IN THE INCOME-TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI. Before Dr. O.K. Narayanan, Vice-President & Shri S.S. Godara, Judicial Member I.T.A. No.1233/Mds/2008 Assessment Year: 2004-05 Shri C. Shankar, New No. 216, Old No. 65, Shri Ram Bhvanam, Alwarpet Street, Alwarpet, Chennai 600 018. [PAN:AAKPS4107N]

The Assistant Commissioner of Vs. Income Tax, Circle XV, Chennai - 34.

(Appellant)

(Respondent)

Appellant by Respondent by Date of Hearing Date of pronouncement

: : : :

Shri R. Vijayaraghavan, Advocate Shri Shaji P. Jacob, Addl. CIT 17.04.2013 17.04.2013

ORDER PER Dr. O.K. NARAYANAN, VICE-PRESIDENT This appeal filed by the assessee relates to the assessment year 2004-05. The appeal is directed against the order of the Commissioner of Income Tax (Appeals) - XII, Chennai dated 29.02.2008. The appeal arises out of the assessment completed under section 143(3) of the Income Tax Act 1961. 2.

The first issue raised by the assessee in the present appeal is

I.T.A. No.1 No.1233/M/ 233/M/08 /M/08

2

that the lower authorities have erred in adding Regularization Fees of `.31,49,858/- paid by the assessee as per section 113-A of the Tamil Nadu Town and Country Planning Act 1971, which is not a penalty, but only a fees which is compensating in nature. 3. to

The facts are speaking that the assessee had paid `.39,49,858/Chennai

Metropolitan

Development

Authority

(CMDA)

for

regularization of the building violation made by the assessee. The said payment was claimed as deduction in computing taxable income. The assessing authority disallowed the claim on the ground that the payment is in the nature of penalty. The disallowance was confirmed in first appeal. Therefore, the second appeal before us. 4.

The assessee has violated certain essential provisions and

conditions of approval while constructing the building. Later on, the assessee approached CMDA for discharging from the consequences by offering to pay the Regularization Fees. Even though the payment is termed “Regularization Fees”, it is not in the nature of any fee paid to a statutory authority. Here, the payment is made to escape from the consequences

of

unauthorized

construction

of

building.

The

consequences shall be demolition of unauthorized construction as well

3

I.T.A. No.1 No.1233/M/ 233/M/08 /M/08

as other penal provisions that may even lead to have been prosecution. Since violation of building regulations is a perennial problem in our country, various local authorities have made a special clause in the respective Act to condone the offence on payment of Regularization Fees. The result is that when a person makes such a payment, the person is exonerated from the consequences and the construction of the building is regularized. 5.

Even though it is regularization for various reasons, it does not

amount to payment of fees, per se. the payment is, in fact, compounding a criminal offence. Almost all the local authorities like Municipalities, Corporations and Panchayats in our country are offering such graceful treatment to builders who are violating the Rules and Regulations in constructing buildings as a result of which the conditions of many of the cities in our country have become intolerable. Any payment made in lieu of violation of any statute or law is in the nature of penalty even though the nomenclature of the payment may be different. 6.

The ld. Counsel appearing for the assessee has relied on a

judgment of the Hon’ble Supreme Court in the case of CIT vs.

4

I.T.A. No.1 No.1233/M/ 233/M/08 /M/08

Ahmedabad Cotton Mfg. Co. Ltd. 205 ITR 163, wherein the Court has held that the amount was paid at the option of assessee, and it is not in the nature of penalty. The Hon’ble Supreme Court held that such amounts paid by an assessee are eligible for deduction. But, we are afraid that decision does not advance the contention of the assessee. In the case considered by the Hon’ble Supreme Court, there is an option given to the assessee under law / the statutory scheme. It is after exercising that option, the assessee has paid the amount in lieu of producing and packing the minimum quantity of specified type of cloth as required by the Textile Commissioner. In the present case, the assessee has contravened the plan approved by the Competent Authority and made unauthorized construction. The option available before the assessee is either to demolish the unauthorized portion or permit the civic authorities to demolish the unauthorized portion and thereafter face the penal consequences. In lieu of the above said consequence, it is possible for the assessee to make payment to the appropriate local authority and get the unauthorized construction approved. In fact, it is the option of the civic authority and not the option of the assessee. The assessee has no option, but to make the payment of money to the civic authorities if it wanted to retain the

