Amount paid for violation of laws not allowable despite Compounding

IN THE ITAT DELHI BENCH ‘A’

Arun Kumar Gupta (HUF)

Versus

Assistant Commissioner of Income-tax

IT Appeal No. 871 (Delhi) of 2012

[Assessment year 2008-09]

OCTOBER 15, 2012

ORDER

A.N. Pahuja, Judicial Member – This appeal filed on 21.02.2012 by the assessee against an order dated 09th January, 2012 of the ld. CIT(A)-XXVIII, New Delhi, raises the following grounds:-

 1.  “On the facts and in law ld. CIT(A)-XXVIII, was not justified in dismissing appeal of the assessee.

 2.  On the facts and in the circumstances of the case ld. CIT(A)-XXVIII, was not justified in confirming addition of Rs. 47,650/- towards estimated interest on advances, made by the Assessing Officer.

 3.  On the facts and in law ld. CIT(A)-XXVIII, has erred in rejecting the claim of the appellant that the payment made to MCD amounting to Rs. 4,67,950/-, towards registration, conversion and parking charges, was of revenue nature, therefore, allowable u/s 37(1) of the I.T. Act.

 4.  On the facts and in law ld. CIT(A)-XXVIII, was wrong to confirm the addition made by Assessing Officer for Rs. 4,67,950/-, towards payment made to MCD and considered by him, in the nature of capital expenditure.

 5.  On the facts and in circumstances of the case ld. CIT(A)-XXVIII, has erred in confirming disallowance of Rs. 23,404/-, being 1/5th of conveyance expenses, made by the Assessing Officer on estimated basis.

 6.  On the facts and in circumstances of the case ld. CIT(A)-XXVIII, has erred in confirming disallowance of Rs. 5,431/-, being 1/5th of vehicle maintenance expenses, made by the Assessing Officer on estimate basis.

 7.  On the facts and in circumstances of the case ld. CIT(A)-XXVIII, has erred in confirming disallowance of Rs. 7,639/-, being 1/5th of telephone expenses, made by the Assessing Officer on estimate basis.

 8.  The appellant craves leave to add, alter, amend or forgo any of the grounds of appeal at the time of hearing.”

2. Adverting first to ground no. 2 in the appeal, facts, in brief, as per relevant orders are that return declaring income of Rs. 16,14,980/- filed on 12.09.2008 by the assessee, trading in iron and steel works, in the name and style of M/s Shyam Sunder Arun Kumar, was selected for scrutiny with the service of a notice u/s 143 (2) of the Income-tax Act, 1961, (hereinafter referred to as the ‘Act’), issued on 25.09.2009. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed on perusal of balance sheet of M/s Shyam Sunder Arun Kumar, proprietary concern of the assessee, that the assessee reflected following loan and advances given to the related persons:

2.1 Since no interest was received on the aforesaid advances given to family members of the assessee, nor any business connection was apparent while the assessee paid interest of Rs. 10,09,156/- to the bank & on unsecured loans, the AO asked the assessee as to why interest @12% on interest free advances given for non business purposes be added to the income. In response, the assessee replied that there was no business connection for these advances and objected to the proposed addition. However, the AO did not accept the submissions of the assessee. Since interest of Rs. 10,09,156/- was paid to the bank and on unsecured loans taken by the assessee, accordingly, the AO disallowed an amount of Rs. 47,650/- @12% per annum on the amount of Rs. 3,97,078/- while relying upon decisions in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1; Elmer Havell Electrics v. CIT [2005] 277 ITR 549 and S.A. Builders Ltd. v. CIT [2004] 269 ITR 535.

3. On appeal, the ld. CIT(A) upheld the disallowance, holding as under:-

“I have gone through the assessment order and written submission of the appellant. The Assessing Officer has contended that firm Shyam Sunder Arun Kumar is not receiving any interest on these advances given but firm is paying interest to the tune of Rs. 10,09,156/- to the Bank on unsecured loan taken. Therefore, that amount of interest which should have been received on loan/advances given is being disallowed u/s 36(1)(iii) from the total interest debited to the P&L account. Interest at the rate of 12% on the interest free advances given for non-business purposes comes to Rs. 47,650/-. This amount of interest was disallowed from the total interest claim of Rs. 10,09,156/- and added back to the total income of the assessee by the Assessing Officer. He has placed reliance on these case laws, CIT v. Abhishek Industries Ltd. 286 ITR 001 and Elmer Havell Electricals v. CIT 227 ITR 549, S.A. Builders Ltd. v. CIT [2004] 269 ITR 535. I agree with the contention of the Assessing Officer, he has rightly disallowed interest amounting to Rs. 47,650/-, I sustain the addition. Appeal on this ground is dismissed.”

