COMMISSIONER OF INCOME-TAX Vs. MAMTA ENTERPRISES

JUDGEMENT

(1.) THIS reference is made under Section 256 (2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the Revenue out of the order dated July 16, 1996, made by the income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal") in I. T. A. No. 198/bang of 1989. The question of law referred to this court reads as follows : "whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the payment of the compounding fees is not a penalty for infraction of law and hence allowable ?"

(2.) 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. (Construction) [1984] 147 ITR 624, wherein the Delhi High Court took the view that the payment of compounding fine by the assessee to regularise the construction of the building made in violation of the building regulations must be regarded as an integral part of the profit earning process of the assessee.

(3.) SRI Seshachala, learned counsel appearing for the Revenue, submitted that the conclusion reached by the Tribunal that the compounding fine paid by the assessee to regularise the construction of the building made in violation of the building regulations must be regarded as an integral part of the profit earning process of the assessee is totally erroneous in law and the said conclusion has been reached by the Tribunal overlooking the Explanation provided to Section 37 of the Act. Elaborating his submission he pointed out that the construction of eighth floor in the absence of a sanctioned plan amounts to violation of the provisions of Section 300 of the karnataka Municipal Corporation Act, 1976 (hereinafter referred to as "the Corporation Act"), and the building regulations and therefore when it is prohibited by the bye-law and also it is made an offence under Section 436 of the Corporation Act in view of the Explanation to Section 37 of the Act which in specific terms excludes the 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 in respect of such expenditure, the Commissioner as well as the Tribunal have erroneously erred in law in reversing the order made by the Assessing Officer disallowing the said expenditure. Learned counsel in support of his submission, relied upon the decision of the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 and referred to us the observations made at pages 359 and 360 of the judgment and also the decision in the case of maddi Venkataraman and Co. (P.) Ltd. v. CIT [1998 ]229 ITR534 (SC), JT1997 (9 )SC 546 , 1997 (7 )SCALE327 , (1998 )2 SCC95 , [1997 ]supp6 SCR67 and referred to us the observation made at page 539 of the judgment. He also pointed out the order passed by the Commissioner clearly indicates that the offence has been compounded and the penalty was paid by the assessee. It is also his submission that the object of the Explanation is not to give deduction in respect of the expenditure 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 ITR624 (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 Court in the case of Haji Aziz and Abdul Shakoor Bros. [1961] 41 ITR 350 and in the case of Maddi Venkataraman and Co. (P.) Ltd. [1998 ]229 ITR534 (SC ), JT1997 (9 )SC 546 , 1997 (7 )SCALE327 , (1998 )2 SCC95 , [1997 ]supp6 scr67 has no application to the facts of the present case.