JUDGMENT
Arijit Pasayat, C. J.
Pursuant to directions given by this court under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'), the following questions have been referred by the Income Tax Appellate Tribunal, Delhi Bench 'B' (hereinafter referred to as the 'Tribunal') :
"For assessment year 1974-75
1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in deleting the disallowance of Rs. 13,605 made by the Income Tax Officer on account of penalty paid to the Delhi Development Authority for the misuse of the premises occupied by the assessed for the purpose of business ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the commercial use of the premises meant for residential use by the assessed does not amount to infraction of law and the penalty paid in pursuance thereof is incidental to the business of the assessed and such expenditure is wholly and exclusively laid out for the purpose of business under section 37.of the Income Tax Act ?
For assessment year 1975-76
1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in deleting the disallowance of Rs. 500 made by the Income Tax Officer on the penalty paid to the Delhi Development Authority for misuse of the premises occupied by the assessed for the purpose of business ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the commercial use of the premises meant for residential use by the assessed does not amount to infraction of law and the penalty paid in pursuance thereof is incidental to the business of the assessed and such expenditure is wholly and exclusively laid out for the purpose of the business under section 37 of the Income Tax Act."
2. Background facts in nutshell are as follows. assessed is a partnership firm. For the previous year relevant to the assessment year 1974-75 assessed had filed a return declaring an income of Rs. 1,57,086. For the subsequent year, i.e., assessment year 1975-76, assessed filed its return declaring an income of Rs. 2,30,515. The Income Tax Officer noticed during the course of assessment proceedings that a partner of the assessed-firm had misused the business premises situated at G-86 and G-63, Connaught Circus, New Delhi. These premises were to be used as residential premises but partners of the firm used them for commercial purposes. Therefore, assessed had to pay Rs. 13,605 and Rs. 500 respectively for the two assessment years. The assessing officer was of the view that the expenditure was in the nature of penalty and was not allowable. Matter was carried in appeal by the assessed before the Appellate Assistant Commissioner (hereinafter referred to as the 'AAC). It was submitted that the expenditure was made for business purposes and was as such allowable. Appellate Assistant Commissioner did not accept the plea. Matter was carried in further appeals before the Tribunal by the assessed. Tribunal inter alia came to the following conclusions :
2. Background facts in nutshell are as follows. assessed is a partnership firm. For the previous year relevant to the assessment year 1974-75 assessed had filed a return declaring an income of Rs. 1,57,086. For the subsequent year, i.e., assessment year 1975-76, assessed filed its return declaring an income of Rs. 2,30,515. The Income Tax Officer noticed during the course of assessment proceedings that a partner of the assessed-firm had misused the business premises situated at G-86 and G-63, Connaught Circus, New Delhi. These premises were to be used as residential premises but partners of the firm used them for commercial purposes. Therefore, assessed had to pay Rs. 13,605 and Rs. 500 respectively for the two assessment years. The assessing officer was of the view that the expenditure was in the nature of penalty and was not allowable. Matter was carried in appeal by the assessed before the Appellate Assistant Commissioner (hereinafter referred to as the 'AAC). It was submitted that the expenditure was made for business purposes and was as such allowable. Appellate Assistant Commissioner did not accept the plea. Matter was carried in further appeals before the Tribunal by the assessed. Tribunal inter alia came to the following conclusions :
"6. We have heard the parties and perused the entire evidence on record. The learned counsel for the assessed contended that the landlady has filed a suit for demolition of unauthorised construction. That matter is still sub judice. So at this stage it cannot be said that the appellant had any unauthorised construction. It is common ground that the premises in question were residential but the assessed being a partner of the firm has been using them for business purposes. It is also common ground that the assessed has been carrying on business in the premises in question. The payments were made by the assessed for using premises for commercial purposes. So in any view of the matter, the assessed for the purpose of carrying on business had to make the payment in question. Such payments are only incidental to the business. Such payments cannot be called penalty because the assessed has not contravened any provision of law. At the most it can be said that there was breach of the contract by the assessed. The decision in Abdul Chakoor (supra), relied by the learned Departmental Representative is not applicable on the facts of the present case. In that case the assessed withheld that payment of sales-tax. For that purpose the penalty was imposed. On those facts the Supreme Court ruled that the payment was made as a result of contravention of law.
7. Looking to the aforesaid facts and the evidence on record, in our opinion, the expenditure in question were laid out wholly and exclusively for the purposes of the business. In any view of the matter, they were incidental to the business. So they are allowable expenditure under section 37(1) of the Income Tax Act, 1961. So the learned Appellate Assistant Commissioner was wrong in refusing to allow the expenditure. "
On being moved for reference, Tribunal declined to do so and this court directed reference of the questions indicated above.
3. We have heard learned counsel for revenue . There is no appearance on behalf of assessed. Learned counsel for revenue submitted that Tribunal has not noticed the factual position correctly. In fact the partners have clearly indicated that the payments were made as damages to the DDA for unauthorised additions, alternations and misuse of the premises.
3. We have heard learned counsel for revenue . There is no appearance on behalf of assessed. Learned counsel for revenue submitted that Tribunal has not noticed the factual position correctly. In fact the partners have clearly indicated that the payments were made as damages to the DDA for unauthorised additions, alternations and misuse of the premises.
4. In Prakash Cotton Mills (P) Ltd. v. CIT (1993) 201 ITR 684 (SC) it was observed by the Apex Court that whenever any statutory impost paid by an assessed by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is partly of compensatory nature and partly of penal nature, the authorities have to bifurcate the two components of the impost and give deduction of that component which is compensatory in nature and refuse to give deduction of that component which is penal in nature. Obviously, where the impost is penal in nature there cannot be any allowance. The Tribunal does not seem to have examined this aspect as is evident from the quoted portion of its order. In the aforesaid background we remit the matter back to the Tribunal for rehearing and deciding the appeal afresh keeping in view the guidelines indicated by the Apex Court in Prakash Cotton Mills' case (supra).
4. In Prakash Cotton Mills (P) Ltd. v. CIT (1993) 201 ITR 684 (SC) it was observed by the Apex Court that whenever any statutory impost paid by an assessed by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is partly of compensatory nature and partly of penal nature, the authorities have to bifurcate the two components of the impost and give deduction of that component which is compensatory in nature and refuse to give deduction of that component which is penal in nature. Obviously, where the impost is penal in nature there cannot be any allowance. The Tribunal does not seem to have examined this aspect as is evident from the quoted portion of its order. In the aforesaid background we remit the matter back to the Tribunal for rehearing and deciding the appeal afresh keeping in view the guidelines indicated by the Apex Court in Prakash Cotton Mills' case (supra).
The references are accordingly disposed of.
