Compounding fee is penalty hence Disallowed

By | August 19, 2015

Q; Whether Compounding fee is penalty and therefore not allowed as business expenditure ?

Compounding fee paid by assessee, a land developer to Municipal Corporation on account of deviations from original sanctioned plan was in nature of penalty and therefore would not be allowable as deduction in view of provisions of Explanation to section 37(1)

IN THE ITAT PUNE BENCH ‘B’

Modi Builders

v.

Joint Commissioner of Income-tax, Range-5, Pune

R. K. PANDA, ACCOUNTANT MEMBER
AND VIKAS AWASTHY, JUDICIAL MEMBER

IT APPEAL NOS. 1693 AND 1728 (PN.) OF 2013
[ASSESSMENT YEAR 2009-10]

JUNE  26, 2015

Section 37(1) of the Income-tax Act, 1961

FACTS 

■         The assessee was a partnership firm engaged in the business of land developers and builders, leasing out commercial and residential property.

■         The assessee filed its return claiming deduction of penalty charges paid to municipal corporation (PMC) for obtaining completion certificate.

■         The Assessing Officer noted that the assessee had violated the norms levied by the Municipal authorities while constructing commercial complex due to which the PMC had levied penalty. According to the Assessing Officer as perExplanation to section 37(1), any expenditure incurred by an assessee for a purpose which was an offence or which was prohibited by law will not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance would be made in respect of such expenditure. He accordingly disallowed the amount claimed by the assessee.

■         The Commissioner (Appeals) upheld the order of the Assessing Officer.

■         On second appeal:

HELD

■         Compounding fee paid by the assessee, a land developer to the Municipal Corporation on account of deviations from original sanctioned plan was in the nature of penalty and therefore would not be allowable as deduction in view of provisions of Explanation to section 37(1). [Para 10.7]

 

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