Law:

Section:

Section 37(1) of the income-tax act, 1961-Business expenditure-Assessee-firm, formed for construction of multi-storeyed building, constructed in excess of floor area permitted by municipal committee, on one floor-Assesses, therefore, submitted fresh plan for permission to construct one floor less than that sanctioned in original plan so as not to exceed total floor area of all floors as sanctioned in original plan-Revised plan was approved and deviation from original plan was condoned by municipal committee on payment by assessee of ad hoc composition fee levied under section 195 of Punjab Municipal Act, 1911-Whether such sum paid was in nature of penalty-Held, on facts, no-Whether sum so paid was admissible as business expenditure-Held, on facts, yes Facts The assessee-firm, formed for the construction of a multi-storeyed building for sale thereafter as flats, exceeded the floor are a permitted by the concerned Municipal Committee, on one of the floors and in view of this excess construction, it submitted a fresh plan for permission to construct one floor less than that sanctioned in the original plan so as not to exceed the total floor area of all floors as sanctioned in the original plan. The revised plan was approved and the deviation from the original plan was condoned by the Municipal Committee on payment by the assessee of an ad hoccomposition fee. The assessee, in its income-tax return for the relevant assessment year, claimed the composition fee paid as a deduction in arriving at profits of its business. The ITO disallowed the claim on the ground that the sum paid by the assessee was penalty levied under section 195 of the Punjab Municipal Act, 1911, for infringement of the Municipal bye-laws. The Tribunal allowed the assessee's appeal on the ground that the sum paid was not in the nature of penalty but was made on grounds of commercial expediency in the course of the assessee's business as consideration for getting the revised plan passed by the Municipal Committee. On reference : Held The compensation, in the instant case, was for the breach of a regulatory procedure in the matter of ex post factosanction of a building constructed in deviation of a…

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