Nirman Sonestaa Developers Vs DCIT (ITAT Bangalore)
Compounding Fee for Plan Deviations Not Allowable – ITAT Bangalore Upholds Disallowance Under Explanation 1 to 37(1)
Assessee, a partnership firm engaged in construction of flats, paid Rs.76,05,613/- as compounding fee to BBMP for regularising deviations from the sanctioned building plan. AO held the payment to be penal in nature, being compounding of an offence under municipal law, & disallowed it by invoking Explanation 1 to s.37(1). CIT(A) confirmed the disallowance.
Before Tribunal, no one appeared for Assessee. Tribunal examined the issue relying on binding Karnataka High Court rulings in Mamta Enterprises (266 ITR 356) & Millennia Developers (322 ITR 401), wherein it has been clearly held that compounding fee for unauthorised construction is a payment to compound an offence, inherently penal, & hit by Explanation 1 to s.37(1). Tribunal noted that compounding does not erase the offence; the payment still arises from violation of law & therefore cannot be treated as business expenditure.
Accordingly, Tribunal upheld CIT(A)’s order & dismissed the appeal, holding that compounding fee paid to BBMP for plan deviation is not allowable as deduction u/s 37(1).
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The assessee has filed the present appeal against the impugned order dated 28/05/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2018-19.
