EON Hadapsar Infrastructure P.Ltd, Pune V. Dy. CIT, Pune

ITA 1526/PUN/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1851 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-05-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 01-08-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Keywords: Search and seizure; Loose papers; Competent authority; Bonafide mistake
• Section: 153A; 37(1); 131

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , . . , , . . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM . / ITA NO. 1 526 /PN/201 3 / ASSESSMENT YEAR : 20 0 9 - 1 0 EON HADAPSAR INFRASTRUCTURE PVT. LTD., TECHPARK - 1, TOWER E, NEXT TO DON BOSCO SCHOOL, OFF AIRPORT ROAD, YERWADA, PUNE 41 1006 . / APPELLANT PAN: AA DCP3598A VS. THE ASST. C OMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(1), PUNE . / RESPONDENT / APPELLANT BY : SHRI SHARAD SHAH / RESPONDENT BY : SHRI S.K. RASTOGI, CIT / DATE OF HEARING : 1 0 . 0 5 .201 6 / DATE OF PRONOUNCEMENT: 13 . 0 5 .201 6 / ORDER PER SUSHMA CHOWLA, J M : TH IS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT (A) - CENTRAL , TH IS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT (A) - CENTRAL , PUNE , DATED 1 3 . 06 .20 1 3 RELATING TO ASSESSMENT YEAR 20 0 7 - 0 8 AGAINST ORDER PASSED UNDER SECTION 1 4 3(3) R.W.S. 153A OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1 . THE LD. ASSESSING OFFICER ERRED IN DISALLOWING [AND CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF] THE EXPENDITURE O F RS.45,00,000/ - PAID TO THE RESERVE BANK OF INDIA TOWARDS COMPOUNDING FEE IN RELATION TO ECBS THE RESERVE BANK OF INDIA TOWARDS COMPOUNDING FEE IN RELATION TO ECBS ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 2 OBTAINED BY THE ASSESSEE COMPANY WITHOUT COMPLYING WITH ONE OF THE CONDITIONS, NAMELY, THE LENDERS SHOULD BE RECOGNIZED LENDER AS PER FEMA CIRCULAR. 2 . THE LD. A SSESSING OFFICER ERRED IN DISALLOWING [AND CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF] THE EXPENDITURE OF RS.45,00,000/ - PAID TO THE RESERVE BANK OF INDIA TOWARDS COMPOUNDING FEE IN RELATION TO ECBS ON THE GROUND THAT THE SAID EXPENDITURE IS INCURRED F OR A PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW DISREGARDING THE FACTS THAT THE EXPENDITURE IS NOT TOWARDS ANY OFFENCE NOR IS PROHIBITED BY LAW. 3. THE ONLY ISSUE ARISING IN THE PRESENT APPEAL IS AGAINST DISALLOWANCE OF RS.45 LAKHS PAID BY THE ASSESSEE TO THE RESERVE BANK OF INDIA TOWARDS COMPOUNDING FEES. COMPOUNDING FEES. 4. BRIEFLY, IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF DEVELOPMENT AND SELLING OF REAL ESTATE. SEARCH AND SEIZURE OPERATIONS ON THE PREMISES OF ASSESSE E WERE CARRIED OUT ON 11.09.2009. IN RESPONSE TO THE NOTICE ISSUED UNDER SECTION 153A OF THE ACT, THE ASSESSEE FURNISHED RETURN OF INCOME