5

I.T.A. No.1 No.1233/M/ 233/M/08 /M/08

unauthorized construction. In fact, there is no question of any option. The question is whether, it is to be demolished or money to be paid. Under both circumstances, an assessee has to part away either the structure or money. Therefore, we find that there is no question of option in the present scheme so as to apply the decision of the Hon’ble Supreme Court relied upon by the Counsel. 7.

On the other hand, the Hon’ble Karnataka High Court, had an

occasion to examine similar issue in the case of CIT v. Mamta Enterprises [266 ITR 356]. In the said case, the Hon’ble Court held that the fine and penalties paid to the Municipal Corporation as compounding fee for condoning of law violating illegal construction of property are not deductible as contended by the assessee. The Hon’ble Court held that the explanation to section 37 makes it clear that an assessee, who incurs expenditure for any purposes which is an offence or which is prohibited by law are not entitled to deduction for such expenses incurred by him. In that case also, the municipal law permitted the assessee who violates the provisions of municipal law to compound the offence to save the unauthorized or illegal construction put up by him. The Hon’ble Court held that such compounding fee paid to the Municipal Corporation is a penalty, which is not deductible under

6

I.T.A. No.1 No.1233/M/ 233/M/08 /M/08

section 37. 8.

A similar issue was again considered by the Hon’ble Karnataka

High Court in the case of Millennia Developers P. Ltd. v. DCIT [322 ITR 401]. The Hon’ble Court held that the amount paid by the builder as “Regularization Fee” for violating building bye-laws is a penalty, therefore, not deductible as an expenditure. 9.

In view of the above, we hold that the lower authorities are

justified in disallowing the claim of expenditure made by the assessee towards payment of “Regularization Fee”. 10.

The ld. Counsel appearing for assessee has raised one more

contention in this regard that the Assessing Officer has not adopted the correct amount for the purpose of disallowance. According to the ld. Counsel, out of the amount of `.31,49,858/- paid by the assessee as “Regularization Fee”, a portion of the payment has been reimbursed by the owners of the flats constructed by him. Therefore, the ld. Counsel submitted that the disallowance must be limited to the actual amount claimed by the assessee as a deduction in its computation of taxable income.

7

11.

I.T.A. No.1 No.1233/M/ 233/M/08 /M/08

This proposition is acceptable. This issue is remitted back to the

assessing authority. The assessing authority is directed to find out the exact amount of “Regularization Fee” claimed by the assessee in his computation as deduction and see that amount alone is disallowed. 12.

The second issue raised by the assessee is that the lower

authorities have erred in not taking into account interest fee funds to the extent of `.1,23,36,674/- including the net profit declared by the assessee of `.38,87,844/- out of which an interest free advance of `.18,87,135/- had been made. The ld. Counsel at the time of hearing did not press all the limbs of the above issue raised in the appeal. According to the ld. Counsel, only a sum of `.9.00 lakhs can be considered as interest free funds utilized by the assessee for making advances. He has stated that the opening balance cannot be added for the purpose of disallowance as no such case was raised by the Assessing Officer in the earlier assessment year. We find that this argument advanced by the ld. Counsel is legitimate. We remit back this issue to the Assessing Officer to work out the amount for attributing interest. He shall exclude the opening balance and thereafter adopt the exact amount of fund transacted by the assessee during the impugned previous year to attract estimation of interest.

8

13.

I.T.A. No.1 No.1233/M/ 233/M/08 /M/08

In result, the appeal filed by the assessee is partly allowed. Order pronounced on Wednesday, the 17th of April, 2013 at

Chennai.

Sd/(S.S. GODARA) JUDICIAL MEMBER Chennai, Dated, the 17.04.2013 Vm/To: The assessee//A.O./CIT(A)/CIT/D.R.

Sd/(Dr. O.K. NARAYANAN) VICE-PRESIDENT