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TMI Blog2012 (10) TMI 783X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to MCD towards registration, conversion and parking charges - revenue v/s capital - Held that:- Expenses which are permitted as deductions are such as are made for the purpose of carrying on the business and if a sum is paid by an assessee conducting his business because in conducting it he has acted in a manner which has rendered him liable to penalty for breach of laws, it cannot be claimed as a deductible expense. The assessee is expected to carry on the business in accordance with law. The evasion of law cannot be a trade pursuit. Since in the instant case, MCD demanded the aforesaid compounding charges only when Hon’ble Apex Court directed the MCD to act and seal the premises in view of flagrant violations of various laws including Municipal Laws, Master Plan and other plans besides Environmental laws and indisputably, the assessee misused its property and violated the civic and Environmental laws, it is to be opined that aforesaid charges paid by the assessee to MCD, could not be allowed in view of explanation to sec. 37(1). Thus the issue as to whether expenditure is revenue or capital, becomes academic and therefore, does not survive for our adjudication - against asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave to add, alter, amend or forgo any of the grounds of appeal at the time of hearing. 2. Adverting first to ground no. 2 in the appeal, facts, in brief, as per relevant orders are that return declaring income of Rs.16,14,980/- filed on 12.09.2008 by the assessee, trading in iron and steel works, in the name and style of M/s Shyam Sunder Arun Kumar, was selected for scrutiny with the service of a notice u/s 143 (2) of the Income-tax Act, 1961, (hereinafter referred to as the Act ), issued on 25.09.2009. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed on perusal of balance sheet of M/s Shyam Sunder Arun Kumar, proprietory concern of the assessee, that the assessee reflected following loan and advances given to the related persons: Smt. Nitasha Gupta, a relation Rs.1,00,000/- Smt. Sunita Gupta w/o Alok Gupta, a nephew of Shri Arun Gupta Rs.2,15,000/- Smt. Anita Gupta w/o shri Arun Gupta Rs.82,078/- Total Rs.3,97,078/- 2.1 Since no interest was received on the aforesaid advances given to family members of the assessee, nor any business connection was apparent wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted the findings of the ld. CIT(A). 5. We have heard both the parties and gone through the facts of the case as also the decision relied upon by the ld. AR. As is apparent from the aforesaid facts, the AO disallowed interest of Rs.47,650/- @12% per annum on the amount of Rs.3,97,078/- paid to aforesaid three relatives on loan taken by the assessee on the ground that the assessee paid interest to the bank and on unsecured loans. Neither the date of advances nor the nexus between loans or advances and funds borrowed is evident from the impugned order nor the ld. CIT(A) recorded any findings as to the business expediency of interest free advances or on the nexus between borrowed funds and interest free advances. The ld. CIT(A) did not analyse the issue in proper perspective nor it is evident from the impugned orders as to on which date interest free advance was given to the aforesaid three persons and what was the purpose and for what purpose interest bearing funds were borrowed by the assessee. As is apparent from the impugned order, before the AO or the ld. CIT(A), the assessee did not place any evidence as to how the funds borrowed by it had been utilized and what was the comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be enjoying the benefits thereof. It cannot be held that the funds to the extent diverted to associate persons without charging any interest, were required by the assessee for the purpose of its business and loans to that extent were required to be raised. Unless the interest free loan goes to advance business interest of the assessee, there cannot be any commercial expediency. 5.1 In the instant case, the assessee failed to establish that the interest free advances were given out of interest free borrowings or own funds nor even established any commercial expediency in advancing funds while even no cash flow statement was placed before lower authorities and even before us. In Punjab Stainless Steel Industries vs. CIT [2011] (Delhi), Hon ble High Court held as under: In the instant case, there was absolutely no finding recorded by the Tribunal that the interest free advances were made by the assessee to sister concern for its business purposes. There was no such finding by the Tribunal even with respect to the advances extended in the previous years. It was not the case of the assessee that it had so much surplus cash available with it at the time of extending those adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 ITR 406 (P H). However, the AO did not accept the submissions of the assessee on the ground that the aforesaid charges were paid for violation of municipal laws. Therefore, invoking explanation to sec. 37(1) of the Act, the AO disallowed the amount of Rs.4,67,950/- while distinguishing the decisions relied upon by the assessee and allowed depreciation on the aforesaid amount, treated as capital in nature. 