Income Tax Appellate Tribunal - Hyderabad
Keerthi Estates Pvt.Ltd., Hyd, ... vs Dcit, Circle-2(1), Hyderabad, ... on 9 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 271/Hyd/2016
Assessment Year: 2011-12
Keerthi Estates (P) Ltd., Vs. Dy. Commissioner of Income-
Hyderabad. tax, Circle - 2(1), Hyderabad.
PAN - AFUPV0344P
(Appellant) (Respondent)
Assessee by : Shri S. Rama Rao
Revenue by : Shri P. Chandrasekhar
Date of hearing : 04-07-2017
Date of pronouncement : 09-08-2017
ORDER
PER S. RIFAUR RAHMAN, A.M.:
This is an appeal of the assessee directed against the order of the learned Commissioner of Income-tax - 2, Hyderabad, dated 8.01.2016 for AY 2011-12.
2. Briefly the facts of the case are that the assessee company filed its return of income for the Asst. Year 2011-12 on 30.09.2011 admitting total income of Rs.1,10,70,224/- after claiming deduction u/s. 80IB(10) amounting to Rs. 5,38,55,695/-. Assessment was completed u/s.143(3) on 13.03.2014 on a total income of Rs. 1,19,55,644/-. The tax payable was determined on the basis of MAT provisions u/s. 115JB.
3. On a perusal of the assessment record under the powers vested u/s 263 of the Act, the CIT observed that prima-facie it appeared 2 ITA No. 271/H/16 Keerthi Estates (P) Ltd.
that the assessment order passed u/s.143(3) dt. 13.03.2014 is erroneous and prejudicial to the interests of revenue as the AO while passing the impugned order has not disallowed the amount of Rs. 86.60 lakhs which was paid by the assessee towards 'Compounding Fine' and penalty to the Bangalore Mahanagar Palike and claimed it as an allowable expenditure in its profit & loss account under the name "Building Approval Fees". The CIT, therefore, was of the view that as this amount represented the compounding fine and penalty, it is not allowable for a deduction as per explanation below sec. 37(1) of the I.T. Act, 1961. Accordingly, a show cause notice dt. 16.02.2015 was issued proposing to revise the assessment.
3. In response to the show cause notice issued, the ld. AR of the Assessee attended on 17.03.2015 & 20.11.2015 and filed written submissions seeking to drop the proposed action. In the written submissions, the A.R. has given the following reasons against the proposed action:
"(a) The said payment was made for regularization of a deviation in the building plan which was within the permissible limits and it was not in respect of an offence. Hence, explanation (1) to sec. 37(1) has no application to the facts of its case.
(b) For the A.Y under consideration the income was determined u/s.115JB at Rs. 6,37,27,397/- and the tax payable was accordingly determined at Rs. 1,27,01,189/-. Even if the said amount of Rs. 86,60,482/- were to be added to the total income determined under the normal provisions, the tax payable would work out to Rs. 65,54,047/- which is much below the tax determined u/s.115JB. As such the order passed by the AO without making the said disallowance was not prejudicial to the interests of revenue.
In support of his contentions, the Ld. A.R. has cited the decision of Hon'ble Delhi High Court in the case of CIT Vs. Loknath & Co., reported in 147 ITR 624, wherein it was held that the fee paid against the deviations in the approved building plan is an allowable deduction u/s.37 of the I.T. Act. It was further stated by him that the decision taken by the AO was 3 ITA No. 271/H/16 Keerthi Estates (P) Ltd.
based on the decision of the Delhi High Court which was in favour of the assessee and which should be followed as laid down by the Supreme Court in the case of CIT Vs. Vegetable Products Ltd., reported in 88 ITR 192."
4. After considering the contentions raised by the counsel with reference to the facts of the case and the relevant provisions of the Act, the CIT observed that the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Loknath & Co. (Construction) was rendered prior to the introduction of the explanation below sec. 37(1) in the Income Tax Act. The explanation below sec. 37(1) which was incorporated in the I.T. Act by Finance Act No.2/1998 with retrospective effect w.e.f. 01.04.1962 stipulates" 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 in respect of such expenditure". He observed that when the decision in the case of Loknath & Co. was rendered by the Hon'ble High Court on 13.01.1984 this explanation was not there in the statute and hence the decision of the Hon'ble Delhi high Court does not apply to the facts of the assessee's case. He observed that the assessee's case is clearly covered by the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Mamta Enterprises, reported in 266 ITR 356 which was rendered on 30th October, 2003 i.e. after the incorporation of the explanation below sec. 37(1) of the I.T. Act. In fact the decision in the case of Loknath & Co. was referred in the judgment of the Hon'ble Karnataka High Court in the case of Mamta Enterprises and was distinguished. Further the decision of the Hon'ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd., quoted by the A.R. is applicable when two different High Courts take totally divergent views on the same issue and in the same facts. However, in the present case, the Hon'ble High Courts at Delhi & Karnataka have decided the issue under different statutory Provisions namely one before the 4 ITA No. 271/H/16 Keerthi Estates (P) Ltd.
incorporation of the explanation below sec. 37(1) and the other after the incorporation of the said explanation. Therefore, the CIT opined that the applicable law in the facts of the assessee's case is that of the decision rendered by the Hon'ble Karnataka High Court in the case of Mamta Enterprises, which is against the assessee. Therefore, he held that the assessment order passed by the DCIT, Circle-2(1), Hyderabad, under sec. 143(3) dt. 13.03.2014 is erroneous.
