ACIT, New Delhi V. M/s Mohan Exports (India) Pvt. Ltd., New Delhi

ITA 3571/DEL/2011

• Counselvise Citation: 357120114 RSA 2011
• Duration Of Justice: 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-03-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 16-02-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 15-07-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R S NEGI
• Assessee Lawyers: V K AGGARWAL
• Keywords: Commercial expediency
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E NEW DELHI. BEFORE SHRI RAJPAL YADAV AND SHRI K.G. BANSAL I.T.A. NO.3571(DEL)/2011 ASSESSMENT YEAR: 2008-09 ASSTT. COMMISSIONER OF INCOME M/S MO HAN EXPORTS PVT. LTD., TAX, CIRCLE 5(1), NEW DELHI. VS. 7, MO HAN HOUSE, ZAMRUDPUR COMMUNITY CENTRE, KAILASH COLONY EXTN., NEW DELHI. PAN: AAACM4168J (APPLICANT) (RESPONDENT) APPELLANT BY : SHRI R.S. NEGI, SR. DR RESPONDENT BY : SH RI V.K. AGGARWAL, C.A. DATE OF HEARIN G: 16.02.2012 DATE OF PRONOUN CEMENT: 02.03.2012. ORDER PER K.G. BANSAL : A.M TWO POINTS HAVE BEEN TAKEN BY THE REVENUE IN THIS APPEAL REGARDING DISALLOWANCE U/S 14A AND DISALLOWANCE OF MISUSE CHARGES. 2. IN REGARD TO THE FIRST ISSUE, THE AO FOUND IN THE COURSE OF ASSESSMENT THAT THE ASSESSEE HAS MADE INVESTMENTS IN SHARES OF COMPANIES AND UNITS OF MUTUAL FUNDS. THE INVESTMENTS AS O N 31.03.2008 STOOD AT RS. 89,77,51,107/- AS COMPARED TO RS. 54,10,80,750/- AS ON 31.03.2007. THE ASSESSEE WAS REQUIRED TO EXPLAIN AS TO WHY APPR OPRIATE DISALLOWANCE ITA NO. 3571(DEL)/2011 2 SHOULD NOT BE MADE FROM THE EXPENDITURE DEBITED TO THE BOOKS OF ACCOUNT BY INVOKING THE PROVISIONS CONTAINED IN SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME-TAX RU LES, 1962. IT WAS SUBMITTED THAT THE ASSESSEE HAS MADE INVESTMENTS IN SHARES OF GROUP COMPANIES, SHARES AND UNITS OF UNLISTED COMPANIES OR FUNDS, AND SHARES AND UNITS OF LISTED COMPANIES AND MUTUAL FUNDS. THE SHARES OF GROUP COMPANIES HAVE NOT YIELDED ANY DIVIDEND IN THIS YEAR. THE SHARES AND UNITS OF UNLISTED COMPANIES AND MUTUAL FUNDS HA VE ALSO NOT YIELDED ANY INCOME. THE ASSESSEE HAS RECEIVED DIVIDEND OF R S. 46.65 LAKH FROM FOREMOST FACTOR LTD. THEREFORE, IT WAS ARGUED THAT NO AMOUNT IS DISALLOWABLE UNDER THE AFORESAID PROVISION. THE AO CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE HIM. IT IS MENTIONED THAT THE INVESTMENTS HAVE BEEN MADE WITH A VIEW TO EARN DIVIDEND. SUCH INCOME IS NOT TO BE INCLUDED IN THE TOTAL INCOME O F THE ASSESSEE. THEREFORE, PROVISIONS CONTAINED IN SECTION 14A AND RULE 8D ARE APPLICABLE. RULE 8D LAYS DOWN THE PROCEDURE FOR CALCULATING THE AMOUNT WHICH IS ATTRIBUTED TO EARNING TAX-FREE INCOME. THIS RU LE WAS APPLIED. CONSEQUENTLY, DISALLOWANCE WAS MADE UNDER RULE 8 D(2)(II) AND RULE 8D(2)(III). THE DISALLOWANCE UNDER FORMER PROVISI ON WAS CALCULATED AT ITA NO. 3571(DEL)/2011 3 RS. 51,78,366/- AND UNDER THE LATTER PROVISION AT RS. 35,97,079/-. THUS, A TOTAL SUM OF RS. 87,75,445/- WAS DISALLOWED. 3. VARIOUS SUBMISSIONS WERE MADE BEFORE THE LD. CIT(APPEALS) BY THE ASSESSEE. HE CONSIDERED THE ASSESSMENT ORDER AN D THE SUBMISSIONS MADE BEFORE HIM. HE ALSO EXAMINED THE BANK ACCOUNT M AINTAINED BY THE ASSESSEE COMPANY WITH CITI BANK IN ORDER TO ASCE RTAIN IMMEDIATE SOURCE OF INVESTMENT IN SHARES AND UNITS. IT WAS FOU ND THAT THE INVESTMENTS HAVE BEEN MADE IN THIS YEAR FROM INTEREST-FREE F UNDS AVAILABLE WITH THE ASSESSEE. IN VIEW THEREOF, IT WAS HELD THAT NO DI SALLOWANCE IS WARRANTED UNDER RULE 8D(2)(II). 