4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld.AR on behalf of the assessee while reiterating their submissions before the ld. CIT(A) contended that the ld. CIT(A) was not justified in upholding the disallowance. Inter alia, the ld. AR relied upon decision in CIT v. Century Flour Mills Ltd. [2011] 334 ITR 377.On the other hand, the ld. DR supported the findings of the ld. CIT(A).

5. We have heard both the parties and gone through the facts of the case as also the decision relied upon by the ld. AR. As is apparent from the aforesaid facts, the AO disallowed interest of Rs. 47,650/- @12% per annum on the amount of Rs. 3,97,078/- paid to aforesaid three relatives on loan taken by the assessee on the ground that the assessee paid interest to the bank and on unsecured loans. Neither the date of advances nor the nexus between loans or advances and funds borrowed is evident from the impugned order nor the ld. CIT(A) recorded any findings as to the business expediency of interest free advances or on the nexus between borrowed funds and interest free advances. The ld. CIT(A) did not analyse the issue in proper perspective nor it is evident from the impugned orders as to on which date interest free advance was given to the aforesaid three persons and what was the purpose and for what purpose interest bearing funds were borrowed by the assessee. As is apparent from the impugned order, before the AO or the ld. CIT(A), the assessee did not place any evidence as to how the funds borrowed by it had been utilized and what was the commercial expediency in such borrowings. In this connection, the relevant provisions of section 36(1)(iii) of the Act provide for deduction of interest on the borrowed funds raised for business purposes. Once the assessee claims any such deduction, the onus is on the assessee to satisfy the AO that loans raised by the assessee were used for business purposes. If in the process of examination of claim for such a deduction, it transpires that the assessee had diverted certain funds to associates without any interest, there would be a very heavy onus on the assessee to be discharged before the AO to the effect that in spite of pending loans on which the assessee was incurring the liability to pay interest, still there was justification for diversion of funds to associate or sister concerns for non-business purposes . In Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 Hon’ble Supreme Court observed that under s. 10(2)(iii) of the 1922 Act (now sec. 36(1)(iii) of the 1961 Act), three conditions were required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the purpose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. It was also held that the expression “for the purpose of business” occurring under the provision is wider in scope than the expression “for the purpose of earning income, profits or gains”. In the case under consideration, there is nothing in the order of lower authorities to suggest that the assessee discharged the onus laid down upon them that borrowed funds had indeed been utilized for the purpose of its business so as to entitle it to claim deduction u/s 36(1)(iii) of the Act. In case the assessee had some surplus amount which, according to him, could not be repaid prematurely to its creditors, still the same were either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that these were diverted towards associate or sister concerns free of interest. This would result in not presenting the true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the associate or sister concerns/persons would be enjoying the benefits thereof. It cannot be held that the funds to the extent diverted to associate persons without charging any interest, were required by the assessee for the purpose of its business and loans to that extent were required to be raised. Unless the interest free loan goes to advance business interest of the assessee, there cannot be any commercial expediency.

5.1 In the instant case, the assessee failed to establish that the interest free advances were given out of interest free borrowings or own funds nor even established any commercial expediency in advancing funds while even no cash flow statement was placed before lower authorities and even before us . In Punjab Stainless Steel Indus. v. CIT [2011] 196 Taxman 404 (Delhi), Hon’ble High Court held as under:

“In the instant case, there was absolutely no finding recorded by the Tribunal that the interest free advances were made by the assessee to sister concern for its business purposes. There was no such finding by the Tribunal even with respect to the advances extended in the previous years. It was not the case of the assessee that it had so much surplus cash available with it at the time of extending those advances that the same could have been extended by it out of those surplus funds available to it. In fact, the payments made to sister concern from cash credit account indicated to the contrary and showed that advances made during the financial year relevant to the assessment year 2001-02, were extended out of borrowed funds and not out of any credit balance available with the assessee-firm at that time.”

