2021 (12) TMI 814 - AT - Income Tax

Nature of expenses - fees, taxes and other cost or any other charges on rented premises - impact fee levied by the municipal authority is penal in nature - as per AO assessee was not owner of rental premises and impact fee being penal in nature levied by the municipal authority for regularizing illegal construction, and expenditure being capital in nature, the assessee has no locus to claim benefit of the same - explanation of the assessee is that in order to run business, it was a necessary expenditure linked with the tenancy agreement - HELD THAT - In the present case, it is pertinent to note that though municipal authorities have imposed an impact fee of ₹ 5,19,051/-, and the assessee has made provision of this amount also, but ultimately, assessee has recovered ₹ 2,40,193/- from his owner and only claimed expenditure of ₹ 2,78,858/- whereas the AO has disallowed total amount of impact fee. The expenditure claimed by the assessee is only ₹ 2,78,858/-. This fact has duly been submitted by the assessee in his submission as discernible from the submissions noted above. Therefore, it is not justifiable at the end of the AO to make an addition of ₹ 5,19,051/- as against claim of ₹ 2,78,858/-. In the present case, the assessee was under obligation to bear the expenditure as per the tenancy agreement. Therefore, we are of the view that the ld. CIT(A) has erred in disallowing claim of the assessee. We allow this ground and delete the impugned addition - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the impact fee levied by the municipal authority is penal in nature and thus disallowable as an expenditure.
2. Whether the assessee can claim the impact fee as a revenue expense under Section 30 of the Income Tax Act.

Detailed Analysis:

Issue 1: Nature of Impact Fee
The primary issue revolves around whether the impact fee of ?5,19,051/- levied by the municipal authority is penal in nature and thus disallowable. The Assessing Officer (AO) argued that the impact fee is a "compounding fee" for regularizing illegal construction, which is inherently penal and capital in nature. This view was supported by the AO’s observation that such fees are levied on the property owner to rectify defects in the title of the property, thus benefiting the owner rather than the tenant. Consequently, the AO disallowed the entire impact fee, adding it to the total income of the assessee.

Issue 2: Claiming Impact Fee as Revenue Expense
The assessee contended that the impact fee was a necessary business expenditure linked to the tenancy agreement, thus allowable under Section 30 of the Income Tax Act. The assessee emphasized that the impact fee was borne to ensure smooth business operations and was partially recovered from the property owner, with only ?2,78,858/- claimed as an expense. The assessee referenced multiple judicial precedents, including decisions from ITAT Mumbai and Surat Benches, which allowed similar fees as deductible expenses when levied for regularizing minor irregularities.

Tribunal's Findings:
The Tribunal noted that while the municipal authorities imposed an impact fee of ?5,19,051/-, the assessee only claimed ?2,78,858/- after recovering ?2,40,193/- from the property owner. The Tribunal found that the AO erred in disallowing the total impact fee amount of ?5,19,051/- when the actual claimed expenditure was only ?2,78,858/-. The Tribunal also considered the tenancy agreement, which obligated the assessee to bear such expenditures, and the judicial precedents cited by the assessee, which supported the view that the impact fee was compensatory rather than penal.

Conclusion:
The Tribunal concluded that the impact fee was a necessary business expenditure under the tenancy agreement and not penal in nature. Therefore, the Tribunal allowed the assessee’s claim and deleted the disallowed addition of ?5,19,051/-.

Order:
The appeal of the assessee was allowed, and the impugned addition of ?5,19,051/- was deleted. The order was pronounced on 8th December 2021 at Ahmedabad.