3.1 COMING TO THE SUBMISSION THAT NO DIVIDEND HAD BEEN RECEIVED FROM VARIOUS COMPANIES, THE FINDING OF THE LD. CIT(APPEALS) IS THAT THIS DOES NOT MEAN THAT SUCH COMPANIES WILL NOT DECLA RE DIVIDEND IN FUTURE. FOR MAKING DISALLOWANCE U/S 14A, IT IS NOT NECES SARY THAT ALL THE INVESTMENTS MUST YIELD INCOME IN THE YEAR UNDE R CONSIDERATION. THE RELEVANT CONSIDERATION IS THE POTENTIALITY OF EARNING INCOME IN FUTURE YEARS. THEREFORE, REJECTING THIS ARGUMENT, THE DISALLOWANCE UNDER RULE 8D(2)(III), AMOUNTING TO RS. 35,97,079/-, HAS BEEN SUSTAINED. ITA NO. 3571(DEL)/2011 4 4. BEFORE US, THE LD. SENIOR DR REFERRED TO THE FINDINGS OF THE AO AND THE LD. CIT(APPEALS). THESE FINDINGS HAVE ALRE ADY BEEN SUMMARIZED BY US. OUR ATTENTION HAS BEEN DRAWN TOWARDS PAGE NOS. 6, 18 AND 22 OF THE PAPER BOOK. PAGE 6 SHOWS THE INVESTMENTS MADE IN THE UNQUOTED SHARES AND UNITS OF THE COMPANIES AND MUTUAL FUNDS AND INCOME RECEIVED THEREFROM. THESE DETAILS ARE REPRODUCED BELOW:- NAME OF THE COMPANY OPENING BALANCE CLOSING BALANCE DIVIDEND RECEIVED (RS.) (RS.) (RS.) FOREMOST FACTORS LTD. (FFL) 69,146,235.00 69,146,235.00 27,99,015.00 LORD KRISHNA BANK LTD. (LKBL) 443,333,506.00 0.00 0.00 MOTHERSON SUMI-INFOTECH & DESIGNS LTD. 34,50,000.00 0.00 0.00 GEE GEE FACBRICS PVT. LTD. 8,000,000.00 8,000,000.00 0.00 MADHUSUDAN CABLE INDUSTRIES PVT. LTD. (MCIPL) 6,619,808.00 6,619.808.00 0.00 CRAYON CAPITAL ART FUNDS (UNITS) 2,500,000.00 2,500,000.00 0.00 533,049,549.00 86,266,043.00 27,99,015.00 4.1 PAGE NO. 18 CONTAINS THE EXPLANATION OF TH E ASSESSEE BEFORE THE AO THAT THE INVESTMENTS HAD BEEN MADE IN EARL IER YEARS AND THERE IS NO NEXUS BETWEEN INTEREST PAID AND INVESTMENTS MA DE IN THIS YEAR. FOR INVESTMENT OF RS. 6,92,12,607/- IN SHARES OF HOTLI NE TELETUBES LTD. AND ITA NO. 3571(DEL)/2011 5 FOREMOST FACTORS LTD., THE ASSESSEE HAD INTERE ST-FREE FUNDS BY WAY OF SHARE CAPITAL, RESERVE AND SURPLUS AND CURREN T LIABILITIES AMOUNTING TO RS. 4.96 CRORE, RS. 60.27 CRORE AND RS. 43.86 C RORE RESPECTIVELY. PAGE 22 IS A DETAILED CHART OF INVESTMENTS AND INC OME RECEIVED THEREON. THIS CHART SHOWS TOTAL INVESTMENTS OF RS.54,10,80,750/- AS ON 31.03.2007 AND RS. 89,77,51,107/- AS ON 31.03.2008. THE ADDI TION TO THE INVESTMENT IN THIS YEAR IS SHOWN AT RS. 35,66,70,357/-. THE COR RESPONDING INCREASE IN INVESTMENTS IN IMMEDIATELY PRECEDING YEAR WAS RS. 1,75,69,808/-. THE CASE OF THE LD. DR IS THAT THERE HAS BEEN SUBSTAN TIAL INCREASE IN THE INVESTMENTS IN THIS YEAR. THE AO HAS FOLLOWED PR OPER PROCEDURE AS MENTIONED IN THE DECISION IN THE CASE OF MAXOP P INVESTMENTS LTD. VS. CIT, (2011) 203 TAXMAN 364 (DEL). THEREFORE, IT IS ARGUED THAT THE ORDER OF THE LD. CIT(APPEALS) MAY BE SET ASIDE ON THIS ISSUE AND THAT OF THE AO MAY BE RESTORED. 5. IN REPLY, THE LD. COUNSEL FOR THE ASSESSEE S UBMITTED THAT IT HAD SUFFICIENT INTEREST-FREE FUNDS AND NO PART OF THE INTEREST PAID IN THIS YEAR IS RELATED TO THE INVESTMENTS MADE BY THE ASSESSEE IN SHARES OR UNITS. NO DISALLOWANCE WAS MADE IN THE PROCEEDINGS OF ASSESSMENT YEAR 2007- 08 AS THE RETURN HAD BEEN PROCESSED U/S 143(1). THE LD. CIT(APPEALS) HAS EXAMINED THE BANK ACCOUNT TO ENSURE THAT T HERE IS NO NEXUS BETWEEN ITA NO. 3571(DEL)/2011 6 INVESTMENT MADE IN THIS YEAR AND THE BORROWED F UNDS. THEREFORE, IT IS ARGUED THAT NO AMOUNT COULD BE DISALLOWED UNDER RULE 8D(II). IT MAY BE MENTIONED HERE THAT THE ASSESSEE HAS NOT FILE D APPEAL AGAINST THE DISALLOWANCE UPHELD BY THE LD. CIT(APPEALS) BY INVOKING THE PROVISION CONTAINED IN RULE 8D(2)(III). 6. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. THERE IS NO EVIDENCE ON RECORD TO S UGGEST THAT ANY INVESTMENT IN SHARES OR UNITS HAS BEEN MADE IN TH IS YEAR OUT OF BORROWED FUNDS ON WHICH INTEREST IS PAYABLE BY THE ASSESS EE. THE LD. CIT(APPEALS) HAS GIVEN A VERY SPECIFIC FINDING THAT THE E XAMINATION OF THE BANK ACCOUNT SHOWS THAT SUCH INVESTMENTS ARE OUT OF INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE-COMPANY. RULE 8D(2)(II ) DEALS WITH A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIB UTABLE TO ANY PARTICULAR INCOME OR RECEIPT IN TERMS OF THE DECISION I N THE CASE OF MAXOPP INVESTMENTS LTD. (SUPRA). THE LOWER AUTHORITIES WERE EXPECTED TO EXAMINE WHETHER THE INTEREST PAID IN THIS YEAR IS OR IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THERE IS A FINDING THAT THE INTEREST IS NOT DIRECTLY RELATED TO RECEIPTS BY WAY OF DIVIDENDS. THEREFORE, ITA NO. 3571(DEL)/2011 7 IT FOLLOWS THAT THE PAYMENT OF INTEREST IS IN RESPECT OF INCOME OTHER THAN DIVIDEND INCOME. IN SUCH A SITUATION, THE INTE REST CANNOT BE SAID TO BE A KIND OF GENERAL EXPENDITURE INCURRED FOR EARNIN G OF VARIOUS KINDS OF INCOMES. THEREFORE, THE PROVISION CONTAINED IN RULE 8D(2)(II) IS NOT APPLICABLE. IT WAS ALSO THE ARGUMENT OF THE LD. SENIOR DR THAT THE AO HAS FOLLOWED THE PROCEDURE LAID DOWN IN THE CASE O F MAXOPP INVESTMENTS LTD. THE DECISION IS THAT THE AO HAS TO EXAMIN E THE EXPENDITURE AND ITS NEXUS WITH THE EARNING OF TAX-FREE INCOME, AS PROVIDED IN SUB-SECTION (2) OF SECTION 14A. IF THERE IS NO SUCH NEXUS , THE DISALLOWANCE CANNOT BE MADE, OTHERWISE THE DISALLOWANCE CAN BE COMPUTED AS PRESCRIBED UNDER RULE 8D. IN VIEW OF THE FINDING OF THE LD. C IT(APPEALS), NO INTEREST EXPENDITURE HAD BEEN INCURRED FOR EARNING TAX- FREE INCOME. THEREFORE, THE PROVISION CONTAINED IN RULE 8D(2)(II) CANNO T BE INVOKED. THUS, GROUND NOS. 2 AND 2.1 REGARDING THIS ISSUE ARE D ISMISSED. 7. COMING TO THE SECOND ISSUE, THE AO FOUND THAT THE ASSESSEE CLAIMED THE DEDUCTION OF A SUM OF RS. 67,31,919/ -. ANNEXURE H OF THE AUDIT REPORT FURNISHED THE BREAK-UP OF THE EXPE NDITURE AS UNDER:- (I) MISUSE CHARGES 34,22,1 47/- (II) INTEREST ON MISUSE CHARGES 30 ,84,530/- (III) INTEREST ON CONVERSION CHARGES 1,2 5,420/- (IV) INTEREST ON GROUND RENT 99,822/- ITA NO. 3571(DEL)/2011 8 7.1 THE ASSESSEE WAS REQUIRED TO STATE ITS CASE AS TO HOW THE AMOUNT IS DEDUCTIBLE IN COMPUTING THE TOTAL INCOME. IT WAS SUBMITTED THAT THE AMOUNT REPRESENTS THE DEMAND RAISED BY THE DELHI DEVEL OPMENT AUTHORITY (DDA FOR SHORT). THE ASSESSEE HAD CONTESTED THE DEMAND. FINALLY, THE DEMAND NOTICE DATED 08.05.2007 WAS ACCEPTED BY IT. THE DEMAND WAS PAID IN THE CURRENT YEAR. THEREFORE, THE SAME IS DEDUCTIBLE FROM THE INCOME. ON GETTING THE EXPLANATION, THE AO ISSUE D A FURTHER SHOW CAUSE NOTICE ASKING THE ASSESSEE TO STATE ITS CASE A S TO WHY THE EXPENDITURE SHOULD NOT BE DISALLOWED. IT WAS SUBMITTED THA T THE ASSESSEE PURCHASED TWO COMMERCIAL PLOTS IN PUBLIC AUCTION IN MARCH, 1978. THE MASTER PLAN