5.2 In view of the foregoing, especially when complete facts are not available before us nor the ld. AR furnished date(s) of interest free advances or dates of borrowings and nor furnished any material, establishing commercial expediency in advancing aforesaid funds before the lower authorities and even before us, nor the ld. CIT(A) recorded any findings on these aspects, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the issue raised in this ground to his file for deciding the matter afresh in accordance with law, in the light of our aforesaid observations and of course after allowing sufficient opportunity to both the parties and keeping in view various judicial pronouncements, including those referred to above. With these observations, ground no. 2 in the appeal is disposed of.

6. Ground nos.3 and 4 relate to disallowance of claim of Rs. 4,67,950/-on account of payment to MCD. The AO noticed during the course of assessment proceedings that the assessee paid an amount of Rs. 2,44,740/- and Rs. 2,23,210/- to MCD towards parking charges, registration and conversion charges under the head shop expenses. To a query by the AO, the assessee explained that these charges were revenue in nature, payments having been made in view of notification published by MCD on 5th September, 2009 in various newspapers in pursuance to judgment in the Supreme Court, M.C. Mehta v. Union of India [CWP No.4677/1985 dated 16.2.2006]. Accordingly, the assessee pleaded that the expenditure was incurred towards municipal charges and no new asset or enduring benefit had been obtained and, therefore, amount be allowed as revenue expenditure.. In response to another show cause notice dated 30th November, 2010, the assessee replied that charges paid to MCD could not be treated as capital nature. Inter alia, the assessee relied upon decisions in CIT v. J.K. Industries (P.) Ltd. [1980] 125 ITR 218 (Cal.) and CIT v. Suri Sons [1989] 177 ITR 406. However, the AO did not accept the submissions of the assessee on the ground that the aforesaid charges were paid for violation of municipal laws. Therefore, invoking explanation to sec. 37(1) of the Act, the AO disallowed the amount of Rs. 4,67,950/- while distinguishing the decisions relied upon by the assessee and allowed depreciation on the aforesaid amount, treated as capital in nature.

7. On appeal, the learned CIT(A) upheld the disallowance in the following terms:-

“5. In view of the findings and decision in the above judgments, it is respectfully submitted that the expenses incurred by the assessee towards conversion and parking charges paid to MCD are expenditure in the nature of removal of restriction, obstruction or disability and not in nature of acquiring any new capital asset, therefore, the same should be considered as revenue expenditure and not capital in nature.

I have gone through the assessment order and written submission of the appellant. I have also perused and considered the case laws cited by the appellant. During the year under consideration M/s Shyam Sunder Arun Kumar has paid Rs. 2,44,740/- and Rs. 2,33,210/- to MCD against parking charges, registration charges and conversion charges. The payments were made in view of MCD’s notification published on dated 5.9.2006, in the newspapers based on judgment of Hon’ble Supreme Court. These charges were paid in pursuant of a notification in published in the newspaper as submitted by the assessee. Notification said that it is in pursuant of the decision of the Hon’ble Supreme Court of India in the case of M.C. Mehta v. UOI and others CWP No. 4677/1985.As per notification if related documents/ affidavits/ payments are not made, shops would be sealed. The appellant violated the Municipal Corporation Laws and, therefore, was made to pay these charges. Had these charges not been paid, shops would have been sealed. As these charges have been paid for violation of law, it cannot be allowed as per Explanation to Section 37(1) of the I.T. Act, 1961. Therefore, the Assessing Officer disallowed this amount of Rs. 4,67,950/-. The Assessing Officer further distinguished the case laws cited by the appellant.

Facts of these cases are different from the present case. In the case of CIT v. K.K. Industries Pvt. Ltd. [1980] 125 ITR 0218, municipal taxes paid on the land was allowed in pre-construction period. But in the present case, first, assessee has paid conversion, parking and registration charges and not municipal taxes. Secondly, in the case referred by the assessee, no building was constructed on the said land. But in the present case, there is already a shop for which if conversion charges are not paid, shop would be sealed. Thirdly, in the case referred by the assessee, there was no violation of law. But in the present case, there is violation of municipal laws and direction from Hon’ble Supreme Court came to make the payments. So facts of the present case are different from the case quoted by the appellant.

