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Income Tax Appellate Tribunal, “D”, BENCH KOLKATA
Before: SHRI S.S.VISWANETHRA RAVI, JM & DR. A.L.SAINI, AM
O R D E R
Per Dr. Arjun Lal Saini, AM:
The captioned appeal filed by the assessee, pertaining to the Assessment Year 2009-2010, is directed against the order passed by ld. Commissioner of Income Tax (Appeals), Asansol, in Appeal No.234/CIT(A)/Asl/Cir-1/Asl/11-12, dated 01.12.2014, which in turn arises out of an order passed by the Assessing Officer (AO) Under Section 143(3) of the Income Tax Act 1961, (in short the ‘Act’), dated 11.03.2014.
Brief facts of the case qua the assessee are that the assessee company filed its return of income for the assessment year 2009-10 on 12.01.2011 declaring total income of Rs.18,63,098/-. Assessee’s case was selected for scrutiny u/s.143(3) of the Act and the AO has completed the assessment by making various additions.
Aggrieved from the order of ld. AO, the assessee filed an appeal before the ld. CIT(A), who has also confirmed the additions made by the AO, by observing the followings :-
In section 23 the proviso reads as under :- “Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of the previous year in which such taxes are actually paid by him. Clearly the elements in the demand notice viz.(a) 100% penalty of sanction fees & development fees (b) Fine for deviated area @Rs.70/- per sq.ft.and (c) Development and sanctioned fee are not "taxes levied by any local authority in respect of the property". The municipal tax here is the tax determined payable on annual basis post completion determined in a pre specified manner, generally on basis of national rental value.
The appellant argued that Rs.12,66,076/- and Rs.5,20,759/- are fine and not penalty and fine is akin to taxes here. Hence he pleaded that this sum be allowed since the same goes in augmenting profit. 7. The matter is considered. The explanation offered by the appellant does not meet the condition stipulated in law. Here we are computing income from house property which is determined on basis of specific non discretionary deduction and not profits and gains of business and profession. The sums in the two demand notices of Asansol Municipal Corporation are not "taxes levied on the property by local authority" as specified in proviso to section 23(1). They are sums that were to be paid at pre commencement of construction stage and penalty for violation of municipal laws. This is not deductible in accordance with proviso to section 23(1) in computing annual value. Hence decline to accept the plea of appellant. 8. The disallowance of Rs.19,00,772/- made by Assessing Officer is upheld. The grounds 1 to 4 stands dismissed.
Not being satisfied with the order of ld. CIT(A), the Assessee is in further appeal before us and has taken the following grounds of appeal :-
1. That on the facts and circumstances of the case Id. CIT(A), Asansol erred in confirming the disallowance of Rs.1900772/- paid 3 M/s Sormistha Builders & Construction (P) Ltd. to Asansol Municipal corporation on account of fees for deviation of building plan whereas such payment is part and parcel of business expenses incurred wholly and exclusively for the purpose of business of the appellant.
2. That on the facts and circumstances of the case Id. CIT(A), Asansol erred in not appreciating the fact that appellant derives income from House Property and also from Business on account of purchase and sale of commercial and residential flats after promoting and constructing the same and consolidated Profit/Loss account is prepared debiting the above sum of Rs.1900772/- wherein both the income from the House Property and income from sale of commercial and residential complexes were credited in the Profit/Loss Account.
3. That on the facts and circumstances of the case Id. CIT(A), Asansol erred in not appreciating the fact that the details were filed before the A.O. and CIT(A) and explained that fees paid to the Municipal Corporation is a part and parcel of the expenditure allowable u/s 28 though not allowable u/s 22.
4. The appellant craves leave to alter, amend and substitute and ground or grounds before or at the time of hearing.
5.Although, in this appeal, the assessee has raised four grounds of appeal, but at the time of hearing the main grievance of the assessee has been confined to the issue that ld. CIT(A) did not allow the penalty paid by the assessee to Municipal Corporation on account of deviation of building plan.
5.1. Ld. AR for the assessee has submitted that the assessee derives income from house property and also income from business. Income from business is mainly on account of purchases and sales of commercial and residential flats. The assessee prepared a consolidated profit and loss account, where he has debited the penalty paid to Municipal Corporation at Rs.19,00,772/-. In the profit and loss account both the income of the assessee are getting reflected i.e. income from house property and that penalty paid to the Municipal Corporation is a part and parcel of the expenditure allowable u/s.28. Since the assessee has two types of income i.e. income from house property and income from business. The assessee cannot claim the penalty expenditure under the head income from house property because there is no any provision to allow penalty expenditure, therefore, the option available before the assessee is to claim the penalty paid to Municipal Corporation in the profit and loss account. The assessee has paid this penalty because of deviation of building plan. Ld. AR argued that because of deviation of building plan, the assessee would be able to get more revenue and more carpet area and, therefore, this way the business income of the assessee is increasing and, therefore, it is for the purpose of the business. Because of deviation of building plan the assessee would be able to get more revenue from the sale of residential flats and commercial flats, therefore, the penalty paid to the Municipal Corporation on account of deviation of building plan is business expenditure and should be allowable u/s.37(1) of the Act.
5.2 On the other hand, Ld. DR for the revenue has primarily reiterated the stand taken by the CIT(A) and AO, which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. The Ld. DR pointed out that penalty paid for violation of any Act or Law is not allowable u/s 37(1). If the penalty and fines are allowed as a business expenditure then there would be more crime and unlawful or the fine paid by the assessee which is prohibited by law should not be allowed as a business expenditure and Section 37(1) prohibits the same.
Explanation 1 to Section 37(1) reads as follows :-
“Explanation 1- 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.”
5.3. Having heard the rival submissions, perused the material available on record, we are of the view that there is merit in the submissions of ld. DR for the revenue. Ld. DR of the revenue has explained before us that penalty expenditure is not a business expenditure and he has rightly pointed out that Explanation 1 to Section 37(1) of the Act prohibits the same, therefore, 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 allowed in respect of such expenditure. In the case under consideration the assessee has violated the Municipal Law. Therefore, the penalty fee paid to the Municipal Corporation on account of deviation of building plan is not allowable expenditure. This expenditure is neither allowable under the head income from house property nor under the head business income. Considering the factual position and the provisions of Section 37(1) of the Act, we do
6 M/s Sormistha Builders & Construction (P) Ltd. not find any infirmity in the order passed by ld. CIT(A). Therefore, we confirm the order of ld. CIT(A). 5.4. In the result, appeal filed by the assessee is dismissed. Order pronounced in the open court on this 21/12/2016.
Sd/- Sd/- (S.S.VISWANETHRA RAVI) (DR. A.L.SAINI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक Dated 21/12/2016 �काश �म�ा/Prakash Mishra,�न.स/ PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant-M/s Sormistha Builders & Const.(P)Ltd 2. ��यथ� / The Respondent.-ACIT/Cir-1/Asansol 3. आयकर आयु�त(अपील) / The CIT(A), Kolkata. 4. आयकर आयु�त / CIT �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//