2012 (8) TMI 58 - AT - Income Tax

Deduction u/s 37(1) -Payment of compounding fee in lieu of an offence - whether or not penal in nature - legal principles, namely, ratio decidendi and the doctrine of stare decisis Stare decisis et non quieta movere - held that - After analyzing and referring various case laws matter remanded back to CIT(A) with the directions to decide the same in accordance with law requiring him to call for and examine the provisions of the Specific Scheme which empowered the GDA to collect the compounding fee.

Summary

Issues Involved:
1. Confirmation of additions of Rs.1,48,234/- on account of compounding fee paid to GDA.
2. Nature of compounding fee - whether it is penal or compensatory.
3. Applicability of Explanation to Section 37(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Confirmation of Additions of Rs.1,48,234/- on Account of Compounding Fee Paid to GDA:
The assessee, a builder, filed an appeal against the order of CIT(A)-Ghaziabad which confirmed the addition of Rs.1,48,234/- paid as compounding fee. The assessee argued that the fee was not penal but a necessary business expenditure to regularize construction deviations. The Assessing Officer (A.O.) disallowed the claim, citing Explanation to Section 37(1) of the Income Tax Act, 1961, which prohibits deductions for expenditures incurred for any purpose which is an offence or prohibited by law.

2. Nature of Compounding Fee - Whether it is Penal or Compensatory:
The assessee contended that the compounding fee was compensatory and necessary for business, as it allowed the sale of flats. The A.O. and CIT(A) relied on the Karnataka High Court judgment in CIT vs. Mamta Enterprises, which held that compounding fees for unauthorized construction are penal and disallowable under Explanation to Section 37(1). The Tribunal noted that the specific provisions of the Ghaziabad Development Authority (GDA) Act, which empowered the collection of compounding fees, were not examined. It was essential to determine if the fee was purely penal or had a compensatory element.

3. Applicability of Explanation to Section 37(1) of the Income Tax Act, 1961:
The Tribunal emphasized the need to consider the Explanation to Section 37(1), inserted by the Finance (No.2) Act, 1998, with retrospective effect from 1.4.1962. This provision disallows deductions for expenditures incurred for purposes that are offences or prohibited by law. The Tribunal highlighted the importance of examining the relevant provisions of the GDA Act to ascertain the nature of the compounding fee. The Tribunal referred to various judgments, including the Supreme Court's decision in Haji Aziz & Abdul Shakoor Brothers, which held that penalties for infraction of law are not allowable as business expenditures.

Restoration to CIT(A):
The Tribunal restored the issue to the CIT(A) for reconsideration, directing a thorough examination of the GDA Act's provisions and the nature of the compounding fee. The CIT(A) was instructed to consider whether the fee was compensatory or penal, and whether it fell within the scope of Explanation to Section 37(1). The Tribunal stressed that the assessee must be given a reasonable opportunity to present evidence and arguments.

Conclusion:
The appeal was allowed for statistical purposes, and the matter was remanded to the CIT(A) to decide in accordance with the law, considering the specific statutory provisions and the nature of the compounding fee. The Tribunal underscored the necessity of distinguishing between compensatory payments and penalties to determine the allowability of the expenditure under Section 37(1) of the Income Tax Act.