Hospital construction fee deemed genuine cost, not penalty, allowing depreciation

The case involved appeals regarding the regularization fee paid for constructing a hospital building. The assessing authority disallowed depreciation on the fee, considering it penal. The Accountant Member allowed depreciation, stating the fee was genuine construction cost. The Third Member agreed, emphasizing the fee's irrevocable payment for construction. The debate on fee characterization as penalty was resolved in favor of the assessee, allowing depreciation under section 32. The Third Member upheld the decision to allow the appeals, concluding in favor of the assessee for claiming depreciation on the regularization fee paid.

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Issues: Whether the regularisation fee paid to the local planning authority, and capitalised in the cost of the hospital building, formed part of the actual cost so as to qualify for depreciation under section 32.

Analysis: The fee was paid to regularise violations committed in constructing the hospital building and was directly connected with the acquisition and completion of the asset. It was not refundable to the assessee and, on the facts, was a final outgoing incurred for the building. The payment therefore had to be included in the construction cost for the purpose of computing the actual cost of the asset under section 43(1). The decision relied upon by the Revenue on penalty disallowance under section 37 was held to be inapplicable because the assessee was not claiming the amount as a revenue deduction but only as part of the capital cost for depreciation.

Conclusion: The assessee was entitled to depreciation on the regularisation fee as part of the cost of the hospital building.

Ratio Decidendi: A non-refundable payment made directly in connection with the construction and regularisation of an asset forms part of its actual cost and is eligible for depreciation when capitalised, even if the payment may have a penal character.

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