2010 (1) TMI 223 - HC - Income Tax

Business Expenditure- The assessee is a private limited company carrying on business activity as a developer and builder. For the assessment year 2005-06, the assessee had claimed certain amounts as deductible business expenditure under section 37 of the Income-tax Act, 1961, 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 the Bangalore Mahanagara Palike Building bye-laws. The claim of the assessee was disallowed by the Assessing Officer. Held that- dismissing the appeal, that the language of section 483 of the Karnataka Municipal Corporation Act, 1976, made it clear that it was an amount paid to compound an offence. The amount paid for compounding an offence is inevitably a penalty in terms of section 483 itself and the mere fact that it had been described as compounding fee could not, in any way alter the character of the payment. The amount was not deductible.

Summary

Issues: Disallowance of regularisation fee as deductible business expenditure under section 37 of the Income-tax Act, 1961.

Analysis:
The judgment by the Karnataka High Court involved the disallowance of a regularisation fee claimed as deductible business expenditure by a private limited company under section 37 of the Income-tax Act, 1961. The company had paid the fee for deviations in construction that violated the sanctioned plan approved by municipal authorities under the Karnataka Municipal Corporations Act, 1976, and the Bangalore Mahanagara Palike Building bye-laws. The Assessing Officer disallowed the claim, considering the fee as penal in nature and not qualifying for deduction under section 37. The Appellate Commissioner, following a previous ruling, upheld the disallowance, which was further affirmed by the Income-tax Appellate Tribunal. The company appealed to the High Court under section 260A of the Income-tax Act, arguing that the fee was a regularisation fee and not a penalty. The company contended that the fee was paid for deviations within permissible limits as per the approved plan and should not be treated as a penalty, citing relevant bye-laws and distinguishing the present case from the previous ruling.

Upon examination, the High Court found that the authorities below had not erred in law in disallowing the regularisation fee as deductible expenditure. The court referred to section 483(b) of the Karnataka Municipal Corporation Act, 1976, which allowed for compounding of offences, including deviations in construction. The court determined that the fee paid for compounding an offence was essentially a penalty, regardless of how it was described. Given the penal nature of the fee, it could not qualify as deductible expenditure under section 37 of the Income-tax Act. Therefore, the court dismissed the appeal, ruling against the assessee and in favor of the Revenue.

In conclusion, the High Court upheld the disallowance of the regularisation fee as deductible business expenditure under section 37 of the Income-tax Act, considering it as a penalty for deviations in construction that violated the approved plan, as enabled by relevant municipal laws. The court's decision was based on the nature of the fee as a penalty for compounding an offence, which precluded its eligibility for deduction under section 37, leading to the dismissal of the appeal by the company.