Karnataka H.C : Whether in law, the Tribunal was justified in upholding the disallowance of payment of Rs. 4,40,500 for regularization of the deviations which were within the permissible limits, holding it as penalty and thus not liable to be allowed under s. 37(1) of the Act ?

High Court Of Karnataka

Millennia Developers (P) Ltd. vs. DCIT

Section 37(1)

Asst. Year 2005-06

D.V. Shylendra Kumar & N. Ananda, JJ.

IT Appeal No. 810 of 2009

19th January, 2010

Counsel Appeared :

Dinesh for S. Parthasarathi, for the Appellant

JUDGMENT

D.V. SHYLENDRA KUMAR, J. :

The assessee is a private limited company carrying on business activity as a developer and builder. For the asst. yr. 2005-06, assessee had claimed certain amounts as deductible business expenditure under s. 37 of the IT Act, the amount which had been paid by way of regularisation fee for the deviations that had been indulged in by the assessee while constructing a structure and for having violated the sanctioned plan, in terms of the building bye- laws, which had been approved by the municipal authorities, in terms of the provisions of the Karnataka Municipal Corporations Act, 1976 and Bangalore Mahanagara Palike Building Bye-laws.

The claim of the assessee was disallowed by the AO, the amount claimed by way of expenditure under the head “Project expenditure”, which was nothing but compound fee paid to Bangalore Mahanagara Palike towards regularisation of deviations in construction was about Rs. 4,40,500, for the reason that the amount which was in the nature of penalty, being penal in nature. Therefore, it did not qualify for deduction under s. 37 of the IT Act.

In the appeal by the assessee, the CIT(A), purporting to follow the ruling of this Court in the case of CIT vs. Mamta Enterprises (2004) 187 CTR (Kar) 414 : (2004) 266 ITR 356 (Kar), dismissed the appeal. Further, appeal to the Tribunal also having met the same fate, the assessee is in appeal before this Court under s. 260A of the IT Act, 1961.

Appearing on behalf of the appellant/assessee, Mr. Dinesh, learned counsel would submit that in the first instance, the amount could not be taken as a penalty, as it was an amount in the nature of regularisation fee even in terms of bye-law 6.0 of Bangalore Mahanagara Palike Building Bye-Laws, which reads as under : “6.0. Deviations during construction— (i) Wherever any construction is in violation/deviation of the sanctioned plan, the Commr. may, if he considers that the violations/deviations are within 5 per cent of (1) the set-back to be provided around the building, (2) plot coverage (3) floor area ratio and (4) height of the building and that the demolition under Chapter XV of the Act is not feasible without affecting structural stability, he may regularize such violations/deviations after recording detailed reasons for the same. (ii) Violation/deviation as at 6.0(i) above may be regularized only after sanctioning the modified plan recording thereon the violations/deviations and after the levy of fee prescribed by the corporation from time to time.” Therefore, the learned counsel submits that the authorities below have committed an error in law in understanding that the payment was in the nature of a penalty. The further submission is that, the ruling of this Court rendered in the case of Mamta Enterprises (supra) is not attracted to the present case for the reason that in the case of Mamta Enterprises (supra), on facts it was found that the builder/assessee had put up 8th floor of the building without obtaining any approved plan at all. Whereas in the present case the assessee had put up construction on obtaining an approved plan from the municipal authorities and compounding fee was paid only in respect of deviations within the permissible limits upto 5 per cent of the sanctioned plan. In the light of enabling provisions of regularising such deviations had paid regularisation fee, applying the said ruling to the present facts of the case was not called for and therefore the authorities below have committed an error in law in holding that ruling covers this case also.

We have bestowed our consideration to the submissions made at the Bar and perused the orders of the assessing authority, first and second appellate authority.

The appeal is sought for admission on the following questions of law :

“(i) Whether in law, the Tribunal was justified in upholding the disallowance of payment of Rs. 4,40,500 for regularization of the deviations which were within the permissible limits, holding it as penalty and thus not liable to be allowed under s. 37(1) of the Act ?

(ii) Whether in law under the KMC Act the payment made for regularization of the deviations in the plan within the permissible margin could be held to be penalty for the purpose of disallowance under s. 37(1) of the Act especially when the appellant had contracted and sold the properties in accordance with the regularized plan, the profit from which had been offered for taxation ?”

9. On the overall examination of the facts and legal position, we find that the authorities below have not committed any error in law, warranting a correction by this Court in exercise of appellate jurisdiction under s. 260A of the Act. We say so, for the reason that the so-called regularisation fee in terms of bye-law 6.0 of the Bangalore Mahanagara Palike Bye-Laws is a provision made for regularising the deviations/violations as enabled under s. 483(b) of the Karnataka Municipal Corporation Act, 1976 which reads as under : “483. Provisions respecting institution, etc., of civil and criminal actions and obtaining legal advice—The Commr. may— (a) ……… (b) compound any offence against this Act, the rules, bye-laws or regulations which may be rules made by the Government be declared compoundable.”

The language of s. 483(b) leaves us with no doubt as to the nature of the expenditure as it is only an amount paid for compounding an offence. The amount paid for compounding an offence is inevitably a penalty in terms of s. 483 itself and the mere fact that it has been described as compounding fee cannot, in any way, alter the character of the payment which payment is in the nature of penalty.

As it is in the nature of penalty, the law too is well-settled to hold that it can never be an amount in the nature of expenditure which can qualify for deduction under s. 37 of the IT Act and it is for this reason, we have to dismiss this appeal. If an answer is warranted in respect of the questions referred above, we answer the same against the assessee and in favour of the Revenue.

12. The appeal is dismissed.

[Citation : 322 ITR 401]

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