4.1 Further, the CIT observed that though the contention raised by the A.R. that the tax determined u/s.115JB of the Act in the impugned assessment order was much more than the tax that would be payable under the normal provisions even after disallowance and adding of the said amount of Rs. 86,60,482/- is correct but still the impugned order is prejudicial to the interests of revenue since the correct assessment of the total income under the normal provisions by disallowing the said amount of compounding fine will have an effect of altering the tax credit under MAT provisions in the subsequent years.
4.2 In view of the above observations, the CIT held that the impugned order passed by the AO is not only erroneous but also prejudicial to the interests of revenue and accordingly, the impugned assessment order was revised u/s.263 and the AO is directed to disallow and add the amount of compounding fine of Rs. 86,60,482/- to the income determined and issue a revised computation accordingly.
5. Aggrieved by the order of the CIT, the assessee is in appeal before us raising the following grounds of appeal:
" 1. The order of the learned Commissioner of Income-Tax is erroneous both on facts and in law.
2. The learned Commissioner of Income-Tax erred in holding that there is an error in the order passed u/s 143(3) of the I.T. Act on 13.3.2014 which is prejudicial to the interests of Revenue.5 ITA No. 271/H/16
Keerthi Estates (P) Ltd.
3. The learned Commissioner of Income-Tax erred in holding that the payment of Rs.86,60,482/- attracts the provisions of Sec.37(1) of the I.T. Act. The learned Commissioner of Income- Tax ought to have observed that the said payment was made to Bruhath Bangalore Mahanagar Palika for regularization of deviation in the floor area ratio which is within the permissible limit and is not prohibited by law.
4. Without prejudice to the above, the learned Commissioner of Income Tax ought to have observed even if the said disallowance were to be made, the tax payable would be less than the tax u/s 115JB and as such no prejudice is caused to Revenue."
6. Before us, the ld. AR of the assessee submitted that explanation (1) to section 37(1) has no application to the facts of the case and the AO has rightly allowed the expenditure and, therefore, there is no error in the assessment made by the AO, which may be restored back and the order of the CIT may be set aside. Ld. AR has relied on the following case law:
1. EON Hadapsar Infrastructure (P) Ltd., [2016] 71 Taxmann.com 115 (Pune). In this case it has been observed as under:
"Now, coming to the stand of authorities below that such payment is covered by Explanation to section 37(1). The said stand of Commissioner (Appeals) has no merit. The Explanation to section 37(1) was inserted in respect of any expenditure incurred for any purpose which was an offence or which was prohibited by law. The Circular of Reserve Bank of India itself provided that where the assessee had committed an irregularity while dealing in foreign earnings or expenditure outgoes, then such an action of applicant could be compounded as per Rules and Regulations provided in the said Circular. It is not a case where the assessee has been held to have committed an offence or the amount has been paid for purpose, which was prohibited in law, hence the provisions of Explanation to section 37(1) are not attracted. In view thereof, the assessee is entitled to the claim of deduction under section 37(1)."
2. DCIT Vs. Bharat C. Gandhi, [2011 10 Taxmann.com 256 (Mum.). The bench has held in this case as under:
6 ITA No. 271/H/16Keerthi Estates (P) Ltd.
"9. In view of the legal principles established above and also noticing that the assessee has made about 230 trips by paying compounding fees, as per the rules in the Motor Vehicle Act, it cannot be stated that assessee's payments of compounding fees is in violation of law. Since assessee is engaged in transporting of over dimensional capacities in its transport business, it is necessary business expense wholly for the purpose of Shri Bharat C. Gandhi business. Therefore, the same is allowable under section 37(1). CIT(A)'s order on this is confirmed."
7. Ld. DR, on the other hand, relied on the orders of revenue authorities and also relied on the following case law:
1. Modi Builders Vs. JCIT, [2015] 60 Taxmann.com 54 (Pune Trib.). The Tribunal held that compounding fee paid by the assessee, a land developer to the Municipal Corporation on account of deviations from original sanctioned plan was in the nature of penalty and therefore would not be allowable as deduction in view of provisions of Explanation to section 37(1).
