2017 (8) TMI 1672 - AT - Income Tax

Revision u/s 263 - AO while passing the impugned order has not disallowed the amount paid by the assessee towards 'Compounding Fine' and penalty to the Bangalore Mahanagar Palike and claimed it as an allowable expenditure in its profit loss account under the name Building Approval Fees - CIT was of the view that as this amount represented the compounding fine and penalty, it is not allowable for a deduction as per explanation below sec. 37(1) - HELD THAT - It is fact that at the time of approval, the corporation and the builders aware that it is not possible to complete the project as per the proposed plan as there are certain adjustments need to be made at the time of actual execution. As long the actual completion of the projects are within the parameters of approval, the corporation/approving authorities permit the projects as approved with the nominal fine or compounding fee. This is the reason, the corporation has the clause intact in the rules books. If the projects are illegal, which is an offence and cannot be cured, the whole project cannot be approved by the approving authorities, as the same is subject matter of public safety. The penalty can be classified as two types; one charged for violation of law in the nature of offence, which cannot be pardoned by compounding and the second is charged for violation of certain rules which are not in the nature of offences and can be cured by compounding. In the case of housing/commercial projects, the corporation aware that there will be certain deviations at the time of approval and no project can be completed without any deviation. The question is, the extent of deviation. In case it is within the permissible limits, the approving authorities, allow with compounding the deviation by levying compounding fees. In the given case, the project was completed and the deviations are within the limits, for which the Bangalore Mahanagar Palike has approved the project by compounding fees, which is not in the nature of offence nor prohibition of any law. Hence, it is allowable u/s 37(1) of the Act. Adjustment proposed by the CIT will have impact on the tax credit available to the assessee in the subsequent AY. Hence, this ground is dismissed. Since there is no impact on the original assessment, the proceedings u/s 263 is quashed.

Issues Involved:

1. Whether the payment of Rs. 86.60 lakhs as 'Compounding Fine' and penalty to the Bangalore Mahanagar Palike is an allowable expenditure under Section 37(1) of the Income Tax Act.
2. Whether the assessment order passed by the AO without disallowing the compounding fine is erroneous and prejudicial to the interests of revenue.
3. The impact of the disallowance on the tax credit under MAT provisions in subsequent years.

Issue-wise Detailed Analysis:

1. Allowability of Compounding Fine under Section 37(1):

The CIT observed that the payment of Rs. 86.60 lakhs, claimed as 'Building Approval Fees', represented a compounding fine and penalty, which is not allowable for deduction as per the explanation below Section 37(1) of the Income Tax Act, 1961. This explanation, incorporated by Finance Act No.2/1998 with retrospective effect from 01.04.1962, stipulates that any expenditure incurred for any purpose which is an offence or prohibited by law is not deemed to have been incurred for business purposes and no deduction shall be made in respect of such expenditure.

The assessee contended that the payment was for regularization of deviations within permissible limits and not in respect of an offence, citing the decision of the Hon'ble Delhi High Court in CIT Vs. Loknath & Co. However, the CIT noted that this decision was rendered before the incorporation of the explanation below Section 37(1) and thus does not apply. Instead, the CIT referenced the decision of the Hon'ble Karnataka High Court in CIT Vs. Mamta Enterprises, which held that such payments are in the nature of penalties and not deductible.

2. Erroneous and Prejudicial Assessment Order:

The CIT held that the assessment order passed by the AO was erroneous and prejudicial to the interests of revenue because it failed to disallow the compounding fine. The CIT emphasized that the applicable law, as per the decision of the Karnataka High Court in Mamta Enterprises, is against the assessee. Therefore, the assessment order was revised under Section 263, directing the AO to disallow and add the compounding fine to the income determined.

3. Impact on Tax Credit under MAT Provisions:

Despite the assessee's argument that the tax determined under Section 115JB was higher than the tax payable under normal provisions even after disallowance, the CIT observed that the correct assessment of total income under normal provisions would affect the tax credit under MAT provisions in subsequent years. This justified the revision of the assessment order as it was prejudicial to the interests of revenue.

Tribunal's Decision:

The Tribunal considered the rival submissions and the material facts on record. It noted that the payment of compounding fine was for regularizing deviations within permissible limits and not in the nature of an offence or prohibited by law. The Tribunal distinguished between penalties for violations of law and those for deviations within permissible limits, concluding that the latter are allowable under Section 37(1).

However, the Tribunal dismissed the ground regarding the impact on tax credit under MAT provisions, acknowledging the CIT's concern about the effect on subsequent years.

Ultimately, the Tribunal quashed the proceedings under Section 263, partly allowing the appeal of the assessee. The original assessment was restored, and the order of the CIT was set aside.

Conclusion:

The Tribunal held that the payment of compounding fine for regularizing permissible deviations is allowable under Section 37(1) and quashed the proceedings under Section 263, partly allowing the assessee's appeal. The adjustment proposed by the CIT regarding tax credit under MAT provisions was dismissed.

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