2012 (4) TMI 187 - AT - Income Tax

Capitalization of regularization fee paid - Construction of hospital building - Held that - The regularization fee paid by the assessee has a direct nexus to the construction of the hospital building as it is paid only for the purpose of regularizing the violations committed in the course of constructing the building - State Government Ordinance has been held to be unconstitutional but even then, the Hon ble High Court has not directed to repay the amount to the defaulters - It cannot be held that the payment could not be booked anywhere in the business accounts of the assessee - The assessee has rightly booked the payment under the cost of construction of the hospital building - appeals are to be allowed

Summary

Issues:
1. Regularization fee payment as part of the cost of construction for claiming depreciation under section 32.
2. Characterization of regularization fee as penalty and its impact on depreciation claim.

Analysis:

Issue 1: Regularization fee payment as part of the cost of construction for claiming depreciation under section 32:
The case involved appeals related to the assessment years 2004-05, 2005-06, and 2006-07 filed by the assessee regarding the regularization fee paid to the Chennai Metropolitan Development Authority (CMDA) for constructing a hospital building. The assessing authority disallowed depreciation on the amount of regularization fee added to the building cost, considering it penal in nature after the Ordinance was struck down by the High Court. The Judicial Member remanded the issue to the Assessing Officer for reconsideration, citing conflicting judgments. However, the Accountant Member disagreed, emphasizing that the expenditure was genuine and formed part of the construction cost, thus allowing depreciation under section 32. The Third Member concurred, stating that the regularization fee, though part of a disputed Ordinance, was irrevocably paid for construction and should be considered for depreciation, as it directly related to the building's construction cost.

Issue 2: Characterization of regularization fee as penalty and its impact on depreciation claim:
The debate centered on whether the regularization fee constituted a penalty and if it could be included in the cost of construction for depreciation purposes. The Revenue relied on a Karnataka High Court judgment regarding penalty deductibility under section 37, which was deemed inapplicable as the assessee claimed depreciation under section 32, not deduction under section 37. The Third Member highlighted that the fee was paid to regularize building violations, not as a penalty on the assessee personally. Despite the Ordinance's invalidation, the fee was retained by the government and used for public welfare, indicating its finality. Therefore, the regularization fee, being an integral part of the construction cost, was deemed eligible for depreciation under section 32, and the Third Member upheld the Accountant Member's decision to allow the appeals.

In conclusion, the Third Member resolved the issue in favor of the assessee, affirming the eligibility for claiming depreciation on the regularization fee paid for constructing the hospital building. The case was to be finalized by the Regular Division Bench based on the majority view.