Dr.K.Senthilnathan, CHENNAI V. ACIT, CHENNAI

ITA 493/CHNY/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58001 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-03-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 02-03-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 19-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR
• Assessee Lawyers: R MUGUNTHAN
• Keywords: Depreciation; Cost of acquisition; Difference of opinion; Revenue expenditure; Capital expenditure
• Section: 133A; 32; 37; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI [BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER] I.T.A.NOS.493, 494 & 495/MDS/2010 ASSESSMENT YEARS : 2004-05, 2005-06 & 2006-07 DR.K.SENTHILNATHAN PLOT NO.1499, 6 TH MAIN ROAD ANNA NAGAR, CHENNAI - 40 VS THE ASST. COMMISSIONER OF INCOME-TAX CIRCLE XIV CHENNAI [PAN - AADPK0449A ] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R.MUGUNTHAN, C.A RESPONDENT BY : SHRI K.E.B RENGARAJAN, JR. STANDING COUNSEL DATE OF HEARING : 7-12-2011 DATE OF PRONOUNCEMENT : O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THESE APPEALS OF THE ASSESSEE, FOR ASSES SMENT YEARS 2004-05, 2005-06 AND 2006-07, ARE DIRECTED AGAINST SEPARATE ORDERS OF THE LD. CIT(A)-XII, CHENNAI, BUT DATED 28.1.2010. IN THESE APPEALS ALMOST IDENTICAL ISSUES ARE INVOLVED, THEREFORE, FOR THE S AKE OF CONVENIENCE AND BREVITY, WE PROCEED TO DECIDE THEM BY A COMMON ORDER. ITA 493 TO 495/10 :- 2 -: 2. BRIEFLY STATED, THE FACTS OF THE CASES ARE THAT THE RETURN OF INCOME FILED FOR ASSESSMENT YEAR 2004-05 HAD BEEN P ROCESSED UNDER SECTION 143(1) ON 20.12.2004 AND REGULAR ASSESSMENT HAD BEEN MADE ON 26.12.2006, ACCEPTING THE RETURNED INCOME. WHIL E COMPLETING THE ASSESSMENT FOR ASSESSMENT YEAR 2005-06, IT WAS NOT ICED THAT THE ASSESSEE CLAIMED DEPRECIATION ON REGULARIZATION FEE S CAPITALIZED AS PART OF BUILDING AND IT WAS ALLOWED IN ASSESSMENT Y EAR 2004-05. THE ASSESSEE HAD PAID ` 18,41,787/- TO CMDA AS REGULARIZATION FEES IN FINANCIAL YEAR 2003-04, ON ACCOUNT OF REGULARIZATIO N OF PLAN OF CONSTRUCTION OF HOSPITAL BUILDING TOWARDS DEVIATION . IN FACT, CMDA, REGULARIZED THE PLAN UNDER THE FORCE OF NEWLY ADDED SECTION 113-A OF THE TAMIL NADU TOWN AND COUNTRY PLANNING AMENDMENT ORDINANCE, 2000 (ORDINANCE NO.7 OF 2000) AS ULTRA VIRES UNDER ARTICLES 14 AND 21 OF THE CONSTITUTION OF INDIA. THEREFORE, THIS FEES WAS TREATED AS NOT LEGAL AND AS A PENALTY. SO, THE ASSESSMENT FOR AS SESSMENT YEAR 2004- 05 WAS REOPENED. THIS ISSUE IS ALSO INVOLVED IN AS SESSMENT YEARS 2005-06 AND 2006-07. 