Law:

Section:

Section 37(1) of the Income-tax Act, 1961, read with provisions of the Karnataka Municipal Corporation Act, 1976 - Business expenditure - Allowability of - Assessee, a builder, in contravention of provisions of Karnataka Municipal Corporation Act and Building Regulations had put up 8th floor in an apartment without there being a sanctioned plan - Competent authority of Town Planning on a request made by assessee, permitted it to compound offence on payment of compounding fine - Assessee, accordingly, paid compounding fine and claimed same as business expenditure under section 37 - Whether claim for deduction made by assessee had to be considered in light of Explanation to section 37(1) and not with reference to provisions in Corporation Act - Held, yes - Whether, therefore, assessee was not entitled to deduction as claimed - Held, yes FACTS The assessee, a builder, in contravention of the provisions of the Karnataka Municipal Corporation Act, 1976 and the Building Regulations had put up 8th floor in an apartment without there being a sanctioned plan. However, the competent authority of Town Planning on a request made by the assessee, by means of his order dated 30-9-1982, permitted the assessee to compound the offence on payment of compounding fine. The assessee, accordingly, paid certain sum as compounding fine to the Bangalore City Corporation and claimed the same as an expenditure under section 37. The Assessing Officer disallowed the assessee's claim. On appeal, the Commissioner (Appeals) allowed the assessee's claim by treating the compounding fine as an expenditure incurred by the assessee during the course of its business. On further appeal, the Tribunal confirmed the impugned order relying upon the of the Delhi High Court in the case of CIT v.Lokenath & Co. (Construction) [1984] 147 ITR 624 /17, Taxman 209 wherein the Delhi High Court took the view that the payment of compounding fine by the assessee to regularise the construction of the building made in violation of the Building Regulations must be regarded as an integral part of the profit-earning process of the assessee. On reference : HELD From the scheme of several provisions in the Karnataka…

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