2011 (3) TMI 278 - AT - Income Tax

Disallowed - Settlement fees paid by the assessee under the Motor Vehicle Act - Disallowed by the Assessing Officer on the pretext that it was a penalty not allowable under section 37(1) but allowed by the CIT(A) as an expenditure - Held that the assessee has made about 230 trips by paying compounding fees, as per the rules in the Motor Vehicle Act, it cannot be stated that assessee s payments of compounding fees is in violation of law - Since assessee is engaged in transporting of over dimensional capacities in its transport business, it is necessary business expense wholly for the purpose of business - Therefore, the same is allowable u/s 37(1) - Thus, the CIT(A) s order is confirmed - Appeal of the Revenue is dismissed.

Summary

Issues:
Relevance of allowing settlement fees paid by the assessee under the Motor Vehicle Act disallowed by the Assessing Officer as a penalty under section 37(1) but allowed by the CIT(A) as an expenditure.

Analysis:
1. The appeal by the Revenue challenged the order of the CIT(A) XIII, Mumbai dated 24-5-2009, focusing on the relevance of allowing settlement fees paid by the assessee under the Motor Vehicle Act. The Assessing Officer disallowed the fees as a penalty under section 37(1), while the CIT(A) allowed it as an expenditure.

2. The assessee, an individual and proprietor of a transport company specializing in over-dimensional consignments, paid compounding fees to the RTO for transporting such consignments beyond permitted limits. The Assessing Officer considered this as a penalty not allowable under section 37(1). However, the assessee argued that it was a business necessity and not a deliberate violation of law. The CIT(A) agreed with the assessee, citing clarifications from the Central Government and precedent from the ITAT, allowing the expenditure as a deduction under section 37(1).

3. The learned counsel for the assessee referenced the ITAT order in a similar case and the Central Government's circular exempting certain consignments from compounding fees. Precedent cases were also cited to support the argument that such payments are regular business expenses, not penalties for violating the law.

4. The Revenue contended that the intention of the Legislature was to disallow amounts paid for law violations. The Revenue argued that the compounding fees were a penalty for violating the law and should not be allowed as an expenditure.

5. The CIT(A) held that the fees paid were not in violation of the law but were a business necessity for transporting over-dimensional consignments. The ITAT's decision in a similar case supported this view, stating that such payments are regular business expenses and not penalties for law violations.

6. Ultimately, the ITAT confirmed the CIT(A)'s decision, dismissing the Revenue's appeal and upholding the allowance of the compounding fees paid by the assessee as a deduction under section 37(1).

In conclusion, the judgment clarified that the compounding fees paid by the assessee for transporting over-dimensional consignments were not penalties for violating the law but necessary business expenses, thus allowing them as a deduction under section 37(1).