ENVISAGES THAT THE RESIDENTIAL PREMISES WILL BE CONSTRUCTED ON SECOND AND THIRD FLOORS. THE ASSESSEE-COMPANY PROTESTED AG AINST THIS POLICY. IN THE MEAN TIME, THE ASSESSEE CONSTRUCTED THE COMMERCI AL CENTRE ON THE PLOTS AND THE SPACE SO CONSTRUCTED WAS ALSO USED F OR COMMERCIAL PURPOSES. THE ASSESSEE ACCEPTED THE DEMAND FROM THE DDA AS FINDING EQUIVALENT COMMERCIAL SPACE IN THE VICINITY WOULD HAVE COST MORE THAN THE CHARGES PAID TO THE DDA. THEREFORE, IT IS ARGUED THAT THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINESS. THE AO CO NSIDERED THE SUBMISSIONS OF THE ASSESSEE. IT HAS BEEN HELD THAT THE EXPEN DITURE DOES NOT PERTAIN TO THIS YEAR. FURTHER, IT HAS BEEN HELD THAT COMME RCIAL SPACE HAS CONSTRUCTED ITA NO. 3571(DEL)/2011 9 BEEN WITHOUT THE PERMISSION OF THE DDA WHICH AMOUN TS TO UNAUTHORIZED CONSTRUCTION. ON NOTICING THIS, THE DDA LEVIED MISUSE CHARGES AND ORDERED DEMOLITION OF THE UNAUTHORIZED CONSTRUCT ION. THIS POINT WAS CONTESTED FOR A LONG TIME. THE ASSESSEE HAS PA ID THE MISUSE CHARGES AND INTEREST THEREON IN THIS YEAR. THERE IS NO VALUE ADDITION TO THE BUILDING. THE EXPENDITURE IS ALSO NOT REVENUE EXPENDI TURE AS IT HAS BEEN INCURRED FOR MISUSE OF THE RESIDENTIAL PREMISES AS COMMERCIAL PREMISES. THUS, THE EXPENDITURE HAS BEEN DISALLOWED. 7.2 BEFORE THE LD. CIT(APPEALS), IT HAS BEEN SUBM ITTED THAT THE DEMAND NOTICES FROM THE DDA ARE DATED 08.05.2007 AND 18.12.2007. THIS SHOWS THAT THE LIABILITY GOT CRYSTALLIZED IN T HIS YEAR. THE AMOUNT INCLUDES MISUSE CHARGES OF RS. 34,22,147/-, INTEREST ON MI SUSE CHARGES AMOUNTING TO RS. 30,84,530/-, INTEREST ON CONVERSION CHARGE S OF RS. 1,25,420/- AND INTEREST ON GROUND RENT OF RS. 99,882/-. THE FACT S REGARDING ALLOTMENT OF THE PLOTS AND CONSTRUCTION THEREON SUBMITTED B EFORE THE AO WERE REITERATED. THE ARGUMENT REGARDING THE EXPENDI TURE HAVING BEEN INCURRED IN THE COURSE OF THE BUSINESS WAS ALSO REITERATE D. IT IS FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT VIOLATED ANY STATUTE AND, THEREFORE, THE MISUSE CHARGES ARE NOT PENAL IN NATURE. THE INTEREST PAID THEREON IS ALSO ITA NO. 3571(DEL)/2011 10 COMPENSATORY IN NATURE. THE DDA IS PURELY COMMER CIAL ORGANIZATION WHICH ACQUIRES AND SELLS THE LAND. THIS ACTIVIT Y IS IN THE NATURE OF BUSINESS. MERELY BECAUSE THE DDA IS A GOVERNME NT BODY, THE CHARGES OF COMMERCIAL NATURE CANNOT BE CATEGORIZED AS PENAL IN NATURE. THE EXPENSES ARE ALSO NOT CAUGHT WITHIN THE MISCHI EF OF EXPLANATION-1 TO SECTION 37. 7.3 THE LD. CIT(APPEALS) CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE HIM. IT IS MENTIONED THAT THE CHARGES WERE PAID ON THE BASIS OF DEMAND NOTICE ISSUED BY THE DDA IN THE MONTHS OF MAY, 2007 AND DECEMBER, 2007. BOTH THESE DATES FALL IN THE CURRENT PREVIOUS YEAR. THEREFORE, IT HAS BEEN HELD THAT THESE AR E NOT PRIOR PERIOD EXPENSES. 7.4 COMING TO DEDUCTION OF EXPENSES U/S 37(1), I T HAS BEEN HELD THAT THE INTEREST OF RS. 33,87,926/- IS OBVIOUSLY COMPENSA TORY IN NATURE, THEREFORE, IT CANNOT BE DISALLOWED U/S 37(1). AS FAR AS M ISUSE CHARGES OF RS. 34,22,147/- ARE CONCERNED, IT IS MENTIONED THAT THE OPINION OF THE AO IS INFLUENCED BY THE FACT THAT IN ITS REPLY DATED 03.12.2010, THE ASSESSEE HAS USED THE TERM PENALTY-DDA MISUSE. THE PAYME NT HAS BEEN MADE FOR CREATING EXTRA COMMERCIAL SPACE, WHICH IS NOT P ERMITTED UNDER THE MASTER ITA NO. 3571(DEL)/2011 11 PLAN APPROVED BY THE DDA. THE SPACE HAS BEEN CREATED BECAUSE THERE WAS A BUSINESS NECESSITY TO DO SO. THUS, THE EXP ENDITURE HAS BEEN INCURRED BY WAY OF COMMERCIAL EXPEDIENCY. IT D OES NOT INVOLVE VIOLATION OF ANY STATUTORY PROVISION. THEREFORE, IT HAS BEEN HELD THAT THIS AMOUNT IS ALSO DEDUCTIBLE IN COMPUTING THE TOTAL INCOME. 