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TMI Blog2003 (10) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... a penalty for infraction of law and hence allowable?" The facts in brief may be stated as hereunder: The respondent-assessee (hereinafter referred to as "the assessee") is a builder carrying on its business in building apartments and selling the same. In the return filed by the assessee, the assessee claimed a sum of Rs. 89,960 paid as compounding fine to the Bangalore City Corporation as an expenditure under section 37 of the Act. However, the Assessing Officer disallowed the said claim. Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner (Appeals) by means of his order dated October 10, 1988, allowed the appeal and held that the assessee is entitled for deduction of allowances claimed and granted the said claim made by the assessee under section 37 of the Act by treating it as an expenditure incurred by the assessee during the course of its business. The Revenue took up the matter in appeal to the Tribunal. The Tribunal by means of its order dated July 16, 1996, confirmed the order passed by the Commissioner relying upon the judgment of the Delhi High Court in the case of CIT v. Loke Nath and Co. (Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred by an assessee who violates the law and commits an offence. It is his submission that if the benefit of expenditure incurred to compound the offence is given, it would encourage people to violate the law and therefore this court while interpreting the provision should place a construction on the provision which would not encourage violation of law and the construction to be placed must serve the object of the law. He also pointed out that the decision in the case of CIT v. Loke Nath and Co. (Construction) [1984] 147 ITR 624 (Delhi), referred to by the Tribunal cannot have any application to the present case as the said decision was rendered prior to the incorporation of the Explanation to section 37 of the Act by means of amendment made to the Act. However, Sri Ashok Kulkarni, learned counsel appearing for the assessee, strongly supported the order passed by the Tribunal and also the Commissioner. It is his submission that construction of a building in violation of the sanctioned plan cannot be treated as a violation of a serious nature which is prohibited by law or amounting to commission of an offence. He submitted that the principle laid down by the Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made under it, or of any direction or requisition lawfully given or made, the owner of the building who puts up such construction shall be liable on conviction to pay a fine prescribed under the said provision. However, clause (b) of section 483 of the Corporation Act empowers the Commissioner to compound any offence committed in breach of the provisions of the Act, rules, bye-laws or regulations which may by rules made by the Government be declared compoundable. Therefore, from the scheme of the several provisions in the Act referred to above, it is clear that nobody can put up any new construction or proceed to reconstruct the existing building without there being a sanctioned plan or permission granted by the Commissioner on that behalf; the putting up any construction without there being a sanctioned plan is made an offence under the Act and it is treated as an act prohibited by law. No doubt, as noticed by us earlier, clause (b) of section 483 of the Corporation Act empowers the Commissioner to compound the offence. Bye-law 5.6 framed by the Corporation in exercise of the power conferred under it under section 428 of the Act enables the Commissioner to set out the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 82, as approved the proposal to compound the offence by levying a compounding fine of Rs. 89,960 (rupees eighty nine thousand nine hundred sixty only). Please remit the above mentioned compound fine by means of challan for issuing the orders on the compounding of the offence." The order passed by the Deputy Director of Town Planning, referred to above, in unmistakable terms states that he had pennitted for compounding of the "offences of unauthorised construction" of eighth floor in two blocks of the premises belonging to the assessee. The language employed in clause (b) of section 483, referred to above, also says that the Commissioner is empowered to "compound the offence". Under these circumstances, there cannot be any doubt what has been done is to permit the assessee to "compound the offence" committed by it by putting up unauthorised construction of eighth floor in the building in question on payment of compounding fine of Rs. 89,960. The Explanation given to section 37 of the Act, as noticed by us earlier, makes it clear that the assessee who incurs expenditure for any purpose which is an offence or which is prohibited by law is not entitled for deduction of such expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jor portions of the said building in the form of flats to various customers. The assessee got the original building plans sanctioned and commenced the constructions. The assessee had no right to make deviations from the sanctioned plan or to continue the construction after the sanction had lapsed. Any constructions thus made would be deemed to have been erected without a proper sanction. Th.;! Committee, however, has the power to sanction revised plans so as to regularise the deviations or give ex post facto sanction for the constructions made after the sanction had lapsed by accepting by way of compensation such sum as it may deem reasonable. It is at that stage that the assessees had to consider the question of payment on the principles of ordinary commercial trading or on grounds of commercial expediency. . . The expenditure of payment of compensation incurred by the assessee has to be regarded as an integral part of the profit-earning process of the assessees." In our view, the above observation made by the Delhi High Court cannot be of any assistance to learned counsel for the respondent to support his case as the said decision was rendered prior to the amendment to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee as a trader the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business.... In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid out for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business." Further, a similar view is taken by the Supreme Court in the case of Maddi Venkataraman and Co. (P.) Ltd. [1998] 229 ITR 534. At page 545 of the judgment, the Supreme Court has observed thus: "In the instant case, the assessee had indulged in transactions in violation of the provisions of the Foreign Exchange (Regulation) Act. The assessee's plea is that unless it entered into such a transaction, i ..... 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