OBEROI CONSTRUCTIONS LTD ( FORMERLY KNOWN AS OBEROI CONSRUCTIONS P. LTD ),MUMBAI vs. ASST CIT CEN CIR 23, MUMBAI

This appeal is filed by the assessee against the order of CIT(A)-40, Mumbai dated 02.11.2012 in respect of Assessment Year (AY) 2009-10 on the following grounds of appeal: 1.The learned A.O has erred in law and facts in making addition of Rs.33, 78,666/- to the total income of the appellant by disallowing expenditure u/s. 14A of the Act read with rule 8D of the Income-tax Rules, 1962 without establishing any nexus between the expenditure incurred and the income which does not form part of the total income and the Hon'ble Commissioner of Income-tax (Appeals) has erred in confirming the above action of the learned A.O.

The Ld. CIT(A) while dealing with this ground observed as under ‘ “4.4 I have gone through the assessment order, perused the submissions and also discussed the case with the ARs of the appellant. The AO has disallowed Rs.33,78,666/- being 0.5% of the average value of investment as per Balance Sheet under Rule 8D(2)(iii) of the I.T. Rules. The appellant has claimed that no expenditure was incurred for earning dividend income. However, the appellant admitted that an indirect expenditure of Rs.93,12,971/- has been charged to the profit & Loss Account. Further, the appellant has admitted that an estimated amount of Rs.10,000/- could have been incurred for earning exempt income. Once appellant admits that expenditure is attributable to exempt income, AO's satisfaction is confirmed by it. Once these two conditions are satisfied, application of Rule 8D is triggered requiring quantification where AO has no option but to work out the amount disallowable. For such a situation only, the formula under Rule 8D has been provided, which, in my opinion, has rightly been applied by the AO. This view is also upheld by Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT [328 ITR 81]. Accordingly, the disallowance made by the AO u/s.14A is upheld.’ 6. We have heard both the parties and perused the material available on record. The AO made the disallowance u/s 14A on the basis of .5% of total investment of the assessee i.e. Rs. 67,57,33,160/- on which Rs. 33,78,666/- was calculated being .5%.

The assessee has not satisfied the AO as to why the disallowance U/s 14 A read with Rule 8D, be not made, however before the CIT(A) the assessee had admitted that and indirect expenditure of Rs. 93,12,971/- has been charged to the P/L account an estimated amount of Rs. 10,000/- could have been incurred in earning the exempt income. Thus both the condition for invoking Rule D was satisfied. The ld AR for the assessee has not brought any material before us as to why the disallowance made u/s 14 A read with Rule D is wrong, thus the addition u/s 14A, made by AO , which was sustained by CIT(A) does not require any interference.

Next ground for our consideration is addition made u/s 37(1) of the Act for payment for BMC by treating it as penal in nature.

The AR of the assessee has relied upon the judgment dated 31.10.2014 in titled as M/s M.P.Gupta vs. ITO, wherein the coordinate bench of Mumbai Tribunal while relying upon the judgements of Hon’ble Supreme Court in the case of Prakash Cotton Mills P. Ltd. vs. CIT[1993] 201 ITR 684 (SC) and CIT vs. Ahmedabad Cotton Mfg. Co. Ltd. [1994] 205 ITR 163 (SC) , held that statutory impost paid as damages, penalty or interest, if compensatory in nature, it is allowable as business expenditure. The Id Sr. Counsel for the assessee also draw attention to the order of the ld. CIT(A) wherein reference was made to cases of T. Khemchand Tejoomal, 161 ITR 492 and Agra Leathers Ltd. ITR 792. The Id. Sr. Counsel for the assessee submitted that these cases pertained to penalties levied by the Customs Authorities for the unlawful act of the assessee, however, in the present case the assessee has not committed any unlawful act, therefore, and these cases are not applicable to the assessee. The ld. Sr. counsel for the assessee further invited our attention to the relevant observation in the case of Agra Leatheries wherein the court has said that the Hon'ble Bombay High Court had correctly allowed the expenditure as a business expenditure as well as allowed to be added towards the cost of goods.

Further, reliance was also placed on the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles Ltd., 17 CTR 281 and in the case of CIT vs. Industrial Cables (I) Ltd. 212 CTR 513 wherein "penalty" levied for drawing extra loading from the grid, in violation of power rules and regulations was held to be allowable as it was not levied for deliberate violation of law. Attention was also invited to the memorandum to the finance Bill 1998 to show that the purpose of introducing explanation to section 37(1) of the Act was to apply the same in the case of unlawful expenditure such as on account of protection money, extortion, hufta, bribes etc. and not to the normal business expenses.

Ld. DR for revenue has further relied upon the judgment of Karnataka High Court in case titled as CIT vs. Mamta Enterprises reported in 2004(1) 266 ITR 356 (Kar), wherein it was held that putting up construction without there being a sanction plan as an offence under Karnataka Municipal Corporation Act, 1976 and it is treated as and prohibited by law. In our opinion, the fact of the case relied by ld. DR are at variance. In the present case, the assessee has paid the charges on account of regularization charges to the BMC and DR has not brought in our notice that any deviation is an offence under the statutory provision or by-laws of BMC.

Respectfully following the order of co-ordinate bench, we hold that the addition made by AO and sustained by CIT(A) u/s 37(1) of the Act is liable to be deleted.

In the above, the appeal filed by the assessee is partly allowed.