I paid a 'regularisation fee' to the municipal corporation for deviations from the sanctioned plan. The Assessing Officer says it is a penalty. Can I deduct it?
Not if the payment is made under a power to COMPOUND an offence. The Karnataka High Court held that a fee paid under Bye-law 6.0 of the Bangalore Mahanagara Palike Building Bye-laws to regularise construction deviations is an amount paid to compound an offence under s.483(b) of the Karnataka Municipal Corporations Act 1976, is therefore a penalty whatever it is called, and can never qualify for deduction under s.37.
Decided by the High Court (D.V. Shylendra Kumar J and N. Ananda J) on 2010-01-19, reported as Karnataka High Court, appeal under s.260A of the Income-tax Act, 1961; assessment year 2005-06. No law-report citation appears in the text read.. It bears on section 37(1), section Explanation 1 to 37(1), section 260A of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
This is the case the Revenue reaches for on every regularisation, compounding or compounding-fee payment, and its reasoning is structural rather than factual: the Court did not ask whether the payment hurt the assessee or whether the deviation was small, it asked which statutory power the payment was made under. That makes the enabling provision, not the receipt, the battleground. The counter-line is Prakash Cotton Mills v CIT (1993) and CIT v Ahmedabad Cotton Mfg. Co., where the Supreme Court requires the scheme of the relevant statute to be examined to see whether the impost is compensatory or penal, and the compensatory component to be allowed. Note also the amendment underneath: from AY 2022-23, clause (iii) of Explanation 3 to s.37(1) expressly puts expenditure incurred 'to compound an offence under any law for the time being in force, in India or outside India' inside Explanation 1, so for AY 2022-23 onwards this reasoning is written into the statute and the compensatory argument is much harder to run on a compounding payment.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was a private limited company carrying on business as a developer. For assessment year 2005-06 it claimed Rs 4,40,500 as deductible business expenditure under s.37, debited under the head 'Project Expenditure'. The amount was paid to the Bangalore Mahanagara Palike towards regularisation of deviations in construction: the assessee had put up a structure with an approved plan but had deviated from it, and paid the amount under Bye-law 6.0 of the Bangalore Mahanagara Palike Building Bye-laws, which permits the Commissioner to regularise violations or deviations within 5 per cent of setback, plot coverage, floor area ratio and height, after recording detailed reasons, by sanctioning a modified plan and levying a fee prescribed by the Corporation. The Assessing Officer disallowed the claim as penal in nature. The Commissioner (Appeals) dismissed the appeal following the High Court's own decision in CIT v. Mamatha Enterprises, and the Tribunal dismissed the further appeal. Before the High Court the assessee argued that Mamatha Enterprises was distinguishable because there the builder had put up a floor with no approved plan at all, whereas here there was an approved plan and the deviations were within the permissible margin.
The appeal was dismissed. The so-called regularisation fee under Bye-law 6.0 is a payment made under s.483(b) of the Karnataka Municipal Corporations Act 1976, which empowers the Commissioner to compound any offence against the Act, bye-laws or regulations. An amount paid to compound an offence is a penalty, and the description of it as a compounding or regularisation fee cannot alter the character of the payment. Being in the nature of a penalty it can never be an amount in the nature of expenditure qualifying for deduction under s.37, and the questions of law were answered against the assessee and in favour of the Revenue (paras 9 to 11).
The Court went behind the bye-law to the enabling section. Bye-law 6.0 is a provision made for regularising deviations and violations as enabled by s.483(b) of the Karnataka Municipal Corporations Act 1976, which is in terms a power to 'compound any offence against this Act, bye-laws or regulations' (para 9). That, the Court said, left no doubt about the character of the expenditure: it is only an amount paid to compound an offence, and an amount paid for compounding an offence is inevitably a penalty; the nomenclature used cannot alter the character of the payment (para 10). Because the payment is in the nature of a penalty, the settled law that a penalty is not deductible applied, and the assessee's attempt to distinguish Mamatha Enterprises on the footing that there was an approved plan and the deviation was within permissible limits did not answer the point (paras 7 and 11).
it can never be an amount in the nature of expenditure which can qualify for deduction
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Handle my notice → Ask a CA on WhatsAppNot if the payment is made under a power to COMPOUND an offence. The Karnataka High Court held that a fee paid under Bye-law 6.0 of the Bangalore Mahanagara Palike Building Bye-laws to regularise construction deviations is an amount paid to compound an offence under s.483(b) of the Karnataka Municipal Corporations Act 1976, is therefore a penalty whatever it is called, and can never qualify for deduction under s.37. This was decided by the High Court (D.V. Shylendra Kumar J and N. Ananda J) and bears on section 37(1), section Explanation 1 to 37(1), section 260A of the Income Tax Act 1961. It is reported as Karnataka High Court, appeal under s.260A of the Income-tax Act, 1961; assessment year 2005-06. No law-report citation appears in the text read.. This is the case the Revenue reaches for on every regularisation, compounding or compounding-fee payment, and its reasoning is structural rather than factual: the Court did not ask whether the payment hurt the assessee or whether the deviation was small, it asked which statutory power the payment was made under. That makes the enabling provision, not the receipt, the battleground. The counter-line is Prakash Cotton Mills v CIT (1993) and CIT v Ahmedabad Cotton Mfg. Co., where the Supreme Court requires the scheme of the relevant statute to be examined to see whether the impost is compensatory or penal, and the compensatory component to be allowed. Note also the amendment underneath: from AY 2022-23, clause (iii) of Explanation 3 to s.37(1) expressly puts expenditure incurred 'to compound an offence under any law for the time being in force, in India or outside India' inside Explanation 1, so for AY 2022-23 onwards this reasoning is written into the statute and the compensatory argument is much harder to run on a compounding payment. If it applies to you, the first step is this: Identify the exact statutory power under which the authority received the money — a power to compound an offence puts you inside this judgment; a power to levy a charge, fee or interest for delay may not.
The assessee was a private limited company carrying on business as a developer. For assessment year 2005-06 it claimed Rs 4,40,500 as deductible business expenditure under s.37, debited under the head 'Project Expenditure'. The amount was paid to the Bangalore Mahanagara Palike towards regularisation of deviations in construction: the assessee had put up a structure with an approved plan but had deviated from it, and paid the amount under Bye-law 6.0 of the Bangalore Mahanagara Palike Building Bye-laws, which permits the Commissioner to regularise violations or deviations within 5 per cent of setback, plot coverage, floor area ratio and height, after recording detailed reasons, by sanctioning a modified plan and levying a fee prescribed by the Corporation. The Assessing Officer disallowed the claim as penal in nature. The Commissioner (Appeals) dismissed the appeal following the High Court's own decision in CIT v. Mamatha Enterprises, and the Tribunal dismissed the further appeal. Before the High Court the assessee argued that Mamatha Enterprises was distinguishable because there the builder had put up a floor with no approved plan at all, whereas here there was an approved plan and the deviations were within the permissible margin. The matter was decided on 2010-01-19 by the High Court (D.V. Shylendra Kumar J and N. Ananda J). On those facts the High Court held as follows. The appeal was dismissed. The so-called regularisation fee under Bye-law 6.0 is a payment made under s.483(b) of the Karnataka Municipal Corporations Act 1976, which empowers the Commissioner to compound any offence against the Act, bye-laws or regulations. An amount paid to compound an offence is a penalty, and the description of it as a compounding or regularisation fee cannot alter the character of the payment. Being in the nature of a penalty it can never be an amount in the nature of expenditure qualifying for deduction under s.37, and the questions of law were answered against the assessee and in favour of the Revenue (paras 9 to 11).
The Court went behind the bye-law to the enabling section. Bye-law 6.0 is a provision made for regularising deviations and violations as enabled by s.483(b) of the Karnataka Municipal Corporations Act 1976, which is in terms a power to 'compound any offence against this Act, bye-laws or regulations' (para 9). That, the Court said, left no doubt about the character of the expenditure: it is only an amount paid to compound an offence, and an amount paid for compounding an offence is inevitably a penalty; the nomenclature used cannot alter the character of the payment (para 10). Because the payment is in the nature of a penalty, the settled law that a penalty is not deductible applied, and the assessee's attempt to distinguish Mamatha Enterprises on the footing that there was an approved plan and the deviation was within permissible limits did not answer the point (paras 7 and 11). In the words reproduced by the source cited on this page: "it can never be an amount in the nature of expenditure which can qualify for deduction" The decision followed or applied CIT v. Mamatha Enterprises 266 ITR 356 (Kar.) — relied on by the authorities below and applied.
