. It ruled in favor of the assessee, allowing the appeal and deleting the disallowance of BMC charges under section 37(1) of the Income Tax Act.

This comprehensive analysis highlights the progression of the case from the Assessing Officer's disallowance to the Tribunal's decision, supported by legal principles and precedents, ultimately resulting in the deletion of the disallowance of BMC charges.