Income Tax Appellate Tribunal - Mumbai
Radhabalabh Silk Mills (P) Ltd. vs Dy. Cit on 16 January, 2006
ORDER
Vimal Gandhi, President
1. These cross appeals one by the assessee and the other by the revenue for assessment year 1998-99 are directed against the order of the Commissioner (Appeals) VIII, Mumbai dated 4-4-2002. As common issues are involved, these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. We shall first take up the appeal of the revenue, wherein deletion of the addition of Rs. 2,60,020 has been challenged.
3. The facts of the case are that the assessee in the period under consideration had contributed Rs. 2,60,020 towards proportionate charges for along a portion of D.P. Road where factory premises of the assessee was situated. The assessing officer held that assessee had constructed a septic tank and soak pit and, therefore, expenditure involved in the above construction was capital in nature. The deduction claimed was accordingly disallowed.
4. On appeal, the assessee submitted before the Commissioner (Appeals) that payment in question was made to Bombay Municipal Corporation (hereinafter referred to as 'BMC') as contribution towards proper charges for laying sewerage along with portion on D.P. Road. BMC had construction septic tank and soak pit and had improved sewerage and drainage facility on portion of D.P. Road and all the factories situated on the said road were called upon to make proportionate contribution of getting better sewerage and drainage facility. Soak pit, septic tank etc., constructed by BMC remained its property. No new asset was acquired by the assessee. After consideration of relevant material and in the light of the case law discussed by the learned Commissioner (Appeals) in para 3.1 of the impugned order, the claim of the assessee that expenditure involved was of revenue nature was accepted. The disallowance made was accordingly deleted.
5. The revenue being aggrieved brought the issue in appeal before the Tribunal. It was reiterated that assessee constructed septic tank and soak pit and thus incurred expenditure, which was of capital nature and, therefore, rightly disallowed by the assessing officer. The contentions advanced on behalf of the revenue are factually incorrect. Assessee has placed on record copy of letter dated 27-1-1998 of BMC asking the assessee to contribute Rs. 2,60,020 towards proportionate charges for laying sewerage along the portion of D.P. Road and abutting along side the property of the assessee. The assessee was asked to approach for sewerage connection. Having regard to the contents of the above letter it cannot be disputed that assessee obtained only sewerage connection as per scheme of BMC to improve drainage facilities in the area. No capital asset was acquired by the assessee and expenditure was incurred for smooth and efficient running of business. The learned Commissioner (Appeals) having considered relevant material rightly allowed the expenditure. On facts of the case, we do no see any good reason to interfere with the impugned order. Accordingly, we dismiss the appeal of the revenue.
6. The assessee in its appeal has challenge disallowance of Rs. 21.84 lakhs and Rs. 2,32,600 paid to BMC to regularize certain constructions. The learned Commissioner (Appeals) disallowed the claim by holding them to be payment of penalty for infraction of law and, therefore, not allowable.
7. We would first consider the disallowance of Rs. 2,32,600 claimed to have been paid to BMC to regularize construction of extension to the existing factory building.
8. The facts recorded by the revenue authorities in the impugned orders are not clear. However, after discussion and after hearing the parties, we have found them to be as under. In the relevant period, assessee had its factory at D.P. Road. Two rooms were added to the existing structure at a certain cost and the cost admitted was capitalized in the books of account. However, plan for above addition to the existing structure was not got approved from the Municipal Authorities as required by regulations of BMC. After the construction was completed the assessee requested BMC to regularize the construction and the same was done on payment of Rs. 2,32,600. This is evident from letter dated 20-4-2001 of BMC, wherein it is stated as under:
This has reference to your above referred letters. The payment of Rs. 2,32,600 was paid on 22-12-1997 towards penalty for regularization of the structure constructed unauthorisedly without obtaining approval from M.C.G.M. The contents of above letter leave no amount of doubt that expenditure was nothing but penalty to regularize 'unauthorized construction' carried out without obtaining approval from BMC. It is difficult to accept that no infraction of law was involved in the impugned expenditure. The argument advanced by Shri Joshi that it was of compensatory nature is of no avail in the light of above clear and categorical evidence. The expenditure claimed was clearly hit by Explanation to Section 37(1) of the Income Tax Act. That apart, payment made to BMC is part of cost of the addition to the existing factory premises. Such cost, other than expenditure in dispute, has been capitalized by the assessee in its books of account. The learned Counsel for the assessee could not explain as to how payment for regularizing construction of capital nature could be treated as revenue expenditure and not part and parcel of cost of construction. In the light of above discussion, we uphold the impugned order of the Commissioner (Appeals) and reject this ground raised by the assessee.