DECLARING TOTAL LOSS OF RS. 8,82,07,947/ - . DURING THE FURNISHED RETURN OF INCOME DECLARING TOTAL LOSS OF RS. 8,82,07,947/ - . DURING THE COURSE OF SEARCH AT THE OFFICE PREMISES OF ASSESSEE, INVENTORY OF CERTAIN LOOSE PAPERS / DOCUMENTS WERE FOUND AND SEIZED. ONE SUCH PAPER FOUND FR OM THE POSSESSION OF ASSESSEE WAS PAGE 20 OF BUNDLE 2 OF ANNEXURE - A, WHERE SOME CALCULATIONS HAD BEEN DONE. THE SCANNED COPY OF SAID PAGE IS AVAILABLE IN THE ASSESSMENT ORD ER AT PAGE 6. ON THE SAID PAGE, THERE WAS NOTING OF COMPOUNDING CHARGES I.E. COMPOUNDING PENALTY OF RS.45 LAKHS AND KAYAL FEES OF RS.1,68,540/ - BY CHEQUE, WHICH IN TURN, WAS DULY REFLECTED IN REGULAR BOOKS OF ACCOUNT . DURING THE COURSE OF ASSESSMENT PROC EEDINGS, THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN AS TO WHY THE COMPOUNDING FEES WHICH WAS SHOWN UNDER THE HEAD RATES AND TAXES AND PAID ACTUALLY TO RESERVE BANK OF INDIA AS PENALTY SHOULD NOT BE DISALLOWED. IN REPLY, THE ASSESSEE EXPLAINED THE NATURE OF SAID FEES PAID BY IT, WHEREIN IT WA S EXPLAINED THAT IT HAD RAISED THREE ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 3 EXTERNAL COMMERCIAL BORROWINGS I.E. ECB, FROM PORTO LIMITED, PORTO LOUIS, MAURITIUS. THE COMPOUNDING FEES WAS PAI D ON THE GROUND THAT THE LENDER M/S. PORTO LIMITED, MAURITIUS WAS NOT A RECOGNIZED LENDER IN TERMS OF GUIDELINES FOR ECB UNDER THE FEMA ACT, 1999 . THE EXPLANATION OF THE ASSESSEE IS INCORPORATED IN THE ASSESSMENT ORDER AND IT WAS CLAIMED BY THE ASSESSEE THAT IT HAD MADE THE BORROWINGS IN GOOD FAITH FOR WHICH, THE RESERVE B ANK OF INDIA HAD GRANTED PERMISSION. HOWEVER, ON A LATER DATE, IT WAS REALIZED THAT THE LENDER WAS NOT RECOGNIZED FOR SOME TECHNICAL REASONS. THE RESERVE BANK OF INDIA HAD ASKED THE ASSESSEE TO PAY COMPOUND ING FEES OF RS.45 LAKHS AS AGAINST MAXIMUM AMOUN T OF RS.30 CRORES. THE ASSESSEE FURTHER EXPLAINED THAT THE SAID AMOUNT OF RS.45 LAKHS WAS DEBITED TO FINANCIAL EXPENSES BANK CHARGES AND SINCE IT WAS INCURRED DURING REGULAR COURSE OF BUSINESS, HENCE, THE SAME WAS TO BE ALLOWED AS DEDUCTION. THE ASSESS ING OFFICER AFTER CONSIDERING THE EVIDENCES FILED BY THE ASSESSEE WAS OF THE VIEW THAT THE COMMUNICATION REFLECTS THAT THE ASSESSEE WAS KNOWING M/S. PORTO LIMITED, PORTO LOUIS, MAURITIUS, WAS NOT A RECOGNIZED LENDER AND STILL THE ASSESSEE COMPANY BORROWED THE LOANS FROM THE SAID COMPANY . H ENCE, THE CLAIM OF ASSESSEE THAT IT WAS A BONAFIDE MISTAKE WAS FOUND TO BE NOT CORRECT. THE ASSESSING OFFICER THUS, DISALLOWED COMPOUNDING FEES OF RS.45 LAKHS AND ADDED TO THE INCOME OF ASSESSEE. 5. THE CIT(A) UPHELD TH E ORDER OF ASSESSING OFFICER AND HELD THAT THE COMPOUNDING FEES PAID BY THE ASSESSEE CAME WITHIN MISCHIEF OF EXPLANATION TO SECTION 37(1) OF THE ACT. WHERE THE DICTIONARY MEANING OF WORD CONTRAVENTION WAS AN ACT DONE IN VIOLATION OF LEGAL CONDITION OR O BLIGATION, THEN THE SAME IS NOT TO BE ALLOWED AS DEDUCTION IN THE HANDS OF ASSESSEE. ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 4 6. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 7. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE DREW OUR ATTENTION TO THE COPY OF COMPOUNDING ORDER PASSED BY THE RESERVE BANK OF INDIA WHICH IS PLACED AT PAGES 1 TO 6 OF THE PAPER BOOK, UNDER WHICH THE ASSESSEE HAD ENTERED INTO THREE LOAN AGREEMENTS WITH M/S. PORTO LIMITED, PORTO LOUIS, MAURITIUS . WITH REGARD TO ECB LOANS, OUR ATTENTION WAS DRAWN TO T HE PAGE 3 OF PAPER BOOK, WHEREIN IT WAS REFERRED THAT THE LENDER COMPANY WAS WHOLLY OWNED COMPANY OF THE DIRECTORS OF ASSESSEE COMPANY AND THE RESERVE BANK OF INDIA HAD SHOW CAUSED THE ASSESSEE THAT THE LENDER WAS NOT A RECOGNIZED LENDER IN TERMS OF GUIDEL INES FOR ECB UNDER FEMA ACT, 1999. FURTHER, THE RESERVE BANK OF INDIA APPROVED THE PRE - PAYMENT OF ALL THESE THREE ECB LOANS F OR INWARD REMITTANCE WITHOUT PREJUDICE TO AN ACTION BEING TAKEN UNDER THE RULES, REGULATIONS, DIRECTIONS OF FEMA. THE LEARNED AUT HORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT THE SAID LOANS WERE SANCTIONED AFTER THE APPROVAL WAS GIVEN BY RESERVE BANK OF INDIA AND IN VIEW OF THE SAID LR NUMBER BEING ISSUED TO THE ASSESSEE, THE AMOUNT WAS DISBURSED UNDER THE ECB LOAN AGREEMENT S . THE TECHNICAL CONDITION WAS THAT THE ASSESSEE COULD HAVE BORROWED THE LOAN FROM ITS DIRECTORS, BUT NOT FROM A COMPANY IN WHICH ITS DIRECTORS WERE THE DIRECTORS. IN VIEW OF THE SAID TECHNICAL DEFAULT, THE ASSESSEE WAS HELD TO HAVE CONTRAVENED THE REGUL ATIONS VIS - - VIS EXTERNAL COMMERCIAL BORROWINGS AMOUN TING TO RS.10.08 CRORES, WHERE THE DURATION OF CONTRAVENTION WAS 3 YEARS 7 MONTHS APPROXIMATELY. THE SAID ORDER OF RESERVE BANK OF INDIA ALSO POINTS OUT THAT IN TERMS OF SECTION 131 OF FEMA, FEES COUL D BE UP TO RS.30.25 CRORES, BUT THE AMOUNT WAS COMPOUNDED AND THE ASSESSEE WAS DIRECTED TO PAY RS.45 LAKHS IN ORDER TO MEET THE ENDS OF JUSTICE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER REFERRED TO THE MASTER ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 5 CIRCULAR ON COMPOUNDING OF CONTRAVENTION UNDER FEMA, 1999 ISSUED BY RESERVE BANK OF INDIA, COPY OF WHICH IS PLACED AT PAGES 7 TO 11 OF THE PAPER BOOK AND IT WAS POINTED OUT THAT THE NATURE OF CONTRAVENTIONS ARE RECOGNIZED BY THE RESERVE BANK OF INDIA AND WHERE THE DEFAULT IS AS PER CLAUSES (A) AND (B) UNDER CLAUSE 3.5, THEN THE COMPOUNDING PROCEEDINGS ARE CARRIED OUT BY THE RESERVE BANK OF INDIA AND IN CASE, WHERE THE CONTRAVENTION PRIMA FACIE INVOLVES MONEY LAUNDERING, NATIONAL AND SECURITY CONCERNS INVOLVING SERIOUS INFRIN GEMENTS OF REGULATORY FRAMEWORK, THEN THE PROCEEDINGS ARE BEFORE THE ENFORCEMENT DIRECTORATE. REFERRING TO THE SCOPE AND MANNER OF COMPOUNDING PROVIDED IN CLAUSE 4 OF THE SAID CIRCULAR, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT UNDER CLAUSE 4.3, IT IS RECOGNIZED THAT THE CONTRAVENTION SHALL BE COMPOUNDED IN RESPECT OF VARIOUS FACTORS AND THE CLAUSE ATTRACTED IN THE CASE OF ASSESSEE WAS ON ACCOUNT OF AMOUNT OF LOSS CAUSED TO ANY AUTHORITY / AGENCY / EXCHEQUER AS A RESULT OF CONTRAVENTI ONS. OUR ATTENTION WAS FURTHER DRAWN TO THE PROVISIONS OF FEMA ACT, 1999 IN THIS REGARD. THE CASE OF THE ASSESSEE BEFORE US WAS THE PAYMENT BY THE ASSESSEE ON ACCOUNT OF COMPOUNDING FEES WAS COMPENSATORY PAYMENT AND WAS DISTINGUISHABLE FROM PENALTY FOR A N OFFENCE. FURTHER, IT WAS NOT PENALTY UNDER FEMA ACT AT ALL. ANOTHER PROPOSITION RAISED BY THE CIT(A) THAT THE SAME WAS COVERED UNDER EXPLANATION TO SECTION 37(1) OF THE ACT WAS ALSO OBJECTED TO BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BY REFERRING TO THE MEMORANDUM EXPLAINING INTRODUCTION OF SAID EXPLANATION VIDE FINANCE (NO.2) ACT, 1998 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE PROPOSAL TO INSERT EXPLANATION UNDER SECTION 37(1) OF THE ACT WAS THAT NO ALLOWANCE SHALL BE MADE IN RESPECT OF ANY EXPENDITURE INCURRED FOR ANY PURPOSE WHICH WAS AN OFFENCE OR WHICH WAS PROHIBITED BY LAW. HE STRESSED THAT THE COMPOUNDING FEES PAID BY THE ASSESSEE DID NOT FALL WITHIN EITHER OF CONDITIONS ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 6 AND HENCE, THE EXPLANA TION TO SECTION 37(1) OF THE ACT WAS NOT ATTRACTED. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN PRAKASH COTTON MILLS PVT. LTD. VS. CIT (1993) 201 ITR 684 (SC), WHERE IN IT WAS HELD THAT DEDUCTION UNDER SECTION 37(1) OF THE ACT IS AVAILABLE WHERE IT IS OF COMPENSATORY NATURE NOTWITHSTAND ING THE NOMENCLATURE OF IMPOST AS GIVEN BY THE STATUTE. HOWEVER, WHERE IT CONSTITUTED OF TWO COMPONENTS, THEN THE SAME HAD TO BE BIFUR CATED AND DEDUCTION IN RESPECT OF COMPONENT WHICH WAS PENAL, WAS NOT TO BE ALLOWED TO THE ASSESSEE. 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW AND POINTED OUT THAT DURING THE COURSE OF SEA RCH, THE SAID INFORMATION WAS RECEIVED BY THE REVENUE AND THE AMOUNT PAID BY THE ASSESSEE WAS ON ACCOUNT OF COMPOUNDING OF PENALTY AND HENCE, NOT TO BE ALLOWED AS DEDUCTION. FURTHER, RELIANCE WAS PLACED ON THE DECISION OF PUNE BENCH OF TRIBUNAL IN MODI BU ILDERS VS. JCIT (2015) 60 TAXMANN.COM 54 (PUNE - TRIB) . 