2021 (3) TMI 212 - AT - Income Tax

Allowable revenue expenditure - penalty/fine paid to BMC - whether expenses not allowable in the scheme of section 37(1) - whether the assessee in return of income for the year in which income from project has been declared has reduced the amount of 19.51 lacs paid as penalty/fine to BMC? - HELD THAT - Assessing Officer in his remand report has mentioned that the assessee in its revised computation for assessment year 2017-18 has reduced penalty/fine. CIT(A) has not granted relief to the assessee merely for the reason that in the Tax Audit Report for assessment year 2017-18 the Auditor has not reported any amount of 19, 51, 365/- paid by way of penalties/fines. Thus in view of the admitted fact that the assessee has reduced the amount of penalty/regularisation charges in the computation of income while filing of return of income in the year it has offered the profits from the project no disallowance in respect of aforesaid penalty/regularisation charges is warranted in the impugned assessment year - Decided in favour of assessee.

Summary

Issues: Disallowance of penalty/fine paid to BMC

The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2013-14. The assessee, a builder and developer, followed the Project Completion Method for profit recognition. The assessee had paid regularisation charges to BMC during the relevant period, which were debited to the P&L Account for the financial year 2012-13. The project was completed in the financial year 2016-17, and the assessee reduced the amount paid to BMC in that year. However, the assessment for the year 2013-14 was reopened to disallow the penalty and fine paid to BMC. The CIT(A) upheld the addition made by the Assessing Officer, leading to the appeal.

The main contention was the disallowance of the penalty/fine paid to BMC, amounting to ?19,51,365. The assessee argued that as per the Project Completion Method, the penalty was reduced in the return of income for the year the project was completed. The Revenue did not dispute the method of profit recognition but contested the allowance of the penalty/fine under section 37(1) of the Act. The CIT(A) sought a remand report from the Assessing Officer, who confirmed that the penalty was reduced in the revised computation for the subsequent assessment year. The CIT(A) did not grant relief based on the Tax Audit Report for the subsequent year, which did not mention the penalty amount. The Tribunal found merit in the assessee's contentions, stating that since the penalty was reduced in the computation of income when declaring profits from the project, no disallowance was warranted for the penalty/regularisation charges in the impugned assessment year. Consequently, the appeal by the assessee was allowed.

In conclusion, the Tribunal allowed the appeal by the assessee, emphasizing that no disallowance was justified for the penalty/fine paid to BMC as it was reduced in the computation of income for the year the project was completed, in accordance with the Project Completion Method of profit recognition.