9. The other ground of appeal raised by the assessee relates to disallowance of Rs. 21.84 lakhs paid by the assessee to BMC towards premium for condoning deficiency in joint open space which arose on account of consent order of Hon'ble High Court in Appeal No. 139 of 1993 between the assessee and Satyanarayan G. Kejriwal & Ors.
The facts and the background under which above payment was made are as under. A dispute relating to the factory premises of assessee was going on and the same was settled through arbitration. The award of the arbitrator became rule of court as per decision of Hon'ble Bombay High Court dated 16-7-1996. The factory premises was divided and certain portion of the building was allotted and given to the assessee on the terms and conditions mentioned in the award. As a result of above award, open space which the assessee was obliged to keep along with the building as per BMC regulations became deficient. The assessee accordingly approached BMC to exercise its discretion and regularize the constructed building in terms of regulation 64 of BMC Regulations. Regulation 64(b) of development regulation for Greater Bombay 1991 provides that in specific cases where a clearly demonstrable hardship is caused, the Commissioner may for reasons to be recorded in writing, by special permission permit any of the dimensions prescribed by these Regulations to be modified. On the request of the assessee and as per order dated 28-8-1997, particularly in the light of the order of the High Court referred to above, division of the building was accepted and deficiency in the open space was condoned on charging Rs. 21.84 lakhs from the assessee. The assessee claimed that above amount was a revenue deduction incurred essentially for protection and preservation of its business asset.
10. The assessing officer in the impugned order disallowed the claim as of capital nature. He further justified the disallowance by observing that amount in question was paid as penalty for regularizing unauthorized construction. The penalty paid could not be allowed as an expenditure. This way Rs. 21.84 lakhs was added in the assessment of the assessee. On appeal, the learned Commissioner (Appeals) confirmed the addition as he agreed with the assessing officer that the amount in question was not compensatory in nature but was of penal character. He held that Commissioner of BMC had exercised his discretionary power under regulation 64 of BMC Regulations to regularize non-compliance of provision relating to open space in the existing structure. He, therefore, confirmed the disallowance in the hands of the assessee. For adopting above course, the learned Commissioner (Appeals) relied upon decision of Hon'ble Supreme Court in the case of Maharashtra Sugar Mihs v. CIT 124 ITR 429 (sic).
11. The assessee being aggrieved, has brought the issue in appeal before the Tribunal. The learned Counsel for the assessee submitted that the learned Commissioner (Appeals) was wrong in holding that amount of Rs. 21.84 lakhs was paid as penalty to BMC. The learned Commissioner (Appeals) failed to appreciate that factory building was already in existence and there was division of the same between the assessee and others as per the award of arbitrator and decree of Hon'ble High Court. The assessee had no choice in the matter, but to accept the property at the direction of the arbitrator and Hon'ble High Court. However, the property as awarded to the assessee suffered from deficiency in the open space which was regularized by the BMC Commissioner by exercising his discretionary power under regulation 64(b) of BMC Regulations. The amount was paid as compensation for getting above regularization. The same cannot be treated as penalty.
