Fees paid towards regularization of deviation in construction form part of cost of construction

Fees paid towards regularization of deviation in construction form part of cost of construction.

Dr K Sentilnathan vs ACIT

 

AO denied the claim of depreciation on ‘Regularization Fees capitalized as part of the building’ ,whether AO was justified to reasoned that to regularize violation in construction fees paid is a penal in nature which cannot be treated as capital expenditure ? Whether the payment forms part of the cost of hospital building to the assessee ?

 

The assessee, as put forth by his ld. AR is that Regularization fees is not a penalty but it is towards condonation for deviation from original sanction and for accepting revised plan for construction.

 

Observation by ITAT- TM Bench

 

It is a fact that the assessee had paid Regularization Fees to CMDA in all the years under the provisions of an Ordinance (section 113-A of the TN Town and Country Planning Amendment Ordinance, 2000 (Ordinance No.7 of 2000) and had capitalized the same in the building account, in all these years. It is also true that the Hon'ble Jurisdictional High Court has declared as ultra vires the amendments to s. 113-A of the TN Town and Country Planning Act, 1971, by amending Acts 31 of 2000, 17 of 2001 and 7 of 2002 and the consequential amendments to the Application, Assessment and Collection of Regularization Fee (Chennai Metropolitan Area) Rules, 1999, as far as applicable to the constructions made after 22.2.1999. The case of the assessee is that it had not received any order or any notice from the CMDA cancelling the regularization fee or the completion certificate.

 

But the question remains to be decided by us is as to whether the fees paid towards regularization of deviation in construction plan of building, is penal in nature or not, and if it is penal what is the effect.

 

It was argued by the ld.AR that although the CMDA has not issued any such notice, still in the light of the Hon'ble Jurisdictional High Court’s decision, if the payment is treated as a penalty, even then it is allowable expenditure.

 

As a matter of public policy, the State Government decided to regularize such buildings and exonerate the defaulters from the consequences of the violation of the regulation, on paying Regularization Fee. Such a step taken by the State Government has been held to be unconstitutional by the Hon’ble Jurisdictional High Court. But even then, the Hon’ble High Court has not directed to repay the amount to the defaulters. Therefore, the payment made by the assessee has become final. That payment has been made directly in connection with the construction of the hospital building, which is an asset used by the assessee in carrying on his business or profession. As far as the assessee is concerned, it was not an unlawful payment. 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.

 

The Judicial member Dr. O.K.NARAYANAN, VICE-PRESIDENT THIRD MEMBER agreed with learned Accountant Member N.S. SAINI and held that, the assessee is entitled to claim depreciation on that amount of regularization fee paid by him, which has been capitalized to form part of cost of construction of the hospital building.

Where as  Judicial Member Mr Hari Om Maratha observed that there were contradictory rulings on the issue of whether payment was penal in nature and feel it fit and justified to restore this issue to the file of the Assessing Officer to consider this issue afresh from all angles.

Thus, in view of the majority opinion, we set aside the orders of lower authorities and allow the appeals of the assessee for all the years under consideration.

 

Must Read:

1. (2004) 182 TAXATION 326 (KARN) in which the Hon'ble Court has held such fees as a penalty.

 

2. CIT vs Loke Nath & Co. held - The payment of 4 lakhs was made in the course of the assessee's business of construction of the building which was ultimately to be sold as a business of the assessee, inasmuch as without paying this amount the assessee could not complete the building according to the plans lawfully. The payment was vital for the business of the assessee which consisted in the construction of the building and its sale flat wise. The expenditure was for saving of the loss of the alteration of the closing stock of the assessee. The expenses incurred were to preserve or, in other words, to save it from extinction. A portion of the building was saved from alteration or demolition and remained as business stock available for sale flat-wise. The payment was not in the nature of penalty for infraction of law and was a permissible deduction in arriving at the business profits of the assessee.

 

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