Roneo Vickers India Ltd., New Delhi vs Assessee

1. This is an appeal filed by the assessee for the AY 2004-05 against the order

of Commissioner of Income Tax (Appeals)-XVIII, New Delhi dated 14.01.2013 in

Appeal No. 240/11-12 raising the following grounds of appeal:

"1. That on the facts and circumstances of the case, the learned CIT(A) erred in upholding the assumption of jurisdiction of the AO. in issuance of a notice u/s 148 of the Act, despite there being "no reason to believe" nor any fresh material to form a belief that income had escaped assessment.

2. With prejudice the aforesaid ground of appeal, on merits, the CIT(A) erred in upholding the disallowance of Rs.21,93,187/-

ITA No.1793/Del /2013 2 being misuse charges in respect of premises used for the purpose of business on the ground that the same is in the nature of penalty and does not relate to the year under appeal.

3. The appellant craves leave to add, alter, amend, substitute, forgo, any or all the grounds of appeal before or at the time of hearing."

2. The facts of the case are that the assessee filed the return of income for the

Assessment Year 2004-05 on 29.10.2004, declaring loss of Rs.25,93,937/-. After

processing the return of income u/s 143(1) of the Act, the case was reopened u/s

147 of the Act by issuing notice u/s 148 and the assessment order came to be

passed on 28.11.2011 u/s 143(3) r.w.s.147 of the Act at the total income of

Rs.2,30,770/-. In the return of income, the assessee had claimed Rs.23,63,187/-

written off debts, debited to P&L account. In the notes to accounts, it is mentioned

that the amount of Rs.21.93,187/- deposited with L&DO is written off because

money will not be received back. The Assessing Officer framed an assessment

147/143(3) dated 28.11.2011 after making disallowance of Rs.21,93,187/- holding

that the amount was paid for infraction of law and the claim cannot be allowed as

bad debt because the conditions stipulated u/s 36(2) of the Act are not complied

with. Aggrieved, an appeal was filed before the CIT(A). The appeal was filed

before the CIT(A)-XVIII, New Delhi who vide order dated 14.01.2013 dismissed

the appeal both on the preliminary issue relating to challenge of reassessment

proceedings as well as merits of the addition. Hence, the present appeal before us. ITA No.1793/Del /2013 3

3. The Ld. AR strongly pleaded that there was no reason to believe that income

got escaped assessment. The reassessment notice was issued after the expiry of

four years and there was no failure on its part to disclose fully all material facts. He

further pleaded that even the assessment u/s 143(1) cannot be reopened unless

there is a fresh material indicating the escapement of income and reason to believe

that income got escape assessment. In the support of this proposition, he relied

upon the following judgments:

i) CIT Vs. Orient Craft Ltd. in ITA No.555/2012 [29 Taxmann.com 392].

ii) M/s A.M. Udyog Ltd. Vs. ITO Wd-4(3), Kolkata ITAT - (2013) 7 TMI

767.

iii) Bapalal & Co. Exports Vs. JCIT [2008] 170 Taxman 131 (Mad. H.C.)

iv) Aipita Marketing (P.) Ltd. Vs. ITO [2008] 21 SOT 302 (Mum. ITAT)

4. On merits, he submitted that the payment was made not for infraction of any

law, but for regularization of the usage of rented billing for commercial purposes

as per the scheme announced by the DDA. On the other hand, Ld. DR submitted

that the amount cannot be allowed as a deduction in as much as the amount was

paid infraction of law and placed reliance in this regard on the decision of the

Hon'ble Madras High Court in the case of Rane Brake Linings Ltd. reported in 115

Taxmann 367(Mad).

5. We heard the rival parties and perused the material available on record. At

the first instance we shall deal with the grounds relating to challenge of

reassessment proceedings. Admittedly, there was no scrutiny assessment. Hence, ITA No.1793/Del /2013 4

based on the information contained notes to account, the audit party pointed out to

the Assessing Officer that impugned amount cannot be allowed as deduction as the

amount was paid for infraction of law. The Assessing Officer after considering the

information had come to a conclusion that the income got escaped assessment and

therefore, initiated the reassessment proceedings. In our considered view this

constitutes reason to believe that income got escaped assessment. Therefore, the

case laws relied upon by the AR are not of any help. Therefore, the reassessment

proceeding was valid.

6. Now, we shall deal with the merits of the addition. The premises were taken

on rent vide lease deed dated 31.05.1961. In accordance with clause 3 of said lease

deed the premises were to be used for residential purposes with option to use for

business on permission and any charges/additional ground rent to pay by the

tenant. The appellant on the same day, applied vide letter dated 31.05.1961 to

landlord for use for business. The landlord also on the same day made application

to the L&DO/Chief Commissioner vide letter dated 31.05.1961 for use of premises

for business purposes and all additional ground rent/charges to be paid. The L&DO

vide letter dated 29.09.1961 granted permission for use of premises for business

purposes upon payment charges as determined in the said letter. The demand on

account of misuse charges of Rs.21,93,187//- was paid under protest and contested

by the appellant. The payment on 16.03.1994 of Rs.3,94,159/- and by way of FDR

with the High Court of 18 lacs. The litigation was pursued before the High Court. ITA No.1793/Del /2013 5

The Govt. introduced conversion policy from leasehold to freehold in August 2003

and accordingly to take benefit of the policy appellant deemed it prudent to accept

the decision and the amount of misuse charges paid Rs.21,93,187/- were written

off and included under bad debts. It was mandatory to pay the misuse charges due

as on the date of exercising the option of owning the property from leasehold to

freehold. In our opinion, the claim was not on account of bad debts, but towards

the charges paid for regularization usage of building. The mere nomenclature in the

books of account does not determine the allowability or otherwise of the claim and,

therefore, considering the fact that the amount was paid under the policy

announced by the Government itself, it does not amount to penalty for infraction of

the any provision of law. We notice from the page nos.9 to 11 of the Paper Book

wherein the rent controller Delhi had furnished the calculation for misuse and

damage charges levied. There was no whisper about the levy of penalty of any

nature. The Hon'ble Supreme Court in the case of CIT Vs. Ahmedabad Cotton

Mfg. Co. Ltd. reported in 205 ITR 163 held as follows:-

"....what needs to be done by an assessing Authority under the Income-tax Act, 1961, in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under s 37 of the Income-tax Act although called a penalty is to see whether the law or scheme under which the amount was paid required such payment to be made as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, ITA No.1793/Del /2013 6

then one has to regard such payment as business expenditure of the assessee, allowable under Section 37...."

7. Following the ratio laid down by the Hon'ble Apex Court in the above case,

we hold that the amount in question is not in the nature of penalty and, therefore,

allowable as deduction. Therefore, this ground of appeal is allowed for statistical

purposes.

8. In the result, appeal of the assessee is allowed for statistical purposes.

The Order pronounced in the open Court on 06th May, 2015.

Sd/- Sd/- (G.C. GUPTA) (INTURI RAMA RAO) Vice President Accountant Member

Dated: 06th May, 2015. Aks/- DCOM

Copy forwarded to 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi