The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) has held that the compounding fee paid to the Legal Metrology department is allowable as an expenditure under Section 37 of the Income Tax Act, 1961.
Before the authorities, the assessee claimed that the compounding fees levied by the Legal Metrology department, Nagpur was compensatory in nature. Rejecting the assessees’ claim for deduction, the Assessing officer held that since legal expenses claimed by the assessee has an element of breach of law, therefore, the same was penalty and not allowable under section 37.
The bench noted that the only allowance of any expenditure, if it was incurred for illegal activities or towards infringement of law are prohibited under section 37.
The bench further noted that the impugned expenditure incurred by the assessee is more in the nature of compensatory and necessitated by commercial expediency.
“In the normal incidences of business, certain damages are to be paid by an assessee and the expenses so incurred is an allowable deduction in the ordinary course of the business. The letter of Inspector of Legal Metrology, Nagpur dated 11.7.2012 states that the assessee to make payment of Rs.20,000/- to avoid any future litigation. The assessee has settled the issue by paying the sum as compensation/ damages for the interest of its business, which according to us, cannot be treated as incurred for infraction of any law and therefore to be disallowed. We are not convinced with the action of the AO in disallowing the impugned claim of the assessee, as there is no finding recorded by the Revenue authorities below to demonstrate that expenses incurred by the assessee are penal in nature and assessee has committed any contravention of law,” the bench said.
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