Is the amount paid by a construction company as regularization fee for violating building bye-laws allowable as deduction?

Is the amount paid by a construction company as regularization fee for violating building bye-laws allowable as deduction?

 

Case :Millennia Developers (P) Ltd. v. DCIT (2010) 322 ITR 401 (Karn.)

section: 37(1) of the Income-Tax Act  

The assessee, a private limited company carrying on business activity as a developer and builder, claimed the amount paid by way of regularization fee for the deviations made while constructing a structure and for violating the plan sanctioned in terms of the building bye-laws, approved by the municipal authorities as per the provisions of the Karnataka Municipal Corporations Act, 1976. The assessee’s claim was disallowed by the Assessing Officer and the disallowance was confirmed by the Tribunal.

The High Court observed that as per the provisions of the Karnataka Municipal Corporations Act, 1976, the amount paid to compound an offence is obviously a penalty and hence, does not qualify for deduction under section 37. Merely describing the payment as a compounding fee would not alter the character of the payment.

In this case, it is the actual character of the payment and not its nomenclature that has determined the disallowance of such expenditure as deduction. The principle of substance over form has been applied in disallowing an expenditure in the nature of penalty, though the same has been described as regularization fee/compounding fee.