7. On appeal, the learned CIT(A) upheld the disallowance in the following terms:- 5. In view of the findings and decision in the above judgments, it is respectfully submitted that the expenses incurred by the assessee towards conversion and parking charges paid to MCD are expenditure in the nature of removal of restriction, obstruction or disability and not in nature of acquiring any new capital asset, therefore, the same should be considered as revenue expenditure and not capital in nature. I have gone through the assessment order and written submission of the appellant. I have also perused and considered the case laws cited by the appellant. During the year under consideration M/s Shyam Sunder Arun Kumar has paid Rs.2,44,740/- and Rs.2,33,210/- to MCD against parking ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Airport Authority of India Vs. CIT (Delhi). I have considered the submission of the appellant in this regard. The facts of the present case are different and distinguishable from the facts of the case of Airport Authority of India. The Assessing Officer disallowed the charges paid to MCD and claimed as revenue expenditure. The Assessing Officer further gave a finding that payments of these expenses resulted in the benefits of enduring and lasting nature. As such no new asset as created but payment of these charges has made possible the use of the shop. Though no specific parking space has been allotted but payment of these charges has made possible that appellant can use space outside its shop for parking. In view of the findings of the Assessing Officer and facts of the case these charges to MCD are capital expenditure. The Assessing Officer has rightly capitalized Rs.4,67,950/- and added back to the block of building and allowed depreciation as per law. I sustain the action of the Assessing Officer. Appeal on these grounds is dismissed. 8. The assessee is now in appeal against the aforesaid findings of learned CIT(A).The ld. AR while reiterating the submissions befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king up the violations on roads which are 80 ft. wide and more. All authorities are directed to render full assistance and cooperation. After expiry of 30 days from the date of public notice, electricity and water supply shall be disconnected. 4. Details of the Roads and the violations shall also be placed on the website by the MCD and copies also sent to Resident Welfare Associations of the area which should be involved in the process of sealing of misuser. The Commissioner of MCD shall file an affidavit, within two weeks, in terms of directions contained in this judgment, where after directions for constitution of the Monitoring Committee would be issued. The sealing would be effected by the officers authorised by the Commissioner of MCD in consultation with the Monitoring Committee. 5. The appropriate directions for action, if any, against the officers responsible for the misuse and for payment of compensation by them and by violators would be issued after the misuser is stopped. 6. None will tamper with the seals. Any tampering with seal will be sternly dealt with. Tampering with seal will include opening another entrance for use of premises. 7. It would be open to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made. 9.2 To be an allowable expenditure, within the meaning of provisions of sec. 37(1) of the Act, the money paid out or away must be- (a) paid out wholly and exclusively for the purpose of the business or profession and further (b) must not be;- (i) capital expenditure, (ii) personal expenses or (iii) an allowance of the character described in sections 30 to 36. The word "wholly" refers to quantum of expenditure. The word "exclusively" refers to the motive, objective and purpose of the expenditure and gives jurisdiction to the taxing authorities to examine these matters. The true test of an expenditure laid out wholly and exclusively for the purposes of trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he test laid down in Travancore Titanium Product's case [1966] 60 ITR 277 (SC) was modified in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 (SC), to the extent that" if the expenditure is laid out by the asseseee as owner-cumtrader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. In the instant case, amount was paid to the MCD to avoid sealing of premises i.e. to protect the asset in which business was carried on. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business. In the facts and circumstances before us, the amount was paid not merely as a trader but as owner also for misuse of the property while violating Municipal laws and Environmental laws. Therefore, such an expenditure is not allowable. 9.3 Now coming to the other aspect on the basis of which the AO disallowed the claim as to whether or not expenditure incurred as a result of compounding of violation of municipal laws Environment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss because in conducting it he has acted in a manner which has rendered him liable to penalty for breach of laws, it cannot be claimed as a deductible expense. The assessee is expected to carry on the business in accordance with law. If the assessee contravenes the provisions of law to cut down the losses or to make larger profits while carrying on the business it was only to be expected that proceedings will be taken against the assessee for violation of the Act. The evasion of law cannot be a trade pursuit. In these circumstances, the expenditure in this case could not be allowed as wholly and exclusively laid out for the purpose of assessee s business. Since in the instant case, MCD demanded the aforesaid compounding charges only when Hon ble Apex Court directed the MCD to act and seal the premises in view of flagrant violations of various laws including Municipal Laws, Master Plan and other plans besides Environmental laws and indisputably, the assessee misused its property and violated the civic and Environmental laws, we are of the opinion that aforesaid charges paid by the assessee to MCD, could not be allowed in view of explanation to sec. 37(1)of the Act. In view thereof, ..... 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