It was decided by the High Court on 2010-01-19 and is reported as Karnataka High Court, appeal under s.260A of the Income-tax Act, 1961; assessment year 2005-06. No law-report citation appears in the text read.. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 37(1), section Explanation 1 to 37(1), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed. The so-called regularisation fee under Bye-law 6.0 is a payment made under s.483(b) of the Karnataka Municipal Corporations Act 1976, which empowers the Commissioner to compound any offence against the Act, bye-laws or regulations. An amount paid to compound an offence is a penalty, and the description of it as a compounding or regularisation fee cannot alter the character of the payment. Being in the nature of a penalty it can never be an amount in the nature of expenditure qualifying for deduction under s.37, and the questions of law were answered against the assessee and in favour of the Revenue (paras 9 to 11). It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 37(1), section Explanation 1 to 37(1), section 260A of the Income Tax Act 1961, and was decided by D.V. Shylendra Kumar J and N. Ananda J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Get the demand, the order and the receipt: if the municipal or regulatory order recites that an offence is being compounded, the label 'regularisation fee' on the receipt will not save the claim. Where part of the payment is genuinely restitutionary (betterment charges, development charges, cost of works), separate it in the computation and argue that component under Prakash Cotton Mills as compensatory. Check the assessment year: for AY 2022-23 onwards, Explanation 3(iii) to s.37(1) covers compounding expenditure expressly, so do not build a case on pre-2022 authorities without saying which side of 1 April 2022 the year falls. If the payment was made to a foreign regulator, note that Explanation 3(i) extends 'prohibited by law' to laws in force outside India only from AY 2022-23 (see AIA Engineering and Sun Pharmaceutical in this library).
Searched for later treatment; none was found. That is not the same as a source affirming it. A citedby search returns only two later decisions, both of the Bangalore Tribunal; no High Court has taken the judgment up, and neither Tribunal decision applies or follows it. In IG Petrochemicals Ltd v DCIT (ITAT Bangalore, 25 May 2022) the judgment reaches the Tribunal only second-hand: at para 12 the Bench is recording what the CIT(A) had done - 'Ld. CIT(A) observed that this issue was already covered against the assessee by the judgement of Hon'ble Karnataka High Court in the case of Millennia Developers Pvt. Ltd. Vs. Deputy Commissioner of Income-tax (188 Taxman 388)' - and the assessee's own concession at para 13 was framed in the same terms. The Tribunal's operative paragraph does not name the judgment at all; it disallows on its own characterisation, 'penalty charges paid by assessee, which is penal in nature in violation of law, which is to be disallowed. Accordingly, we confirm the order of Ld. CIT(A) to the extent of penalty charges', and remits the development-charges component for fresh examination - so the order below was partly set aside, not simply upheld on the strength of the judgment. The other citing decision is adverse in substance: in M/s Muneer Enterprises v ITO (ITAT Bangalore, 1 December 2021) the judgment appears only in the list of authorities the Assessing Officer had relied on, and the Tribunal rejected that reliance, holding the payments compensatory rather than penal and allowing the deduction under s.37(1) on coordinate-bench authority (NMDC Ltd, Ramgad Minerals). A probe for a High Court taking the contrary view - that a regularisation or compounding fee for unauthorised construction is deductible under s.37 - returned only CIT v Mamta Enterprises (Karnataka High Court, 30 October 2003), the earlier decision of the same Court to the same effect. Nothing overruling, doubting or confining the judgment was found either, so the judgment stands untouched: it is simply untested by any later Bench. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The available text of this judgment is an OCR of a scanned original and is badly mangled in places (for example 'penaitiy' for 'penalty' and 'U/s/87' for 'u/s 37'), so read any quotation from it against a clean copy before putting it in a submission. The disposal is paragraph 12, 'The appeal is dismissed.' The operative holding and the answer to the questions of law are in paragraph 11: "As it is in the nature of penalty, the law too is well settled to hold that it can never be an amount in the nature of expenditure which can qualify for deduction U/s.37 of the Income Tax Act and it is for this reason, we have to dismiss this appeal. If an answer is warranted in respect of the questions referred above, we answer the same against the assessee and in favour of the revenue." The judgment decides the point under s.37 and does not in terms name Explanation 1; it is tagged to Explanation 1 because that is the provision an Assessing Officer now cites for it, and because compounding payments are expressly covered by Explanation 3(iii) from AY 2022-23. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed. The so-called regularisation fee under Bye-law 6.0 is a payment made under s.483(b) of the Karnataka Municipal Corporations Act 1976, which empowers the Commissioner to compound any offence against the Act, bye-laws or regulations. An amount paid to compound an offence is a penalty, and the description of it as a compounding or regularisation fee cannot alter the character of the payment. Being in the nature of a penalty it can never be an amount in the nature of expenditure qualifying for deduction under s.37, and the questions of law were answered against the assessee and in favour of the Revenue (paras 9 to 11).
TaxSphere, “Millennia Developers (P) Ltd v DCIT”, https://taxnotice.vittsphere.com/caselaw/case/millennia-developers-regularisation-fee-is-a-compounding-fee/ (validity last checked 2026-09-08)
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