DCIT CEN CIR 8(3), MUMBAI vs. LOKHANDWALA SHELTERS (I) P.LTD, MUMBAI

Date of hearing 07-02-2018 Date of pronouncement 09-03-2018 O R D E R

Per G Manjunatha, AM :

2. The brief facts of the case are that the assessee company is engaged in the business of property development, filed its return of income for AY 2010-11 on 14-10-2010 declaring total income of 2 ITA 5000/Mum/2015 Rs.22,66,264. The case has been selected for scrutiny and notices u/s 143(2) and 142(1) of the Act, were issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished the details, as called for. The assessment has been completed u/s 143(3) on 22-03-2013 determining the total income at Rs.2,08,41,572 interalia making additions towards disallowance of penalty paid to Slum Rehabilitation Authority (SRA), Mumbai of Rs.1,05,19,900, disallowance of sundry expenses of Rs.4,76,813 and disallowance of Rs.6,56,625 towards transactions with Western Outdoor Structures Pvt Ltd. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), assessee has filed elaborate written submissions in respect of addition made by the AO towards disallowance of penalty paid to SRA which has been reproduced by the CIT(A) in his order on pages 5 to 12. The assessee also challenged the addition made by the AO towards sundry expenses and transactions with Western Outdoor Structures Pvt Ltd. The CIT(A), vide his order dated 08-06-2016 partly allowed appeal filed by the assessee wherein he deleted addition made towards penalty paid to SRA u/s 37(1); however, confirmed addition made towards disallowance of sundry expenses and transactions with Western Outdoor Structures Pvt Ltd. Aggrieved by the order of CIT(A), revenue is in appeal before us.

3 ITA 5000/Mum/2015 3. The Ld.DR submitted that the Ld.CIT(A) erred in holding that the penalty of Rs.1,05,19,900 is business expenditure allowable u/s 37 without appreciating the fact that the assessee has violated the law laid down by the SRA, a state government body and as such, the penalty paid on account of infringement of law is not allowable u/s 37 of the Income-tax Act, 1961.

4 ITA 5000/Mum/2015 boundaries. After due survey and demarcation was made, further commencement certificate was granted. The assessee further submitted that it has carried out certain work which is as per the approved plan, but before obtaining the commencement certificate which was beyond their control due to coastal regulation zone ambiguity.

Therefore, the said payment cannot be considered as penalty paid which is in the nature of an offence or which is prohibited by law.

5 ITA 5000/Mum/2015 which the assessee has incurred any expenditure which is in the nature of an offence or which is prohibited by the law is not allowable as deduction. It is the contention of the assessee that penalty paid to SRA, Mumbai is for regularization of certain constructions which was commenced before issue of commencement certificate, but not for violation or infringement of any law. The assessee further contended that it has paid amount to SRA for obtaining commencement certificate beyond certain specified period which was delayed due to ambiguity in demarcation of the Coastal Regulation Zone. The assessee further contended that the National Institute of Oceanography was approached by the Maharashtra Coastal Zone Management Authority for proper demarcation of the coastal regulation boundaries and after duly surveyed and demarcation was made, further commencement certificate for the project was obtained belatedly due the reasons beyond its control. The fact remains that SRA has issued commencement certificate by collecting applicable fees. This itself shows that the said violation is not an offence under the Act.

6 ITA 5000/Mum/2015 constructions within the permissible bye-laws of concerned authority, then it cannot be considered that infringement or violation of any law. In this case, on perusal of the notice available on record, we find that the assessee has paid penalty to SRA, Mumbai for regularization of certain construction work which had been commenced before obtaining commencement certificate from the SRA which is due to reasons beyond its control as there was an ambiguity in demarcation of the Coastal Regulation Zone which been later clarified by the Maharashtra Coastal Zone Management Authority from the National Institute of Oceanography and after duly surveyed and demarcation was made granted commencement certificate for which assessee has paid necessary fees. Therefore, we are of the view that the AO has erred in treating amount paid to SRA, Mumbai as penalty paid for the purpose which is an offence or which is prohibited by law which shall not be allowed as deduction u/s 37(1) of the Act. The CIT(A), after considering relevant facts and also distinguishing the case laws relied upon by the Ld.AO in the case of Mamta Enterprises vs CIT (2004) 135 Taxman 353 rightly deleted addition made by the AO. We do not find any error or infirmity in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal filed by the revenue.

7 ITA 5000/Mum/2015 Order pronounced in the open court on 09th March, 2018.