In the case of CIT v. Suri Sons [1989] 177 ITR 0406, a plot of land was purchased to construct a building and municipal taxes paid on the land, were claimed as revenue expenditure. But in the present case no land was purchased to construct any building. In the quoted case, municipal taxes has been paid on land. But in the present case, payment has been made for shop. Therefore, facts of the quoted case are different from the present case.

The appellant has further placed reliance on Full Bench judgment by Hon’ble Delhi High Court, in the case of Airport Authority of India v. CIT (Delhi). I have considered the submission of the appellant in this regard. The facts of the present case are different and distinguishable from the facts of the case of Airport Authority of India.

The Assessing Officer disallowed the charges paid to MCD and claimed as revenue expenditure. The Assessing Officer further gave a finding that payments of these expenses resulted in the benefits of enduring and lasting nature. As such no new asset as created but payment of these charges has made possible the use of the shop. Though no specific parking space has been allotted but payment of these charges has made possible that appellant can use space outside its shop for parking.

In view of the findings of the Assessing Officer and facts of the case these charges to MCD are capital expenditure. The Assessing Officer has rightly capitalized Rs. 4,67,950/- and added back to the block of building and allowed depreciation as per law. I sustain the action of the Assessing Officer. Appeal on these grounds is dismissed.”

8. The assessee is now in appeal against the aforesaid findings of learned CIT(A).The ld. AR while reiterating the submissions before the ld. CIT(A) relied upon decision in the case of Bikaner Gypsums Ltd. v. CIT [1991] 187 ITR 39. On the other hand, the ld. DR supported the findings of the ld. CIT(A).

9. We have heard both the parties and as also aforesaid decisions relied upon by the learned AR on behalf of the assessee. Indisputably, the aforesaid amount of Rs. 2,44,470/- and Rs. 2,23,210/- have been paid to MCD for registration, conversion and parking charges for misuse of the premises claimed to be owned by the assessee, as a result of outcome of decision of the Hon’ble Apex Court in MC Mehta (supra), wherein Hon’ble Apex Court noticed in respect of large number of immoveable properties throughout Delhi, flagrant violations of various laws including Municipal Laws, Master Plan and other plans besides Environmental Laws . With a view to secure the implementation of laws and protect fundamental rights of the citizens, various orders were passed from time to time. Considering large-scale flagrant violations, Hon’ble Apex Court in the first instance issued directions in respect of shifting of hazardous and noxious industries out of Delhi. Directions were also issued for shifting of heavy and large industries as also some extensive industries. Later, directions were issued for shifting of other extensive industries considering the continued unauthorized use contrary to Master Plan and Zonal Plan, by those industries as well as some other industries continuing in residential/non-conforming areas. Subsequently, Hon’ble Apex Court took up the issue of large scale misuse of residential premises for commercial use as also the issue of power of MCD and Delhi Development Authority (DDA) to direct demolition and/or sealing of the properties being misused. Regarding residential properties used illegally for commercial purposes, Hon’ble Apex Court directed:

“1.  MCD shall within 10 days give wide publicity in the leading newspapers directing major violations on main roads (some instances of such violators and roads have been noted hereinbefore) to stop misuse on their own, within the period of 30 days.

 2.  It shall be the responsibility of the owner/occupier to file within 30 days an affidavit with Commissioner of MCD stating that the misuse has been stopped.

 3.  In case misuse is not stopped, sealing of the premises shall commence after 30 days, from the date of public notice, first taking up the violations on roads which are 80 ft. wide and more. All authorities are directed to render full assistance and cooperation. After expiry of 30 days from the date of public notice, electricity and water supply shall be disconnected.

 4.  Details of the Roads and the violations shall also be placed on the website by the MCD and copies also sent to Resident Welfare Associations of the area which should be involved in the process of sealing of misuser. The Commissioner of MCD shall file an affidavit, within two weeks, in terms of directions contained in this judgment, whereafter directions for constitution of the Monitoring Committee would be issued. The sealing would be effected by the officers authorised by the Commissioner of MCD in consultation with the Monitoring Committee.

 5.  The appropriate directions for action, if any, against the officers responsible for the misuse and for payment of compensation by them and by violators would be issued after the misuser is stopped.

 6.  None will tamper with the seals. Any tampering with seal will be sternly dealt with. Tampering with seal will include opening another entrance for use of premises.

 7.  It would be open to the owner/occupier to approach the Commissioner for removal of the seal on giving undertaking that the premises would be put to only authorised use.

