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In the report titled 2012] 20 ITR (Trib) 727 (ITAT[Del] the assessee made a payment to the Municipal Corporation of Delhi towards registration, conversion, and parking charges under MCD notification dated September 5, 2009, issued in pursuant to the judgment of the Supreme Court in M. C. Mehta v. Union of India [2006] 3 SCC 399 CWP No. 4677 of 1985 dated February 16, 2006.
The assessee held a point that the expenditure was incurred towards municipal charges whereas the AO held a view that they are for violation of municipal laws. He invoked Explanation to section 37(1) of the Act and labeled it as an expenditure incurred solely for an offense or an act that is prohibited by law.
The Delhi bench held that the Municipal Corporation of Delhi demanded the compounding charges only when the hon’ble apex court directed the Municipal Corporation of Delhi to act and seal the premises in view of flagrant violations of various laws including municipal laws, master plans, and other plans besides environmental laws and indisputably, the assessee misused its property and violated the civic and environmental laws so that the charges paid by the assessee to the Municipal Corporation of Delhi, could not be allowed in view of the Explanation to section 37(1) of the Act.
Interestingly the bench following the established tests laid down in more than one Apex Court decision held that what was paid to the Municipal Corporation of Delhi 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 the 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 the owner also for misuse of the property while violating municipal laws and environmental laws. Therefore, such an expenditure is not allowable.
In this scenario perhaps the claim for deduction may be alternatively admissible under the head income from house property which strives to assess the annual value as an owner.
There is yet an interesting decision from the Mumbai bench in[2018] 66 ITR (Trib) 606 which days that the Explanation does not apply to payments arising as a consequence of an offense so that settlement charges paid by Anil D Ambani for SEBI Act violations were held to be an admissible deduction.

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