Compounding fee for construction deviations treated as penalty and disallowed as business deduction under income tax law.

Payments made to compound violations of a sanctioned building plan are penal in nature where the municipal law treats them as compounding an offence against the Act, rules, bye-laws or regulations. Re-labelling such a payment as a regularisation fee does not change its character. As a penalty, the amount is not an admissible deduction under section 37(1) of the Income-tax Act, 1961, because expenditure incurred to compound an offence cannot be allowed as a business deduction.

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Issues: Whether the amount paid for regularisation of deviations in construction, described as a compounding or regularisation fee, was in substance a penalty and therefore inadmissible as deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The payment was made to compound violations of the sanctioned plan under the municipal law. The statutory framework treated such payment as compounding an offence against the Act, rules, bye-laws or regulations. The character of the payment did not change because it was labelled as a regularisation fee. An amount paid to compound an offence is penal in nature, and an expenditure of that character cannot qualify for deduction under section 37(1) of the Income-tax Act, 1961.

Conclusion: The amount was correctly treated as penalty and was not allowable as a business deduction.

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