 8.  Particulars of cases where violators may have obtained orders of stay will be filed in this Court by MCD.

 9.  MCD shall file monthly status report as to action taken by 15th of each month commencing from 10th April, 2006.

10. In case misuse is not stopped in the premises involved in the civil appeals and special leave petitions, subject to what is stated in this judgment, the MCD will take immediate steps to seal those premises soon after expiry of 30 days.”

9.1 Subsequently, as a fall out of the aforesaid decision, in pursuance to a public notice issued by MCD regarding mixed use regulations in respect of mixed use/commercial activities permissible in residential premises, the firm M/s Shyam Sunder Arun Kumar, carrying on the business at the premises 2121-2122, Bahadurgarh Road, Delhi , paid the aforesaid amount towards annual conversion charges to the civic agency for carrying out commercial activities besides one-time charges for parking and registration of commercial property. The assessee claimed the said amount as revenue expenditure while the AO concluded that the amount having been paid for violation of municipal laws for misuse of property, is not allowable in view of explanation 1 to sec. 37(1) of the Act. Inter alia, the AO treated the amount as capital in nature. On appeal, the ld. CIT(A) upheld the findings of the ld. CIT(A). Before us, the ld. AR contended that amount is revenue in nature. The ld. AR did not dispute before us that the amount was paid to MCD as a result of misuse of the property in the light of decision of Hon’ble Apex Court in MC Mehta (supra), finding violations of various laws including Municipal Laws, Master Plan and other plans as also Environmental laws. Apparently, as a result of public notice issued by MCD, violations of various municipal laws and Master Plan has been compounded and the assessee paid the aforesaid charges. The explanation appended to S.37(1) of the Act, invoked by the AO, was inserted by the Finance (No.2) Act, 1998with retrospective effect from 1.4.1962 and reads as under:

“37(1): Any expenditure (not being expenditure of the nature described in sections 30 to 36) and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.”

Explanation: For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made.”

9.2 To be an allowable expenditure, within the meaning of provisions of sec. 37(1) of the Act, the money paid out or away must be (a) paid out wholly and exclusively for the purpose of the business or profession and further (b) must not be (i) capital expenditure, (ii) personal expenses or (iii) an allowance of the character described in sections 30 to 36. The word “wholly” refers to quantum of expenditure. The word “exclusively” refers to the motive, objective and purpose of the expenditure and gives jurisdiction to the taxing authorities to examine these matters. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756. It has to be examined whether the expense has been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration. If the expense is found to bear an element other than the trade or business interest of the assessee the expenditure is not allowable one. In the instant case , in view of flagrant violations of various laws including Municipal Laws, Master Plan and other plans besides Environmental laws while misusing the premises, claimed to be owned by the assessee, the MCD demanded the aforesaid charges .In other words, various flagrant violations were compounded on payment of conversion charges for land use to the civic agency for carrying out commercial activities besides one-time charges for parking and registration of commercial property. The main purpose of the expenditure was to avoid sealing of the premises in terms of aforesaid decision in MC Mehta (supra). Thus, money was not expended exclusively as a trader but also as owner of the asset for misuse of the property in violations of municipal laws & Environmental laws. In deciding whether a payment of money or incurring of expenditure is for the purposes of the business and an allowable expenditure, the test applied is of commercial expediency and principles of ordinary commercial trading. In Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277, the Hon’ble Supreme Court, after referring to earlier cases, summarised the position thus :

“The nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be, necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business.”

The test laid down in Travancore Titanium Product Ltd.’s case (supra) was modified in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 (SC), to the extent that ” if the expenditure is laid out by the asseseee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. In the instant case, amount was paid to the MCD to avoid sealing of premises i.e. to protect the asset in which business was carried on. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business. In the facts and circumstances before us, the amount was paid not merely as a trader but as owner also for misuse of the property while violating Municipal laws and Environmental laws. Therefore ,such an expenditure is not allowable.