2. CIT Vs. Mamta Enterprises, [2004] 266 ITR 356 (Kar.). The High Court has observed as under:
"The Finance (No.2) Act of 1998has inserted an Explanation to section 37 of the Income-tax Act, 1961, with retrospective effect from April 1, 1962. The Explanation 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 expenditure incurred by him. The Explanation declares that such an expenditure "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. When the provision is clear and use unambiguous, it is not permissible for the courts to stretch the meaning attached to the provision of law to extend the benefit to a person who violates the law or the regulations/rules made by the Corporation or the municipal authorities with impunity. The claim for deduction has to be considered in the light of the Explanation given to section 37 of the Act and not with reference to the provision in the Corporation or the municipal law which permits the violator of the provisions of the Corporation or the municipal law to compound the offence either to save the unauthorised or illegal construction put up or to relieve such violator of law from the consequences provided in such Corporation or municipal law. Compounding fees paid to the municipal corporation is a penalty and is not deductible u/s 37."7 ITA No. 271/H/16
Keerthi Estates (P) Ltd.
3. Millennia Devleopers (P) Ltd., Vs. DCIT, [2010] 188 Taxmann 38 (Kar.) "In this case, the Hon'ble High Court held that the so called regularisation fee in terms of the bye-law 6.0 of the Bangalore Mahanagara Palike Bye-laws is a provision made for regularizing the deviations/violations as enabled under section 483(b) of the Karnataka Municipal Corporation Act, 1976.
The language of section 483(b) leaves one with no doubt as to the nature of the expenditure, as it is only an amount paid for compounding an offence. The amount paid for compounding an offence is inevitably a penalty in terms of section 483 itself and the mere fact that it has been described as compounding fee cannot, in any way, alter the character of the payment which payment is in the nature of penalty. As it was in the nature of penalty, the law too is well-settled to hold that it could never be an amount in the nature of an expenditure which would qualify for deduction u/s 37 and, therefore, the appeal was to be dismissed."
3. Nahar Spinning Mills Ltd., Vs. CIT, [2014] 49 Taxmann.com 565 (P&H). In this case, the Hon'ble High Court has held as under:
"In substance, the payment was in the nature of the amount paid on account of infraction of law as there was violation in the building plan of the assessee.
Further, Finance (No.2) Act, 1998 has incorporated Explanation to section 37(12) which was made retrospectively with effect from 01/04/1962.
According to the Explanation, expenditure incurred for any purpose which is an offence or which is prohibited by law, is not entitled for deduction. Thus, the amount paid by assessee to Municipal Corporation on account of compounding fee as compensation for condoning deviations from original sanctioned plan in view of the Explanation to section 37(1) would not be admissible."
8. Considered the rival submissions and perused the material facts on record as well as gone through the decisions cited at bar. The assessee has paid compounding fine to regularise the building plan. The payment of such compounding fine is penalty in the nature of an offence or which is prohibited by law. We have noticed that the 8 ITA No. 271/H/16 Keerthi Estates (P) Ltd.
decision on this count is divided among the various courts. The Hon'ble High Courts Karnataka and P&H have held the same as penalty in the nature of an offence. The other ITAT benches have given divergent views. In our considered view, the builders submit building plan for approval and based on the proposed plan, the Corporation/Municipalities gives approval. It is fact that at the time of approval, the corporation and the builders aware that it is not possible to complete the project as per the proposed plan as there are certain adjustments need to be made at the time of actual execution. As long the actual completion of the projects are within the parameters of approval, the corporation/approving authorities permit the projects as approved with the nominal fine or compounding fee. This is the reason, the corporation has the clause intact in the rules books. If the projects are illegal, which is an offence and cannot be cured, the whole project cannot be approved by the approving authorities, as the same is subject matter of public safety. The penalty can be classified as two types; one charged for violation of law in the nature of offence, which cannot be pardoned by compounding and the second is charged for violation of certain rules which are not in the nature of offences and can be cured by compounding. In the case of housing/commercial projects, the corporation aware that there will be certain deviations at the time of approval and no project can be completed without any deviation. The question is, the extent of deviation. In case it is within the permissible limits, the approving authorities, allow with compounding the deviation by levying compounding fees. In the given case, the project was completed and the deviations are within the limits, for which the Bangalore Mahanagar Palike has approved the project by compounding fees, which is not in the nature of offence nor prohibition of any law. Hence, it is allowable u/s 37(1) of the Act.
9. With regard to ground No. 4, the adjustment proposed by the CIT will have impact on the tax credit available to the assessee in the subsequent AY. Hence, this ground is dismissed.
9 ITA No. 271/H/16Keerthi Estates (P) Ltd.
10. Since there is no impact on the original assessment, the proceedings u/s 263 is quashed.
10. In the result appeal of the assessee is partly allowed.
Pronounced in the open court on 9 th August, 2017.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 9 th August, 2017.
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Copy to:-
1) Shri Keerthi Estates (P) Ltd., C/o Shri S. Rama Rao, Advocate, Flat No. 102, Shriya's Elegance, 3-6-643, Street No. 9, Himayat Nagar, Hyderabad - 500 029.
2) DCIT, Circle - 2(1), Income-tax Towers, AC Guards, Hyderabad.
3) CIT - 2, Hyderabad 4 Addl. CIT, Range - 2, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.
6) Guard File