In Nahar Spinning Mills Ltd. vs. Commissioner of Income-tax, Ludhiana, High Court held that the expense incurred for legalizing the construction of building is not an allowable expenditure Section 37 of the Income Tax Act, 1961.   

Facts of the case:

The asseessee filed Return of Income declaring total income of Rs. 17,08,00,823. The same was processed under section 143(1) of the Act.  The Assessing officer disallowed the amount of compounding fee of Rs. 87,350/- paid by the assessee to Municipal Corporation for the purpose of legalizing the construction of its building under section 37 of the Act. The Assessing officer also disallowed the claim of the assessee on DEPB of Rs. 3,13,87,657/- for export of yarn as export incentive while computation of deduction under Section 80HHC of the Act. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. the CIT(A) partly allowed the appeal. The appellant filed further appeal before the Tribunal. the Tribunal dismissed the appeal and partly allowed the cross objection filed by the assessee. Hence the instant appeal by the appellant assessee.

It was held that:

In Topman Exports’s case (supra), the Supreme Court observed that it was essential to fulfill the two conditions incorporated in third Proviso to sub-section (3) of Section 80HHC of the Act. It was to be examine whether on profits on transfer of DEPB under clause (d) of section 28 of the Act, the assessee was entitled to benefit of exclusion of a smaller figure from “profits of the business” under Explanation (baa) to section 80HHC of the Act.

Where an assessee has an export turnover exceeding Rs.10 crores and has made profits on transfer of DEPB, he would not get the benefit of addition to export profits under third or fourth proviso to sub-section (3) of Section 80HHC, but he would get the benefit of exclusion of a smaller figure from “profits of the business.” Where the export turnover of an assessee exceeds Rs.10 crores, he does not get the benefit of addition of ninety per cent of export incentive under clause (iiid) of Section 28 to his export profits, but he gets a higher figure of profits of the business, which ultimately results in computation of a bigger export profit.” disposed of by remanding the matter to the Assessing Officer who shall pass fresh order in the light of judgment of the Apex Court in Topman Exports’s case (supra) after affording an opportunity of hearing to the assessee.

Matter regarding fees paid to Municipal Corporation was disposed against the assessee. The matter was remanded back to the Assessing Officer who shall pass fresh order inview of Apex Court’s judgement in Topman Exports’s case. Henceforth, expense for legalizing construction of its building was not allowable as business expenditure.

___________________________________________________________________________________________