1982 (5) TMI 98 - AT - Income Tax

Penalties for Violations Not Deductible: Tribunal Ruling Upheld

Kapoor Sons And Company. Versus Income-Tax Officer.

The Tribunal upheld the disallowance of penalties imposed by the Enforcement Directorate and the Delhi Development Authority on the assessee. It ruled ... Expenditure Incurred, Local Authority Issues:1. Whether the disallowance of a penalty imposed by the Enforcement Directorate on the assessee is justified.2. Whether the penalty imposed for the infringement of building by-laws by the Delhi Development Authority can be treated as an allowable deduction.Analysis:1. The appeal was filed by the assessee challenging the disallowance of a penalty of Rs. 2,23,650 imposed by the Enforcement Directorate. The assessee claimed the penalty as a deduction, contending that it was incidental to the business. The Income Tax Officer (ITO) rejected this claim, stating that the penalty could not be considered an expenditure wholly laid down for the purpose of the business. The Commissioner (Appeals) also upheld this decision, citing precedents and concluding that the violation of the FERA was not an essential part of the business. The Tribunal, in its judgment, referred to various legal precedents, including decisions of the Supreme Court and High Courts, emphasizing that penalties incurred for infractions of the law during the course of trade cannot be claimed as deductible expenses. The Tribunal held that the penalty imposed for the violation of the FERA could not be allowed as a deduction, as it was not a commercial loss in trade.2. The second issue raised in the appeal pertained to the disallowance of a penalty of Rs. 5,000 imposed by the Delhi Development Authority for the infringement of building by-laws. The penalty was levied because the cinema building, intended for film exhibition, was rented out by the assessee. The Tribunal ruled that since the penalty was imposed for breaching local authority by-laws, it could not be considered incidental to the assessee's business activities. Therefore, the disallowance of this penalty was upheld by the Tribunal.In conclusion, the Tribunal dismissed the appeal, affirming the decisions of the lower authorities regarding the disallowance of both penalties. The judgment emphasized that penalties incurred due to infractions of the law during the course of lawful business activities cannot be claimed as allowable deductions, as established by legal precedents and the principles laid down by the Supreme Court and various High Courts.