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING BEFORE US IS IN RELATION TO THE CLAIM OF EXPENDITURE OF RS.45 LAKHS. THE ASSESSEE HAD APPLIED TO THE RESERVE BANK OF I NDIA FOR RAISING ECB LOANS. IN ORDER TO AVAIL THE AFORESAID ECB LOANS FROM RESERVE BANK OF INDIA, NECESSARY DOCUMENTS / EVIDENC ES AS REQUIRED UNDER FEMA ACT HAVE TO BE PROVIDED TO RESERVE BANK OF INDIA, WHO IN TURN, APPROVES THE S AME BY WAY OF ISSUING LR NUMBER, CONSEQUENT TO WHICH, THE ASSESSEE IS ENTITLED TO RAISE ECB LOANS IN FOREIGN CURRENCY. THE ASSESSEE BEFORE US IS A COMPANY WHICH WAS PROMOTED BY SHRI VIKAS SHAH AND SMT. SWETHA SHAH. THE ASSESSEE HAD RAISED ECB ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 7 LOANS FROM M/S. PORTO LIMITED, PORTO LOUIS, MAURITIUS , WHICH WAS WHOLLY OWNED COMPANY OF SHRI VIKAS SHAW AND SMT. SWETHA SHAH. THE ASSESSEE ENTERED INTO LOAN AGREEMENTS AND RAISED ECB LOANS AFTER RECEIVING THE PERMISSION FROM RESERVE BANK OF INDIA. THE FIRST LOAN AGREEMENT WAS DATED 19.11. 2004, AGAINST LR NO.2004846, DATED 07.12.2004 WAS ISSUED BY THE RESERVE BANK OF INDIA FOR GRANT OF LOAN OF US $ 8 LAKHS. FURTHER, SECOND LOAN AGREEMENT WAS DATED 09.12.2004 , AGAINST RESERVE BANK OF INDIA ISSUED LR NO.2004865, DATED 17.12.2004 AND THE ASSE SSEE RAISED S UM OF US $ 10 LAKHS ON DIFFERENT DATES. FURTHER, THIRD LOAN AGREEMENT DATED 17.06.2005 , AGAINST LR NUMBER ISSUED BY RESERVE BANK OF INDIA WAS 2005238, DATED 09.06.2005 AND THE ASSESSEE RAISED US$ 5 LAKHS . T OTAL LOAN RAISED BY THE ASSESSEE WA S US$ 23 LAKHS EQUIVALENT TO RS. 1,00,843 LAKHS . THE LENDER COMPANY I.E. M/S. PORTO LIMITED, PORTO LOUIS, MAURITIUS WAS WHOLLY OWNED COMPANY OF PROMOTER DIRECTORS OF ASSESSEE COMPANY. THE LENDER HOWEVER, ASSIGNED ALL THREE ECB LOANS TO PERSON RESIDENT OUT SIDE INDIA VIDE AGREEMENT DATED 31.01.2006 . THE RESERVE BANK OF INDIA AFTER TAKING NOTE OF THE ARRANGEMENT NOTED THAT THE LENDER WAS NOT THE RECOGNIZED LENDER IN TERMS OF GUIDELINES FOR ECB UNDER THE PROVISIONS OF FEMA ACT, 1999. IN VIEW THEREOF, RESERVE BANK OF INDIA APPROV ED PRE - PAYMENT OF ALL THREE ECBS RAISED BY THE ASSESSEE. HOWEVER, PROCEEDINGS WERE INITIATED AGAINST THE ASSESSEE FOR NON - COMPLIANCE WITH THE RULES / REGULATIONS / DIRECTIONS UNDER FEMA ACT, 1999. UNDER THE RESERVE BANK OF INDIA GUID ELINES, A CIRCULAR IS ISSUED BY RESERVE BANK OF INDIA ON COMPOUNDING OF CONTRAVENTIONS UNDER FEMA ACT, 1999. THE SAID MASTER CIRCULAR ON COMPOUNDING OF CONTRAVENTIONS UNDER FEMA ACT, 1999 IS PLACED AT PAGES 7 TO 11 OF THE PAPER BOOK. UNDER CLAUSE 3.5 , IT RECOGNIZES THREE TYPES OF CONTRAVENTIONS, WHICH ARE AS UNDER: - ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 8 A. WHETHER THE CONTRAVENTION IS TECHNICAL AND / OR MINOR IN NATURE AND NEEDS ONLY AN ADMINISTRATIVE CAUTIONARY ADVISE; B. WHETHER THE CONTRAVENTION IS SERIOUS IN NATURE AND WARRANTS COMPOU NDING OF THE CONTRAVENTION; AND C. WHETHER THE CONTRAVENTION, PRIMA FACIE, INVOLVES MONEY - LAUNDERING, NATIONAL AND SECURITY CONCERNS INVOLVING SERIOUS INFRINGEMENT OF THE REGULATORY FRAMEWORK. 