9.3 Now coming to the other aspect on the basis of which the AO disallowed the claim as to whether or not expenditure incurred as a result of compounding of violation of municipal laws & Environmental laws falls within the ambit of aforesaid explanation to sec. 37(1) of the Act, Hon’ble Karnataka High Court in CIT v. Mamta Enterprises [2004] 266 ITR 356, held that compounding of the offence cannot take away the rigors of the Explanation to S.37(1) in view of the expression ‘shall not be deemed to have been incurred’ used in that Explanation. In the said decision, after taking into consideration the legal position in the context of the provisions of Karnataka Municipal Corporation Act, 1976 and the building regulations and bye laws thereunder, their Lordships considering the language employed in Clause (b) of S.483 of the Karnataka Corporation Act which empowered the Commissioner to compound any offence committed in breach of the provisions of the Act, Rules, bye laws or materials which may by rules made by the Government be declared compoundable, held that there cannot be any doubt that offence has been committed by the assessee; what has been done is to permit the assessee to compound the offence committed by the assessee by putting up unauthorized construction of 8th floor in the building in question of payment of compounding fee of Rs. 89,960/-. Their Lordships thus held that when the Explanation to S.37 of the Act defines that the expenditure incurred for any purpose which is an offence or which is prohibited by law is not entitled for deduction it is not possible to take the view that the compounding of the offence or violation of the provisions of the Act for the purpose of saving the offender of the law from the consequences of the commission of such an offence or violation of law should also be given the benefit of S.37 of the Act by permitting the assessee to pay the compounding fee as fine. A similar view was taken in Millennia Developers (P) Ltd. v. Dy. CIT [2010] 188 Taxman 388 (Kar.). Here it may be pointed out that in Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC) relied upon by the Hon’ble Karnataka High Court in aforesaid decision in Mamta Enterprises (supra), their Lordships of the Hon’ble Supreme Court held that infraction of law is not a normal incident of business thus, proceedings launched against an assessee for an infraction of law cannot be called a commercial loss. Expenses which are permitted as deductions are such as are made for the purpose of carrying on the business and if a sum is paid by an assessee conducting his business because in conducting it he has acted in a manner which has rendered him liable to penalty for breach of laws, it cannot be claimed as a deductible expense. The assessee is expected to carry on the business in accordance with law. If the assessee contravenes the provisions of law to cut down the losses or to make larger profits while carrying on the business it was only to be expected that proceedings will be taken against the assessee for violation of the Act. The evasion of law cannot be a trade pursuit. In these circumstances, the expenditure in this case could not be allowed as wholly and exclusively laid out for the purpose of assessee’s business. Since in the instant case, MCD demanded the aforesaid compounding charges only when Hon’ble Apex Court directed the MCD to act and seal the premises in view of flagrant violations of various laws including Municipal Laws, Master Plan and other plans besides Environmental laws and indisputably, the assessee misused its property and violated the civic and Environmental laws, we are of the opinion that aforesaid charges paid by the assessee to MCD, could not be allowed in view of explanation to sec. 37(1) of the Act. In view thereof, the issue as to whether expenditure is revenue or capital ,becomes academic and therefore, does not survive for our adjudication. In the light of aforesaid discussion, ground nos. 3 & 4 in the appeal, are dismissed.

10. Ground nos.5, 6 and 7 of the appeal relate to disallowance of 1/5th of conveyance, vehicle maintenance expenses and telephone expenses. The AO disallowed 1/5th of conveyance expenses, vehicle maintenance expenses and telephone expenses on the ground that personal use of vehicles and telephones was not ruled out.

11. On appeal, the ld. CIT(A) upheld the disallowance while holding that disallowance made by the AO was reasonable.

12. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. AR on behalf of the assessee reiterated their submissions before the ld. CIT(A) while the ld. DR relied upon the findings in the impugned order.

13. We have heard for both the parties and gone through the facts of the case. Since personal use of cars and telephones by the Karta of the assessee HUF and his family members or staff has not been denied nor it was claimed that the Karta or his family members had any independent vehicles or telephones for personal use, in our opinion disallowance of 1/5th of the conveyance expenses, expenses on running and maintenance of vehicles as also expenses on telephones/mobiles, in the light of provisions of sec. 38(2) of the Act, is reasonable. Therefore, ground nos.5 to 7 in the appeal are rejected.

14. Ground no.1 in the appeal, being general in nature nor any submissions having been made before us on this ground, does not require separate adjudication while no additional ground having been raised before us in terms of residuary ground no.8 of the appeal, accordingly, both these grounds are dismissed.

15. No other plea or argument was made before us.

16. In the result, appeal is partly allowed for statistical purposes.