8. IN REGARD TO THE FINDING THAT THE EXPENDITURE DOES NOT PERTAIN TO THIS YEAR, THE LD. SENIOR DR REFERRED TO PAGE NOS . 29 AND 30 OF THE PAPER BOOK. PAGE NO. 29 IS A LETTER DATED 08.05.200 7 FROM THE DDA. IT GIVES THE BREAK-UP OF A SUM OF RS. 36,58,530/- IN TERM S OF MISUSE CHARGES, AND INTEREST ON BELATED PAYMENT OF CONVERSION CHARG ES AND GROUND RENT FOR THE TWO PLOTS OF LAND. THIS LETTER HAS BEEN WRI TTEN IN REFERENCE TO ASSESSEES LETTER DATED 17.02.2007. ON THE BASI S OF THIS DATE, IT IS ARGUED THAT THE AMOUNT HAD BEEN COMPUTED PRIOR TO 17.02 .2007 AS THE ASSESSEE HAD SOUGHT FURTHER CLARIFICATION IN ITS LETTER D ATED 17.02.2007. PAGE NO. 30 IS A LETTER DATED 18.12.2007 FROM THE DDA RE GARDING EXECUTION OF LEASE DEED. IN THIS LETTER, INTEREST ON MISUSE CHARGE S HAS BEEN COMPUTED AT RS. 33,87,926/-. ON THE BASIS OF THESE DOCUMENTS AND AFORESAID SUBMISSIONS, IT IS ARGUED THAT THE EXPENSES ARE IN RESPECT O F EARLIER PERIOD ON WHICH ITA NO. 3571(DEL)/2011 12 INTEREST HAS ALSO BEEN LEVIED IN THIS YEAR. IT IS ARGUED THAT BOTH THESE EXPENSES ARE NOT DEDUCTIBLE IN COMPUTING THE INC OME. 9. IN REPLY, THE LD. COUNSEL ALSO REFERRED TO PA GE NOS. 29 AND 30 OF THE PAPER BOOK AND SUBMITTED THAT THE DEMAND GOT CR YSTALLIZED IN THIS YEAR, THEREFORE, THE EXPENSES CANNOT BE SAID TO BE PR IOR PERIOD EXPENSES. 9.11 IT IS FURTHER SUBMITTED THAT THE MISUSE CHARGES PERTAIN TO THE LOWER BASEMENT. THIS POSITION IS DIFFERENT FROM POSIT ION SUBMITTED BEFORE THE LOWER AUTHORITIES THAT THE 2 ND AND 3 RD FLOORS HAD TO BE CONSTRUCTED FOR RESIDENTIAL PURPOSE AS PER MASTER PLAN. ON RECEIV ING THE LETTER FROM THE DDA, THIS PORTION (THE LOWER BASEMENT) WAS FILL ED UP. THE EXPENDITURE HAS BEEN INCURRED IN PURSUANCE OF BUSINESS EXPE DIENCY AS HIRING OF EQUIVALENT SPACE ELSEWHERE WOULD HAVE LED TO HIGHER EXPENDITURE THAN THE PAYMENT MADE TO THE DDA. THE EXPENDITURE D OES NOT INVOLVE VIOLATION OF ANY LAW. THEREFORE, THE EXPENDITURE HAS BEEN INCURRED AS A MATTER OF BUSINESS EXPEDIENCY, WHICH IS DEDUCTIB LE IN COMPUTING THE INCOME OF THE ASSESSEE. ITA NO. 3571(DEL)/2011 13 10. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. THE FACTS ARE THAT THE ASSESSEE W AS REQUIRED TO PAY MISUSE CHARGES OF RS. 33,87,926/- IN TERMS OF THE LETT ER OF THE DDA DATED 18.12.2007. THIS LETTER SPEAKS OF THE EARLIER LETTER OF 08.05.2007, WHICH SHOWS THAT THERE WAS SOME PREVIOUS CORRESPONDEN CE WHICH TOOK PLACE BETWEEN THE ASSESSEE AND THE DDA IN THIS MATTER O N 08.05.2007. BOTH THESE DATES FALL IN THIS YEAR. FURTHER, THE ASSESSEE HAD TO PAY A TOTAL SUM OF RS. 36,58,530/- IN TERMS OF THE LETTER OF THE DDA DATED 08.05.2007. THIS AMOUNT CONSISTS OF MISUSE CHARGES OF RS. 34, 22,147/-. THUS, THE TWO LETTERS CONTAIN SOME WHAT DIFFERENT AMOUNTS QUANTI FIED AS MISUSE CHARGES. THE LETTER DATED 08.05.2007 ALSO CONTAINS DETAIL S OF INTEREST ON BELATED PAYMENT OF CONVERSION CHARGES AND GROUND RENT. THESE ARE THE ONLY EVIDENCES PLACED BEFORE US OR THE LOWER AUTHORIT IES FOR DECIDING THE QUESTION REGARDING DEDUCTION OF THE OVERALL SUM OF RS. 67,31,919/-. THE LD. COUNSEL FAIRLY SUBMITS THAT THE NATURE OF INTEREST ON MISUSE CHARGES WILL PARTAKE THE CHARACTER OF MISUSE CHARGES IN SO FAR AS ITS DEDUCTIBILITY IN COMPUTING THE INCOME IS CONCER NED. THE QUESTION IS- WHETHER, MISUSE CHARGES ARE DEDUCTIBLE U/S 37( 1) OR NOT? ITA NO. 3571(DEL)/2011 14 10.1 BEFORE DECIDING THIS ISSUE, WE MAY REFER T O THE PRECEDENTS RELIED UPON BY THE RIVAL PARTIES. THE LD. SENIOR D R HAS RELIED ON THE DECISION IN THE CASE OF CIT VS. MAMTA ENTERPRISES (2004) 266 ITR 356 (KARNATAKA). THE ASSESSEE IS A BUILDER AND IS C ARRYING ON THE BUSINESS OF BUILDING APARTMENTS AND SELLING THEM. IT CLAIM ED DEDUCTION OF A SUM OF RS. 89,960/- PAID AS COMPOUNDING FINE TO BANGAL ORE CITY CORPORATION. THE AO DISALLOWED THE SAME. THE CIT(APPEALS) A LLOWED THE DEDUCTION BY HOLDING THAT IT IS INCURRED IN THE COURSE OF B USINESS. THE TRIBUNAL UPHELD THIS ORDER BY RELYING ON THE DECISION IN THE CASE OF CIT VS. LOKE NATH & CO. (CONSTRUCTION) (1984) 147 ITR 624 (DE L), IN WHICH IT HAD BEEN HELD THAT COMPOUNDING FIND PAID BY THE ASSES SEE TO REGULARIZE THE CONSTRUCTION OF THE BUILDING MADE IN VIOLATION OF BUILDING REGULATION IS AN INTEGRAL PART OF PROFIT EARNING PROCESS OF THE ASSESSEE. THE HONBLE COURT CONSIDERED THE DECISION IN THE CASE OF HAJI AZ IZ AND ABDUL SHAKOOR BROTHERS (1961) 41 ITR 350 (SC) AND MADDI VENKA TARAMAN & CO. (P) LTD. (1998) 229 ITR 534 (SC). IN THE LATTER C ASE, THE HONBLE SUPREME COURT OBSERVED THAT THE ASSESSEE HAD INDULGED IN TRANSACTIONS IN VIOLATION OF THE PROVISIONS OF THE FOREIGN EXCHANGE (REGU LATION) ACT. THE PLEA THAT UNLESS IT ENTERED INTO SUCH A TRANSACTION, IT WOULD HAVE BEEN UNABLE TO DISPOSE OFF THE UNSOLD STOCK OF INFERIOR QUA LITY OF TOBACCO AND MUST ITA NO. 3571(DEL)/2011 15 HAVE INCURRED LOSS, CANNOT BE A JUSTIFICATION FOR CONTRAVENTION OF LAW. THE ASSESSEE WAS ENGAGED IN TOBACCO BUSINESS. IT WAS EXPECTED TO CARRY ON THE BUSINESS IN ACCORDANCE WITH LAW. I F IT CONTRAVENES THE PROVISIONS OF FERA TO CUT DOWN LOSSES OR MAKIN G LARGER PROFIT, IT WAS ONLY EXPECTED THAT PROCEEDINGS WILL BE TAKEN AGAINST IT. THE EXPENDITURE INCURRED FOR EVADING THE PROVISION OF THE ACT AND ALSO THE PENALTY LEVIED FOR SUCH EVASION CANNOT BE ALLOWE D AS DEDUCTION. IT IS NOT ENOUGH THAT DISBURSEMENT WAS MADE IN THE COURSE OF TRADE, IT MUST ALSO BE FOR THE PURPOSE OF THE TRADE. THE PURPOSE M UST BE A LAWFUL PURPOSE. IN THE FORMER CASE, IT HAS BEEN HELD THAT IF A S UM IS PAID BY THE ASSESSEE IN CONDUCTING HIS BUSINESS, BECAUSE IN CONDUCTI NG IT HE HAS ACTED IN A MANNER WHICH HAS RENDERED HIM LIABLE TO PENALTY , IT CANNOT BE CLAIMED AS A DEDUCTIBLE EXPENSES. THE PENALTY PAID F OR INFRACTION OF LAW CANNOT BE CALLED COMMERCIAL LOSSES INCURRED BY THE ASSE SSEE AS IT IS NOT A NORMAL INCIDENT OF THE BUSINESS. RELYING ON THESE CASES, IT HAS BEEN HELD THAT THE DEDUCTION ALLOWED BY THE CIT AND THE TRIBUNAL IS TOTALLY UNSUSTAINABLE IN LAW. THUS, THE MATTER HAS BEEN DE CIDED IN FAVOUR OF THE REVENUE. ITA NO. 3571(DEL)/2011 16 10.2 THE DECISION IN THE CASE OF LOKE NATH & COM PANY (CONSTRUCTION) (SUPRA) HAS BEEN DISCUSSED IN BRIEF IN THE CASE OF MAMTA ENTERPRISES (SUPRA). IN THIS CASE, THE ASSESSEE HAD CONST RUCTED EXTRA SPACE ON THE SECOND FLOOR OF THE BUILDING