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TMI Blog2012 (10) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... ds, and shares and units of listed companies and mutual funds. The shares of group companies have not yielded any dividend in this year. The shares and units of unlisted companies and mutual funds have also not yielded any income. The assessee has received dividend of Rs. 46.65 lakh from Foremost Factor Ltd. Therefore, it was argued that no amount is disallowable under the aforesaid provision. The AO considered the facts of the case and submissions made before him. It is mentioned that the investments have been made with a view to earn dividend. Such income is not to be included in the total income of the assessee. Therefore, provisions contained in section 14A and Rule 8D are applicable. Rule 8D lays down the procedure for calculating the amount which is attributed to earning tax-free income. This rule was applied. Consequently, disallowance was made under Rule 8D(2)(ii) and Rule 8D(2)(iii). The disallowance under former provision was calculated at Rs. 51,78,366/- and under the latter provision at Rs. 35,97,079/-. Thus, a total sum of Rs. 87,75,445/- was disallowed. 3. Various submissions were made before the ld. CIT (Appeals) by the assessee. He considered the assessment order a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detailed chart of investments and income received thereon. This chart shows total investments of Rs. 54,10,80,750/- as on 31.03.2007 and Rs. 89,77,51,107/- as on 31.03.2008. The addition to the investment in this year is shown at Rs. 35,66,70,357/-. The corresponding increase in investments in immediately preceding year was Rs. 1,75,69,808/-. The case of the ld. DR is that there has been substantial increase in the investments in this year. The AO has followed proper procedure as mentioned in the decision in the case of Maxopp Investments Ltd. v. CIT [2011] 203 Taxman 364/15 taxmann.com 390 (Delhi). Therefore, it is argued that the order of the ld. CIT (Appeals) may be set aside on this issue and that of the AO may be restored. 5. In reply, the ld. counsel for the assessee submitted that it had sufficient interest-free funds and no part of the interest paid in this year is related to the investments made by the assessee in shares or units. No disallowance was made in the proceedings of assessment year 2007-08 as the return had been processed u/s 143(1). The ld. CIT (Appeals) has examined the bank account to ensure that there is no nexus between investment made in this year and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e break-up of the expenditure as under:- (i) Misuse charges 34,22,147/- (ii) Interest on misuse charges 30,84,530/- (iii) Interest on conversion charges 1,25,420/- (iv) Interest on ground rent 99,822/- 7.1 The assessee was required to state its case as to how the amount is deductible in computing the total income. It was submitted that the amount represents the demand raised by the Delhi Development Authority ('DDA' for short). The assessee had contested the demand. Finally, the demand notice dated 08.05.2007 was accepted by it. The demand was paid in the current year. Therefore, the same is deductible from the income. On getting the explanation, the AO issued a further show cause notice asking the assessee to state its case as to why the expenditure should not be disallowed. It was submitted that the assessee purchased two commercial plots in public auction in March, 1978. The master plan envisages that the residential premises will be constructed on second and third floors. The assessee-company protested against this policy. In the mean time, the assessee constructed the commercial centre on the plots and the space so constructed was also used for commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een held that these are not prior period expenses. 7.4 Coming to deduction of expenses u/s 37(1), it has been held that the interest of Rs. 33,87,926/- is obviously compensatory in nature, therefore, it cannot be disallowed u/s 37(1). As far as misuse charges of Rs. 34,22,147/- are concerned, it is mentioned that the opinion of the AO is influenced by the fact that in its reply dated 03.12.2010, the assessee has used the term "penalty-DDA misuse". The payment has been made for creating extra commercial space, which is not permitted under the master plan approved by the DDA. The space has been created because there was a business necessity to do so. Thus, the expenditure has been incurred by way of commercial expediency. It does not involve violation of any statutory provision. Therefore, it has been held that this amount is also deductible in computing the total income. 8. In regard to the finding that the expenditure does not pertain to this year, the ld. senior DR referred to page nos. 29 and 30 of the paper book. Page no. 29 is a letter dated 08.05.2007 from the DDA. It gives the break-up of a sum of Rs. 36,58,530/- in terms of misuse charges, and interest on belated payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter dated 08.05.2007 also contains details of interest on belated payment of conversion charges and ground rent. These are the only evidences placed before us or the lower authorities for deciding the question regarding deduction of the overall sum of Rs. 67,31,919/-. The ld. counsel fairly submits that the nature of interest on misuse charges will partake the character of misuse charges in so far as its deductibility in computing the income is concerned. The question is - whether, misuse charges are deductible u/s 37(1) or not? 10.1 Before deciding this issue, we may refer to the precedents relied upon by the rival parties. The ld. senior DR has relied on the decision in the case of CIT v. Mamta Enterprises [2004] 266 ITR 356/135 Taxman 393 (Kar.). The assessee is a builder and is carrying on the business of building apartments and selling them. It claimed deduction of a sum of Rs. 89,960/- paid as compounding fine to Bangalore City Corporation. The AO disallowed the same. The CIT (Appeals) allowed the deduction by holding that it is incurred in the course of business. The Tribunal upheld this order by relying on the decision in the case of CIT v. Loke Nath & Co. (Construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to construct only 12 storeys in place of 13 storeys originally sanctioned in view of the excess construction on the second floor. This plan was sanctioned and the infringement by way of additional coverage and other irregularities were condoned on the condition that the assessee shall pay ad-hoc penalty of Rs. 4.00 lakh. The NDMC proposed to revoke the revised plan but a writ petition filed by the assessee against this proposal was allowed by the High Court. The question was-whether, the sum of Rs. 4.00 lakh is allowable as a deduction in computing the business profits of the assessee? The ITO and the AAC decided the matter against the assessee by holding that the amount was paid as penalty for infringement of municipal by-laws. The Tribunal however came to the conclusion that the amount paid was compensation and not penalty. Thus, the deduction was allowed. The matter was agitated before the Hon'ble High Court, which mentioned that section 195 of Punjab Municipal Act ensured that the restrictions were observed by the builder. Such restrictions were enforceable by alteration, demolition or accepting a sum by way of compensation. This section does not create any penal offence. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qualitatively different from the situation in the case of Loke Nath & Co. (Construction) (supra) where the irregularity could be removed by alteration, demolition or accepting compensation. The only recourse in this case was demolition, i.e., filling up the construction in the basement. This also brings out clearly that the DDA while ordering the removal of the infraction was not acting as a trader as in the case of a trader simplicitor, the seller will have no power to direct the buyer to make construction in one way or the other. The DDA in this case was acting as implementer of the master plan and only one course, i.e., removal of the infraction was permissible. Further, the misuse charges were paid in respect of the aforesaid space, therefore, it can be said that the misuse charges were also paid for illegally using the space for a period of time till the infraction was noticed by the DDA and it ordered the removal of the infraction. Thus, the payment of misuse charges is for violation of master plan drawn for the development of areas under the control of DDA. The ld. counsel has admitted that the nature of interest on misuse charges is the same as misuse charges. Such conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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