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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI C.N. PRASAD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax-14, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal
filed by the assessee read as under :
1. On the facts and in the circumstances of the case and in law the Commissioner of Income Tax (Appeals-14 [“the CIT(A)”] was not justified M/s Vighnaharata Builders Assessing Officer of disallowing the BMC charges paid of Rs.38,52,000/-.
2. On the facts and in the circumstances of the case and in law, the Commissioner of Income Tax-(Appeals)-22 [“ the CIT(A)”] was not justified in upholding the action of the Assessing Officer of holding that the penalty imposed by BMC was not on account of infringement of statute but compensatory by way of damages.
3. Briefly stated, the facts of the case are that the assessee, a builder and developer filed its return of income for the assessment year (AY) 2010-11 on 15.10.2010 declaring total income of Rs.1,98,43,190/-. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has debited an amount of Rs.43,64,500/- by way of BMC (Brihanmumbai Municipal Corporation) charges. In response to a query raised by the AO, the assessee filed a reply stating that : this penalty paid is for carrying on the redevelopment work during the stop work period. The assessee had to carry on the work despite stop work to facilitate the rehabilitation of tenants. In this case, the nomenclature of penalty does not determine whether it is penal or compensatory. It is may be noted that in this case, there is no infringement of statue but damages sought by BMC.
However, the AO was not convinced with the above reply of the assessee and relying on the decision in Indian Aluminium Company Ltd. 79 ITR 514, Maddi Venkatraman & Co. 229 ITR 534, Mamata Enterprise 266 ITR 356 and Millenia Developers P. Ltd. 322 ITR 401, made an addition of the BMC charges of Rs.38,52,000/-.
M/s Vighnaharata Builders
Aggrieved by the order of the AO the assessee filed an appeal before the Ld. CIT(A). We find that vide appellate order dated 28.08.2017, the Ld. CIT(A) proposed an enhancement of Rs.5,12,500/- by issuing the following show cause notice dated 26.07.2017 to the assessee :
From the letter No. EEBPR/5579/FS/AR dated 19/1/2009 of Executive Engineer (Building Proposal) City II, Municipal Corporation of Greater Mumbai (MCGM) it is seen that you have also paid regularization fee of Rs.5,12,500/-, in respect of basement below the shops in building No. 2, to Municipal Corporation of Greater Mumbai (MCGM). In the case of Millenia Developers (P) Ltd vs. DCIT (2010) 231 CTR 0401, Hon'ble Karnataka High Court has held that regularization fee paid to the to the Municipal Corporation is the amount paid for compounding of an offence and the same is in the nature of penalty. Therefore, the same is not deductible u/s 37(1) of the I.T. Act. The AO has failed to disallow this payment of Rs.5,12,500/- to the MCGM. Kindly show cause as to why the disallowance of Rs.38,52,000/- made by the AO u/s 37(1) of the IT. Act may not be enhanced by the amount of Rs.5,12,500/- in view of the decision of Karnataka High Court quoted above. Your submission, if any, in respect, of this notice may be filed before the undersigned on or before 7/8/2017, failing which it shall be presumed that you have nothing to say in this matter. In that case, your appeal shall be decided on the basis of material available on record.
However, no reply was received from the assessee by the CIT(A) to the above show cause notice. Even after, allowing additional time to the assessee, no reply was filed. Therefore, the CIT(A) disallowed the payment of Rs.5,12,000/- to MCGM towards “Regularization of basement below shops in building No. 2”. Thus the addition of Rs.38,52,000/- made M/s Vighnaharata Builders AO towards BMC charges was enhanced to Rs.43,64,500/- by the Ld. CIT(A).
Before us, the Ld. counsel for the assessee filed an additional ground which reads as under : “1.1 On the facts and the circumstances of the case and in law, the CIT(A) erred in enhancing the disallowance under section 37 of the Act, to Rs.43,64,500/-. 1.2 The appellant prays that the disallowance of BMC charges of Rs.5,12,500/- be deleted.” Filing the above additional grounds of appeal
, the Ld. counsel submits that while preparing for the hearing, it was noticed that in the original appeal, the assessee had inadvertently and erroneously omitted to raise the specific ground of appeal for disallowance of enhancement of Rs.5,12,500/-, which represents payments made to MCGM for regularization of basement below shops in building No.
2. Further, it is submitted that in a recent decision, the ITAT Mumbai in the case of M/s Acme Housing India Pvt. Ltd. v. DCIT (ITA No. 4919/Mum/2016) for AY 2010-11 dated 11.05.2018, which was not available at the time of filing of appeal, held as under :
In the case of housing/commercial projects, the corporations are 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 a particular case. In case it is within the permissible limits, the approving authorities will allow with compounding the deviation by levying compounding fees. In the given case, the project was completed and the M/s Vighnaharata Builders MCGM 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.
Relying on the decision in NTPC v. CIT 229 ITR 383 (SC) and Jute Corporation of India Ltd. v. CIT 189 ITR 688 (SC), the Ld. counsel submits that the additional ground filed by the assessee be considered while disposing the appeal.