COVERING 50% OF THE AREA INSTEAD OF 35% OF THE AREA SANCTIONED BY THE NDMC. THE ASSESSE E APPLIED FOR REVISED SANCTION OF THE PLAN OF THE BUILDING UNDERTAKING TO CONSTRUCT ONLY 12 STOREYS IN PLACE OF 13 STOREYS ORIGINALLY SANC TIONED IN VIEW OF THE EXCESS CONSTRUCTION ON THE SECOND FLOOR. THIS PLAN WAS SANCTIONED AND THE INFRINGEMENT BY WAY OF ADDITIONAL COVERAGE A ND OTHER IRREGULARITIES WERE CONDONED ON THE CONDITION THAT THE ASSESSE E SHALL PAY AD-HOC PENALTY OF RS. 4.00 LAKH. THE NDMC PROPOSED TO REVOKE THE REVISED PLAN BUT A WRIT PETITION FILED BY THE ASSESSEE AGAINST THIS PROPOSAL WAS ALLOWED BY THE HIGH COURT. THE QUESTION WAS-WHETH ER, THE SUM OF RS. 4.00 LAKH IS ALLOWABLE AS A DEDUCTION IN COMPUTING TH E BUSINESS PROFITS OF THE ASSESSEE? THE ITO AND THE AAC DECIDED THE MATT ER AGAINST THE ASSESSEE BY HOLDING THAT THE AMOUNT WAS PAID AS PENALTY FOR INFRINGEMENT OF MUNICIPAL BY-LAWS. THE TRIBUNAL HOWEVER CAME TO THE CONCLUSION THAT THE AMOUNT PAID WAS COMPENSATION AND NOT PENALTY. THUS, THE DEDUCTION WAS ALLOWED. THE MATTER WAS AGITATED BEFORE THE HONBLE HIGH COURT, WHICH MENTIONED THAT SECTION 195 OF PUNJAB MUNI CIPAL ACT ENSURED THAT ITA NO. 3571(DEL)/2011 17 THE RESTRICTIONS WERE OBSERVED BY THE BUILDER. SUCH RESTRICTIONS WERE ENFORCEABLE BY ALTERATION, DEMOLITION OR ACCEPT ING A SUM BY WAY OF COMPENSATION. THIS SECTION DOES NOT CREATE ANY PENAL OFFENCE. THEREFORE, THE PAYMENT IS NOT OCCASIONED BY INFRINGEMENT OF ANY LAW OR IT IS NOT AGAINST PUBLIC POLICY. THEREFORE, THE PAYMENT CO ULD NOT BE HELD TO BE ILLEGAL. ACCORDINGLY, THE DEDUCTION HAS BEEN AL LOWED. 10.3 IN THE CASE OF GOLDCREST CAPITAL MARKETS L TD. VS. ITO (2010) 130 TTJ (MUM.) 446, IT HAS BEEN HELD THAT FINES A ND PENALTIES LEVIED FOR VIOLATION OF UNFAIR TRADE PRACTICE SPECIFIED IN REGULATION 4.6 AND RULE IV(4)(E) OF THE NSE RULES CANNOT BE EQUATED WIT H VIOLATION OF A STATUTORY RULE OR LAW. ALTHOUGH THE WORKING OF T HE STOCK EXCHANGE IS REGULATED BY THE SEBI AND THE BOARD OF DIRECTORS OF THE NSE HAS NOMINEES OF THE SEBI, YET VIOLATION OF RULES A ND REGULATIONS FRAMED BY SUCH STOCK EXCHANGE CANNOT PER SE BE CONSIDERE D AS IN VIOLATION OF SEBI ENACTMENT. ANY FINE PAID FOR NON-OBSERVATION OF SUCH INTERNAL REGULATION CANNOT BE SAID TO BE THE PAYMENT MADE FOR VIOLATION OF THE LAW. 10.4 IN THE CASE OF ASHOK KUMAR DAMANI VS. ADDIT IONAL CIT, (2011) 9 ITR (TRIB.) 304 (MUM.), IT HAS BEEN HELD THAT PE NALTY LEVIED BY THE STOCK ITA NO. 3571(DEL)/2011 18 EXCHANGE ON ACCOUNT OF SHORT PAYMENT OF MARGIN MO NEY IS IN THE NATURE OF COMPENSATORY PAYMENT UNDER THE RULES OF THE STOCK EXCHANGE. SUCH PAYMENT CANNOT BE ATTRIBUTED TO INFRACTION OF LA W AND, THEREFORE, IT IS REVENUE IN NATURE. 10.5 COMING TO THE FACTS OF THE CASE AT HAND, IT IS SEEN THAT THE ASSESSEE ADMITTEDLY CONSTRUCTED COMMERCIAL SPACE IN THE B ASEMENT WHICH WAS NOT PERMISSIBLE AS PER MASTER PLAN. THE ASSESSEE USE D THIS BUSINESS SPACE FOR SOME TIME BUT THEREAFTER THE DDA DIRECTED IT TO REMOVE THE CONSTRUCTION. SINCE THE CONSTRUCTION AND USER TILL THIS TIME WAS A FATE ACCOMPLI, THE ASSESSEE WAS ALSO DIRECTED TO PAY MISUSE CHARG ES OF RS. 34,22,147/-. THE MATTER REMAINED UNDER DISPUTE FOR SOME TIME AND , THEREFORE, THE PAYMENT WAS NOT MADE. CONSEQUENTLY, THE DDA CHARGED INTEREST ON MISUSE CHARGES AND SUCH INTEREST WAS COMPUTED AT RS. 