In support of his contention, the learned Counsel for the assessee drew our attention to the decision of the Hon'ble Delhi High Court in CIT v. Lokenath & Co. (Construction) , wherein their Lordships on identical circumstances held as under affirming the decision of the Tribunal:
The sum of Rs. 4 lakhs was a permissible deduction in arriving at the profits of the business of the assessee, the outgoing being allowable in one assessment year. The first proviso to Section 195 softened the rigour of the Section by providing that instead of requiring demolition or alteration of the building not conforming to the sanction or the bye-laws, the NDMC might accept by way of compensation such sum as it might deem reasonable. That Section ensured that the restriction to be observed by builders were enforceable either by alteration or demolition or by accepting sums by way of compensation. Section 195 did not create any penal offence. Offences and punishment were created by other Sections such as Sections 192 and 192A, Section 199, Section 219 and Section 221 and power to compound the offences was conferred by Section 229. The Act drew a distinction between an offence which could be compounded and a disobedience for which the NDMC could accept a compensation. The compensation was for the breach of a regulatory procedure in the matter of ex post facto sanction of a building constructed in deviation of a sanctioned plan or where the sanction had lapsed. The ex post facto sanction obtained showed that there was no breach of a provision against public policy and the acceptance of the compensation could not be for any illegal act against public policy. On the acceptance of the compensation there was condonation of disobedience of a procedural requirement the compensation was not a penalty payment to save the assessee from criminal liability or prosecution or to compound any offence committed by the assessee. The payment of Rs. 4 lakhs was made in the course of the assessee's business of construction of the building which was ultimately to be sold as a business of the assessee, inasmuch as without paying this amount the assessee could not complete the building according to the plans lawfully. The payment was vital for the business of the assessee which consisted in the construction of the building and its sale flat-wise. The expenditure was for saving of the loss of the alteration of the closing stock of the assessee. The expenses incurred were to preserve or, in other words, to save kit from extinction. A portion of the building was saved from alteration or demolition and remained as business stock available for sale flat-wise. The payment was not in the nature of penalty for infraction of law and was a permissible deduction in arriving at the business profits of the assessee.
Like in the above cited case, the assessee in the present case paid compensation to BMC to preserve and protect and regularize property allotted to the assessee.
The learned Counsel for the assessee also relied on the decision of Hon'ble Delhi High Court in CIT v. New Garage Ltd. where payment for protection of tenancy right was held to be business expenditure.
The learned departmental Representative opposed above submissions.
12. We have given careful thought to the submissions of the parties and facts of the case on record. We have no quarrel with the proposition laid down in the impugned order for determining whether expenditure is permissible deduction or not, its nature under the impost is to be examined. It is to be allowed if compensatory and in case it is held to be penalty, it is to be disallowed. Having regard to the facts and regulation 64 of BMC Regulations, we are unable to hold that payment made to BMC was a penalty. It is undisputed that existing property was divided and apportioned and given to the assessee under Award of Arbitrator and directions of Hon'ble High Court. The portion allotted to the assessee suffered from deficiency in open space and was required to be regularized which was done on payment of fees as per BMC Regulations. The assessee has not done anything in breach of the statutory provision. The deficiency in the open space had resulted from the directions of the Arbitrator dividing the property between the assessee and others. The assessee did not carry out any act which may be termed as illegal or contrary to statutory provisions. Compensation was paid as relevant Regulation of BMC required payment of compensation for regularization of construction not strictly carried out as per the guidelines (BMC Regulations). So amount in question was demanded and paid by the assessee. However, payment is not to cover any act of the assessee which could be termed as breach of some legal provisions. We are therefore unable to agree with the learned Commissioner (Appeals) that expenditure involved was a penalty and, therefore, could not be allowed.
13. The assessing officer while disallowing the expenditure in dispute had also held that it was of capital nature. The learned Commissioner (Appeals) did not consider above issue and we are inclined to remand the matter back to his file for considering the above question. In the course of hearing, learned Counsel for the assessee has placed reliance on approval of BMC dated 28-8-1997, which contained reasons for granting approval. He further relied upon resolutions of BMC and calculations of premium made by architect M/s. R.S. and Associates. These documents though relevant were not placed before the revenue authorities and are fresh evidence. The learned departmental Representative was justified in objecting consideration of the above material without affording opportunity of rebuttal to the revenue. The objection can be taken care of by restoring the matter to the file of the Commissioner (Appeals), who should afford opportunity of being heard to the assessing officer and then re-examine the claim whether expenditure was capital or revenue in nature after considering all the relevant material. This is another reason for restoring the matter to the file of the learned Commissioner (Appeals).
14. In the above circumstances, we set aside the impugned order of the Commissioner (Appeals) on this point and restore the matter to his file for considering of the question whether expenditure of Rs. 21.84 lakhs claimed by the assessee towards payment of BMC was revenue or capital in nature. The question shall be determined in accordance with law after affording reasonable opportunity of being heard to both the parties.
Pronounced in the open court on the date of hearing i.e. 16-1-2006
15. In the result, appeal of the revenue is dismissed while that of the assessee is allowed for statistical purposes.