10. THE CONTRAVENTION AS PER SUB - CLAUSES (A) AND (B) OF CLAU SE 3.5 ARE TO BE REFERRED TO THE RESERVE BANK OF INDIA AND THE CONTRAVENTION, IF ANY, UNDER SUB - CLAUSE (C) ARE TO BE DECIDED BY THE ENFORCEMENT DIRECTORATE. AS PER CLAUSE 4, THE SCOPE AND MANNER OF COMPOUNDING IS PROVIDED AND AS PER CLAUSE 4.3, THE APPLI CATION FOR COMPOUNDING IS TO BE DISPOSED OF ON MERITS AFTER CONSIDERING THE RECORDS AND SUBMISSIONS AT THE EXCLUSIVE DISCRETION OF COMPETENT AUTHORITY AND DISCRETION IS GIVEN FOR PASSING COMPOUNDING ORDER AND ALSO FOR ARRIVING AT THE QUANTUM OF SUM, ON PAY MENT OF WHICH, CONTRAVENTION SHALL BE COMPOUNDED. IT IS FURTHER PROVIDED UNDER THE SAID CLAUSE THAT THE COMPOUNDING COULD BE ON ACCOUNT OF AMOUNT OF GAIN OF UNFAIR ADVANTAGE, WHEREVER QUANTIFIABLE, MADE AS A RESULT OF THE CONTRAVENTION AND ALSO THE AMOUNT OF LOSS CAUSED TO ANY AUTHORITY / AGENCY / EXCHEQUER AS A RESULT OF CONTRAVENTION; AND OTHER CONDITIONS PROVIDED THEREUNDER. 11. IT IS THE CASE OF ASSESSEE BEFORE US THAT THE COMPOUNDING IN ITS CASE WA S ON ACCOUNT OF AMOUNT OF LOSS CAUSED TO ANY AUTHOR ITY / EXCHEQUER AS A RESULT OF SUCH CONTRAVENTION. THE PERUSAL OF COMPOUNDING ORDER PASSED BY THE AUTHORITY REFLECTS THAT THE AUTHORITY HAD HELD THE ASSESSEE TO HAVE CONTRAVENED REGULATIONS 3 AND 6 OF NOTIFICATION NO. FEMA.3/2000 - RB BY AVAILING EXTERNAL CO MMERCIAL BORROWINGS AMOUNTING TO RS. 10.08 CRORES WITHOUT PRIOR APPROVAL OF THE RESERVE BANK OF INDIA. THE DURATION OF CONTRAVENTION WAS 3 YEARS 7 ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 9 MONTHS APPROXIMATELY. IN TERMS OF SECTION 131 OF FEMA ACT, 1999 , WHERE ANY PERSON CONTRAVENED ANY PROVISIONS OF THE ACT SHALL BE LIABLE TO PENALTY UP TO THRICE THE SUM INVOLVED IN SUCH CONTRAVENTION. THE COMPETENT AUTHORITY NOTED THAT THOUGH IN TERMS OF SECTION 131 OF FEMA ACT, THE PENALTY COULD BE UP TO RS. 30,25,29,000/ - , BUT HOWEVER, AFTER CONSIDERING THE MAT TER AND RATIONALE BEHIND THE COMPOUNDING PROVISIONS, SUBMISSIONS OF ASSESSEE AND ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE, A LENIENT VIEW WAS TAKEN ON THE AMOUNT FOR WHICH CONTRAVENTION WAS TO BE COMPOUNDED AND IT WAS HELD THAT THE PAYMENT OF RS.45 LAKHS WOULD MEET THE ENDS OF JUSTICE. THE PERUSAL OF THE SAID ORDER PASSED BY COMPETENT AUTHORITY REFLECTS THAT AS AGAINST THE CONTRAVENTION OF PROVISIONS TO THE EXTENT OF RS.30.25 CRORES, AFTER CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES AND VARIO US PROVISIONS OF COMPOUNDING, THE ASSESSEE WAS ASKED TO PAY COMPOUNDING FEES OF RS.45 LAKHS. IN OTHER WORDS, THE COMPOUNDING FEES CHARGED TO THE ASSESSEE WAS NOT IN THE FORM OF ANY PENALTY FOR COMMITTING AN OFFENCE BUT WAS COMPENSATORY AMOUNT CHARGED TO T HE ASSESSEE FOR FAILING TO COMPLY WITH PROVISIONS OF FEMA ACT. IT MAY BE CLARIFIED HEREIN THAT THE PROVISIONS OF FEMA ACT, 1999 ITSELF PROVIDES A MEASURE TO BE TAKEN BY THE AUTHORITIES BY CHARGING