30,84,530/-. ALTHOUGH ANY PARTICULAR PROVISION OF THE RULES OR REGUL ATIONS HAS NOT BEEN REFERRED TO, IT IS CLEAR THAT THE DDA ACTED AS A SOVE REIGN WHEN IT DIRECTED THE ASSESSEE TO REMOVE THE IRREGULARITY CAUSED BY C ONSTRUCTION OF COMMERCIAL SPACE IN THE BASEMENT. THE CONSTRUCTED SPACE WAS FILLED UP. THE LEVY OF MISUSE CHARGES WAS ALSO IN CONNECTION WITH THE AFORESAID VIOLATION AS THE ASSESSEE HAD ALREADY USED THE SPACE WHICH IT S HOULD NOT HAVE ITA NO. 3571(DEL)/2011 19 CONSTRUCTED. THEREFORE, THE SITUATION HERE IS QUA LITATIVELY DIFFERENT FROM THE SITUATION IN THE CASE OF LOKE NATH & CO. (SUP RA) WHERE THE IRREGULARITY COULD BE REMOVED BY ALTERATION, DEMOLITION OR AC CEPTING COMPENSATION. THE ONLY RECOURSE IN THIS CASE WAS DEMOLITION, I.E., FILLING UP THE CONSTRUCTION IN THE BASEMENT. THIS ALSO BRINGS O UT CLEARLY THAT THE DDA WHILE ORDERING THE REMOVAL OF THE INFRACTION WA S NOT ACTING AS A TRADER AS IN THE CASE OF A TRADER SIMPLICITOR, THE SE LLER WILL HAVE NO POWER TO DIRECT THE BUYER TO MAKE CONSTRUCTION IN ONE W AY OR THE OTHER. THE DDA IN THIS CASE WAS ACTING AS IMPLEMENTER OF THE MASTER PLAN AND ONLY ONE COURSE, I.E., REMOVAL OF THE INFRACTION WAS PER MISSIBLE. FURTHER, THE MISUSE CHARGES WERE PAID IN RESPECT OF THE AFOR ESAID SPACE, THEREFORE, IT CAN BE SAID THAT THE MISUSE CHARGES WERE ALSO PAID FOR ILLEGALLY USING THE SPACE FOR A PERIOD OF TIME TILL THE INFRACTI ON WAS NOTICED BY THE DDA AND IT ORDERED THE REMOVAL OF THE INFRACTION. THUS, THE PAYMENT OF MISUSE CHARGES IS FOR VIOLATION OF MASTER PLAN D RAWN FOR THE DEVELOPMENT OF AREAS UNDER THE CONTROL OF DDA. THE LD. COUN SEL HAS ADMITTED THAT THE NATURE OF INTEREST ON MISUSE CHARGES IS THE S AME AS MISUSE CHARGES. SUCH CONCLUSION IS OBVIOUS FOR THE REASON THAT TH E PAYMENT TO BE MADE FOR MISUSE CHARGES WAS NOT THE EXPENDITURE INC URRED IN THE NORMAL COURSE OF BUSINESS. EXPLANATION-1 TO SECTION 37(1) PR OVIDES INTER-ALIA THAT ANY ITA NO. 3571(DEL)/2011 20 EXPENDITURE INCURRED FOR ANY PURPOSE WHICH IS PR OHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE O F BUSINESS AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. TO OUR MIND, THIS PROVISION IS CLEARLY APPLICABLE T O THE CASE OF THE ASSESSEE. WE ALSO FIND THAT THE DECISION IN THE CASE OF GOLDCREST CAPITAL MARKETS LTD. (SUPRA) WAS RENDERED ON TOTALLY DIFFERENT FACTS. THE MAIN DISTINCTION IS THAT THE STOCK EXCHANGE HAS NOT BEEN INVESTED WITH ANY SOVEREIGN POWER AND, THEREFORE, ANY VIOLATION OF RULES FR AMED BY IT WOULD NOT LEAD TO INFERENCE OF VIOLATION OF LAW OR DOING AN AC T WHICH IS PROHIBITED BY LAW. THE DECISION IN THE CASE OF ASHOK KUMAR DAM ANI (SUPRA) PROCEEDS ON SIMILAR LINES. THEREFORE, THE RATIO OF THE SE CASES IS NOT APPLICABLE TO THE FACTS OF THIS CASE. IN A NUTSHELL, IT IS HELD THAT MISUSE CHARGES AND INTEREST ON MISUSE CHARGES ARE NOT DEDUCTIBLE I N COMPUTING THE TOTAL INCOME OF THE ASSESSEE. 10.6 THE RESULT OF THE DISCUSSION IS THAT GROUND NOS. 3 AND 3.3 ARE ALLOWED. 11. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. SD/- SD/- (RAJPAL YADAV) (K.G. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER 2/3/2012. ITA NO. 3571(DEL)/2011 21 SP SATIA COPY OF THE ORDER FORWARDED TO:- MOHAN EXPORTS PVT. LTD., NEW DELHI. ACIT, CIRCLE 5(1), NEW DELHI. CIT(A) CIT, THE D.R., ITAT, NEW DELHI. ASSISTANT REGISTRAR.