1. The assessee, a registered firm, carries on the business of iron and steel. The previous year for the assessment year 1976-77 ended 31-12-1975 (not 31-3-1976 as mentioned in the assessment order). The assessee occupied a piece of land identified as 10170, Loha Mandi, Motia Khan, New Delhi, in the year 1948. This piece of land was occupied by the assessee till 25-7-1975. The Delhi Development Authority issued a notice No. D/QS/BB/134-E dated 31-12-1974 informing the assessee that it was an unauthorised occupation of the aforesaid piece of land and, therefore, under Sections 7(2) and (3) of the Public Premises (Eviction of Unauthorised Occupants) Act, 1971, the assessee was required to pay damages of Rs. 25,821.60 at the rate of Rs. 130.50 per month, with effect from 5-4-1958 to 30-4-1974. The above notice, served on the assessee on 10-2-1975 and the date for receiving objections fixed on 10-2-1975, was extended to 24-5-1975. The assessee filed objections to show cause notice on 7-5-1975 pleading that the DDA had no right to institute the present proceedings under the Public Premises (Eviction of Unauthoried Occupants) Act, 1971. Without prejudice, it was submitted that the damages being charged were more, and should be reduced. During the course of emergency the policy decision was taken to shift Loha Mandi from Motia Khan to Naraina. The DDA was said to have informed the dealers that if the damages were not paid, they will not be eligible for allotment of alternative site. Pending the hearing of the objections the assessee was asked to make an ad hoc payment of Rs. 20,000 which was paid by cheque on 24-7-1975. This amount along with expenses of Rs. 194 were claimed by the assessee as deduction against the income of this year. The ITO rejected the assessee's claim by simply observing that the rent of plot did not pertain to this year.
2. The assessee filed an appeal to the AAC. It was pleaded that the payment of Rs. 20,194 was not a payment for incurring any capital expenditure but was in the nature of rent for the use of the land for purposes of business. It was also submitted that the liability arose for the first time in the year 1975 and had been rightly claimed during this year. The AAC accepted the assessee's submission and deleted the addition of Rs. 20,194. The revenue is aggrieved by this order of the AAC.3. The learned departmental representative submitted that the damages paid by the assessee for unauthorised occupation of a piece of land though for purposes of business was not an admissible deduction. For this submission, he drew support from the decision in Mahalakshmi Sugar Mills Co. v. CIT  123 ITR 429 (SC), wherein it was held that interest paid under Section 3(3) of the UP Sugarcane Cess Act, 1956, was not a penalty paid for any infringement of law. It was an allowable deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ("the 1922 Act"). The point that he made was that the assessee had infringed the law by unauthorisedly occupying the aforesaid piece of land. Thus, the damages paid should not be allowed as business expenditure. He referred to the judgment in Haji Aziz & Abdul Shakoor Bros. v. CIT  41 ITR 350 (SC) for the submission that the penalty paid for an infraction of the law cannot be allowed as business expenditure. He referred to the judgment in Mask & Co. v. CIT  11 ITR 454 (Mad.), wherein it has been held that the assessee's action in disregarding the undertaking given was palpably dishonest and the award of damages which followed was not incidental to the trade and did not constitute an expenditure falling within Section 10(2)(xii) of the Act.
The undertaking in that case was that the assessee would sell crackers at certain specified rates along with other traders in the same line.
He referred to the judgment in M.S.P. Senthikumara Nadar & Sons v.CIT 32 ITR 138 (Mad.) wherein it was held that payments of penalty for an infraction of the law fell outside the scope of permissible deduction under Section 10(2)(xv) of the 1922 Act. He further submitted that the method of accounting adopted by the assessee was mercantile and in this method the payment could not be allowed in this year as the initial notice of demand from DDA was received by the assessee on 10-2-1975 and the final notice fixing the damages at Rs. 22,309.70 was dated 12-6-1979. He thus submitted that the sum of Rs. 22,194 should not have been allowed as a business expenditure in this year. The learned counsel for the assessee supported the order of the AAC. He also relied on the judgment in P.N. Sikand v. CIT  131 ITR 9 (Delhi), wherein it has been held that the additional payment was nothing more than by way of enhanced rent for using the property in a manner different from that for which the rent of Rs. 600 per annum was fixed.
4. We have carefully considered the rival submissions. The proposition of law laid down in Haji Aziz Abdul Shakoor Bros. v. CIT (supra) that a payment of penalty for an infraction of the law cannot be allowed as a business expenditure is unexceptionable. It is, therefore, unnecessary for us to discuss the cases reported in Mask & Co. v. CIT (supra) and Senthikumara Nadar & Sons v. CIT (supra). The judgment in Mahalakshmi Sugar Mills Co. v. CIT (supra) is also unexceptionable. We, however, do not agree with the learned departmental representative that the payment of Rs. 20,000 has been made for infraction of any law. As the facts narrated above would show that the assessee had occupied a piece of land in Loha Mandi, Motia Khan, in the year 1948 and this was used for purposes of business without making any payment for the user thereof to anyone. After the DDA was formed sometime in 1958, that authority required the assessee to pay damages which were fixed at a particular rate per month. In the original notice given on 31-12-1974 the rate of damages was fixed at Rs. 130.50 per month and finally the rate was reduced to Rs. 43.50 per month. It is not controverted before us that the piece of land in respect of which damages came to be paid was used by the assessee for purposes of the business. Any payment made by the assessee for purposes of business had to be allowed as a business expediture so long as it is not for acquiring a capital asset or on account of personal expenditure. By making this payment the assessee did not acquire any capital asset nor the expenditure incurred can be said to be of a personal nature. The assessee may have unauthorisedly occupied a piece of land but in doing so it cannot be said that he had infringed any law as such. He has paid damages and these damages are nothing else but payment wholly and exclusively for purposes of business. The judgment in P.N. Sikand v. CIT (supra) supports the assessee because in that case the payment of additional rent for regularising the change of purposes of the use of property was held to be an allowable deduction. We, thus, do not find anything wrong with the order of the AAC. The sum of Rs. 20,194 is, in any case, admissible as it has been incurred by way of expenditure.
5. We also do not accept the submission of the learned departmental representative that the liability to make the payment did not arise during this year. We have seen the copy of the profit and loss account maintained by the assessee and it is for the year 31-12-1975. We have also seen a copy of the assessment order for the assessment year 1978-79 wherein the accounting year is shown ending on 31-12-1977.
Thus, it is clear that the assessee follows calendar year as the accounting year. It has, therefore, to be seen whether the liability to pay the sum of Rs. 20,000 arose during the calendar year 1975. It is true that the show cause notice was issued by the DDA on 31-12-1974 but the assessee was required to pay the sum of Rs. 20,000 without finalising the objections and this payment was made on 24-7-1975. When the assessee actually made the payment of Rs. 20,000, it can certainly say that the liability to make this payment had arisen in this year.
The final liability was settled in the year 1979 but that would not disturb the existing liability of Rs. 20,000 which arose during this year and which was satisfied in this year. We thus do not find any merit in this appeal.