COMPOUNDING FEES IN RESPECT OF CONTRAVENTION, IF ANY. SUC H A COMPOUNDING FEES CHARGED TO THE ASSESSEE BEING COMPENSATORY IN NATURE AS IS EVIDEN T FROM THE FACT THAT THOUGH THE AMOUNT TO BE CHARGED COULD BE UP TO RS.30.25 CRORES, THE ASSESSEE WAS ASKED TO PAY SUM OF RS.45 LAKHS IN ORDER TO MEET THE ENDS OF JUSTICE , ESTABLISHED THE CASE OF ASSESSEE THAT THE SAME WAS NOT IN THE FORM OF PENALTY. WHERE THE AMOUNT PAID BY THE ASSESSEE IS COMPENSATORY PAYMENT AND WAS NOT BY WAY OF ANY PENALTY LEVIED UNDER THE PROVISIONS OF FEMA, THEN SUCH AMOUNT IS TO BE ALLOWED AS DEDU CTION IN THE HANDS OF ASSESSEE. ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 10 12. NOW, COMING TO THE STAND OF AUTHORITIES BELOW THAT SUCH PAYMENT IS COVERED BY EXPLANATION TO SECTION 37(1) OF THE ACT. WE FIND NO MERIT IN THE SAID STAND OF CIT(A). THE EXPLANATION TO SECTION 37(1) OF THE ACT WAS INSE RTED 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 CO MPOUNDED 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) OF THE ACT ARE NOT ATTRACTED. IN VIEW THEREOF, WE HOLD THAT THE ASSESSEE IS ENTITLED TO THE CLAIM OF DEDUCTION UNDER SECTION 37(1) OF THE ACT. 13. NOW, COMING TO THE REL IANCE PLACED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE RATIO LAID DOWN BY PUNE BENCH OF TRIBUNAL IN MODI BUILDERS VS. JCIT (SUPRA) . IT MAY BE POINTED OUT THAT THE COMPOUNDING FEE S PAID IN THE SAID CASE WAS BY A LAND DEVELOPER TO MUNICIPAL CORPORATION ON ACCOUNT OF DEVIATION FROM ORIGINAL SANCTIONED PLAN. BY PAYING THE SAID COMPENSATION , THE ASSESSEE THEREIN HAD BENEFITED BY WAY OF SAVING THE ADDITIONAL COST OF CONSTRUCTION PUT UP IN VIOLATION OF PROVISIONS OF THE ACT AND BYELA WS. FURTHER, AS POINTED OUT BY US IN THE PARAS HEREINABOVE, EXTERNAL COMMERCIAL BORROWINGS WERE AVAILED BY THE ASSESSEE AFTER TAKING DUE PERMISSION FROM RESERVE BANK OF INDIA WHICH IS COMPLICATED PROCEDURE . NO PERSON CAN AVAIL ECB LOANS WITHOUT SUCH PERM ISSION. ONLY BECAUSE OF SOME TECHNICAL DEFAULT, THE ASSESSEE WAS HELD TO BE IN DEFAULT AND REPAY THE ECBS AND FOR THIS, THE ASSESSEE WAS CHARGED WITH COMPOUNDING FEES OF RS.45 LAKHS. ITA NO. 1526 /PN/20 1 3 EON HADAPSAR INFRASTRUCTURE PVT. LTD. 11 SUCH CHARGE CANNOT BE EQUATED WITH CASES OF DEVIATION FROM REGULATIONS OF STATE AUTHORITIES AND CHARGES LAID THEREIN. WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF ASSESSEE. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 1 4 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 13 TH DAY OF MAY , 201 6 . SD/ - SD/ - ( R.K. PANDA ) ( SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 13 TH MAY , 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - CENTRA L , PUNE ; 4. / THE CIT - CENTRAL, PUNE ; 5. , , / DR A , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETA RY , / ITAT, PUNE