5.1 The Ld. counsel further submits that the assessee had submitted the following break up of payment made to MCGM in their letter dated 19.01.2009 to the AO S. No. Particulars Amount in Rs. 1 Penalty towards finishing work done after Stop Work Notice for sale 3,60,000/- Building No. 1 2 Penalty towards regularization of podium work done without 34,92,000/- approval after Stop Work Notice for sale Building No. 1 3 Regularization of basement below shops in Building No. 2 5,12,500/- Total 43,64,500/- It is stated that the foregoing charges are purely compensatory in nature paid in normal course of its building and development projects and these payments represent certain compensation or regularization fees paid to BMC/MCGM which is made in exercise of the option conferred on the assessee under the very law or scheme by MCGM and/or BMC. It is thus explained that these payments cannot be penalty or akin to penalty for any infringement of law. Arguing that these regularization payments are to be regarded as business expenditure allowable u/s 37 of the Act, reliance is placed by the Ld. counsel on the decision in M/s Acme M/s Vighnaharata Builders Housing India Pvt. Ltd. (supra) and Keerthi Estate (P.) Ltd. v. DCIT (ITA No. 271/Hyd/2016 for AY 2011-12).
On the other hand, the Ld. Departmental Representative (DR) submits that the above charges paid to BMC/MCGM are nothing but penalty towards finishing work done after stop work notice for sale of building No. 1 (Rs.3,60,000/-) ; penalty towards regularization of podium work done without approval after stop work notice for sale of building No. 1 (Rs.34,92,000/-) and regularization of basement below shops in building No. 2 (Rs.5,12,500/-). Thus arguing that the above payments being penal in nature, the Ld. DR submits that the order passed by the Ld. CIT(A) be confirmed.
We have heard the rival submissions and perused the relevant materials on record. We find merit in the contentions of the Ld. counsel that in original appeal, the assessee had inadvertently omitted to raise the specific ground of appeal
with regard to enhanced amount of Rs.5,12,500/-, which represents payments made to MCGM for regularization of basement below shops in building No.
2. As the additional ground filed by the assessee is purely legal and does not require any adjudication of new facts, we admit it for adjudication. In M/s Acme Housing India Pvt. Ltd. (supra), the Tribunal has followed the judgement of the Hon’ble Karnataka High Court in CIT v. Mamta Enterprises, [2004] 135 TAXMAN 393 (Kar.). In Keerthi Estate (P.) Ltd. (supra), the Tribunal has arrived at a finding on facts. In Mamta Enterprises, the assessee, a builder, in contravention of the provisions of M/s Vighnaharata Builders Karnataka Municipal Corporation Act, 1976 and the Building Regulations had put up 8th floor in an apartment without there being a sanctioned plan. However, the competent authority of Town Planning on a request made by the assessee, by means of his order dated 30-9-1982, permitted the assessee to compound the offence on payment of compounding fine. The assessee, accordingly, paid certain sum as compounding fine to the Bangalore City Corporation and claimed the same as an expenditure under section 37. The Assessing Officer disallowed the assessee’s claim. On appeal, the Commissioner (Appeals) allowed the assessee’s claim by treating the compounding fine as an expenditure incurred by the assessee during the course of its business. On further appeal, the Tribunal confirmed the impugned order relying upon the judgment of the Delhi High Court in the case of CIT v. Lokenath & 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. On reference, the Hon’ble High Court held : “ From the scheme of several provisions in the Karnataka Municipal Corporation Act, 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 of any new 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, clause (b) of section 483 of the Corporation Act empowers the Commissioner to compound the offence. [Para 5] In the instant case, undisputedly, the assessee had put up 8th floor in an apartment without there being a sanctioned plan. Therefore, the assessee had put up the said construction in violation of the building bye-laws and, therefore, he had committed infraction of law and also an offence within the M/s Vighnaharata Builders 436 of the Corporation Act. The competent authority of Town Planning on the request made by the assessee, by means of his order dated 30-9-1982, permitted the assessee to compound the offence on payment of compounding fine. [Para 6] The order passed by the competent authority of Town Planning in unmistakable terms stated that he had permitted for compounding of the offence of unauthorised construction of 8th floor in two blocks of the premises belonging to the assessee. The language employed in clause (b ) of section 483 of the Corporation Act also says that the Commissioner is empowered to compound the offence. Under these circumstances, there could not be any doubt that what had been done was to permit the assessee to compound the offence committed by it by putting up unauthorised construction of 8th floor in the building in question on payment of compounding fine. When Explanation to section 37 defines that the expenditure incurred for any purpose which is an offence or which is prohibited by law is not entitled to deduction, it is not possible to take the view that the compounding of the offence or violation of the provisions of the Corporation Act, for the purpose of saving the offender of the law from the consequences of the commission of such an offence or violation of law should also be given the benefit of section 37(1) by permitting the assessee to pay the compounding fee as the fine. Therefore, the compounding of the offence under the Corporation Act cannot take away the rigour of the Explanation given to section 37. The claim for deduction made by the assessee had to be considered in the light of the Explanation given to section 37 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. [Para 7] The observation made by the Delhi High Court in Lokenath & Co. Construction’s case (supra ) could not be of any assistance to the assessee to support its case, as the said decision was rendered prior to amendment to section 37 by incorporating the Explanation by means of the Finance (No. 2) Act, 1998 which is made retrospective with effect from 1-4-1962. When section 37 itself declares that 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, it is not possible to take the view that the expenditure incurred for compounding of the offence should be allowed. When the section is clear and 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. Under these circumstances, the expenditure incurred to pay the penalty could not be treated as loss in business to get benefit. The penalty paid had enured to the benefit of the assessee to save the additional construction M/s Vighnaharata Builders Act and the bye-laws framed thereunder and also the consequences of penal provision provided under the corporation or the municipal law. [Para 8] Therefore, the deduction permitted by the Commissioner (Appeals) as well as the Tribunal was totally unsustainable in law. [Para 9]”