Compounding fee for permissible deviation of building plan is allowable

Keerthi Estates (P) Ltd. Vs. DCIT (ITAT Hyderabad)

The assessee has paid compounding fine to regularize the building plan. The payment of such compounding fine is penalty in the nature of an offence or which is prohibited by law. We have noticed that the decision on this count is divided among the various courts. The Hon’ble High Courts Karnataka and P&H have held the same as penalty in the nature of an offence. The other ITAT benches have given divergent views. In our considered view, the builders submit building plan for approval and based on the proposed plan, the Corporation/ Municipalities gives approval. It is fact that at the time of approval, the corporation and the builders aware that it is not possible to complete the project as per the proposed plan as there are certain adjustments need to be made at the time of actual execution. As long the actual completion of the projects are within the parameters of approval, the corporation/approving authorities permit the projects as approved with the nominal fine or compounding fee. This is the reason, the corporation has the clause intact in the rules books. If the projects are illegal, which is an offence and cannot be cured, the whole project cannot be approved by the approving authorities, as the same is subject matter of public safety. The penalty can be classified as two types; one charged for violation of law in the nature of offence, which cannot be pardoned by compounding and the second is charged for violation of certain rules which are not in the nature of offences and can be cured by compounding. In the case of housing/commercial projects, the corporation aware that there will be certain deviations at the time of approval and no project can be completed without any deviation. The question is, the extent of deviation. In case it is within the permissible limits, the approving authorities, allow with compounding the deviation by levying compounding fees. In the given case, the project was completed and the deviations are within the limits, for which the Bangalore Mahanagar Palike has approved the project by compounding fees, which is not in the nature of offence nor prohibition of any law. Hence, it is allowable under section 37(1) of the Act.

Income Tax Act, 1961, Section 37(1)

Business expenditure—Compounding fee—Deviation of building plan within approved limit

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