Deductibility of regularisation charges and nexus for interest disallowance rejected where the levy was compensatory and diversion was unproved.

Impact fee and balcony cover charges paid under a regularisation scheme for unauthorised construction were held deductible under section 37 because the levy was compensatory for condonation of deviations and not a penalty for an offence; the addition was deleted. Interest disallowance for alleged diversion of borrowed funds to interest-free advances was also rejected because no direct nexus was proved between interest-bearing borrowings and the advances, and the assessee had other unsecured funds and some business-purpose advances; the relief was sustained.

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Issues: (i) Whether the impact fee and balcony cover charges paid for regularisation of unauthorised construction were allowable business expenditure under section 37; (ii) Whether the disallowance of interest relating to alleged diversion of interest-bearing funds to interest-free advances was justified.

Issue (i): Whether the impact fee and balcony cover charges paid for regularisation of unauthorised construction were allowable business expenditure under section 37.

Analysis: The payment was made under the regularisation scheme for unauthorised development and was linked to condonation of deviations such as excess FSI, projections and change of user. The levy was not shown to be a penalty for breach of law, but a charge for regularisation of the revised plan. Expenditure which is compensatory in character and not incurred for an offence or prohibited act does not fall within the bar against deduction.

Conclusion: The expenditure was allowable as a deduction and the deletion of the addition was upheld in favour of the assessee.

Issue (ii): Whether the disallowance of interest relating to alleged diversion of interest-bearing funds to interest-free advances was justified.

Analysis: The record did not establish a direct nexus between interest-bearing borrowings and the advances in question. The authorities noted that the assessee had other unsecured funds, interest was paid only on opening balances of loans, and at least part of the advances was for business purposes. The material on record therefore did not support the proposed disallowance.

Conclusion: The disallowance of interest was not justified and the relief granted by the first appellate authority was confirmed in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on both issues, and the additions deleted by the first appellate authority were sustained.

Ratio Decidendi: An expenditure paid for regularisation of unauthorised construction is deductible where it is compensatory in nature and not a penalty for infraction of law, and an interest disallowance cannot stand without proof of a direct nexus between borrowed funds and interest-free advances.

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