3. THE COMMON ISSUE IS REGARDING DENIAL OF CLAIM OF DEPRECIATION ON REGULARIZATION FEES CAPITALIZED AS PART OF THE BUILDING. THE ASSESSING OFFICER REASONED THAT THIS FEES IS A PENA LTY WHICH CANNOT BE ITA 493 TO 495/10 :- 3 -: TREATED AS CAPITAL EXPENDITURE. THE LD. CIT(A) HAS TAKEN A SIMILAR VIEW ON THIS ISSUE. HENCE, THE ASSESSEE HAS COME IN SEC OND APPEAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE CARE FULLY GONE THROUGH THE ENTIRE RECORD. THE CASE OF THE ASSESSE E, AS PUT FORTH BY HIS LD.AR IS THAT REGULARIZATION FEES IS NOT A PEN ALTY BUT IT IS TOWARDS CONDONATION FOR DEVIATION FROM ORIGINAL SANCTION AN D FOR ACCEPTING REVISED PLAN FOR CONSTRUCTION. OUR ATTENTION WAS DRAWN TO A PROVISION IN THE G.O ISSUED BY THE HOUSING AND URBAN DEVELOPM ENT DEPARTMENT, COPY ENCLOSED AT PAGE 10 OF THE PAPER BOOK. RELIAN CE WAS ALSO PLACED ON THE DECISION OF HON'BLE MADRAS HIGH COURT RENDE RED IN THE CASE OF CIT VS N.M.PARTHASARATHY, 212 ITR 105, IN SUPPORT O F HIS CONTENTION BY THE LD.AR. 5. PER CONTRA, THE LD. CIT/DR HAS REITERATED THE SAM E REASONS WHICH HAVE BEEN TAKEN BY THE ASSESSING OFFICER AND THE LD. CIT(A) AGAINST THE GROUNDS OF APPEAL. IT IS A FACT THAT THE ASSESSEE HAD PAID REGULARIZATION FEES TO CMDA IN ALL THE YEARS UNDER THE PROVISIONS OF AN ORDINANCE (SUPRA) AND HAD CAPITALIZED THE SAME IN T HE BUILDING ACCOUNT, IN ALL THESE YEARS. IT IS ALSO TRUE THAT THE HON'BLE JURISDICTIONAL HIGH COURT HAS DECLARED AS ULTRA VI RES THE AMENDMENTS TO SECTION 113-A OF THE TAMIL NADU TOWN AND COUNTRY PLANNING ACT, ITA 493 TO 495/10 :- 4 -: 1971, BY AMENDING ACTS 31 OF 2000, 17 OF 2001 AND 7 OF 2002 AND THE CONSEQUENTIAL AMENDMENTS TO THE APPLICATION, AS SESSMENT AND COLLECTION OF REGULARIZATION FEE (CHENNAI METROPOLI TAN AREA) RULES, 1999, AS FAR AS APPLICABLE TO THE CONSTRUCTIONS MAD E AFTER 22.2.1999. THE CASE OF THE ASSESSEE IS THAT IT HAD NOT RECEIV ED ANY ORDER OR ANY NOTICE FROM THE CMDA CANCELLING THE REGULARIZATION FEE OR THE COMPLETION CERTIFICATE. BUT THE QUESTION REMAINS TO BE DECIDED BY US IS AS TO WHETHER THE FEES PAID TOWARDS REGULARIZATI ON OF DEVIATION IN CONSTRUCTION PLAN OF BUILDING, IS PENAL IN NATURE O R NOT, AND IF IT IS PENAL WHAT IS THE EFFECT. THE FOLLOWING OBSERVATION MADE BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF K.R.RAMAS WAMY (A) TRAFFIC RAMASWAMY (WHICH HAS BEEN INCORPORATED BY THE ASSES SING OFFICER IN HIS ORDER AT PAGE 4) AND HAS NOT BEEN DISPROVED BY THE LD.AR, VERY CLEARLY ESTABLISHES THIS FEES TO BE SEPARATE FROM T HE ONE FOR WHICH IT WAS PAID. THIS OBSERVATION READS AS UNDER: 'THE AMENDMENTS TO SECTION 113-A OF THE TAMIL NADU TOWN AND COUNTRY PLANNING ACT, 1971 BY AMENDING ACTS 31 OF 2000, 17 OF 2001 AND 7 OF 2002 AND THE CONSEQUENTIAL .AME NDMENTS TO THE APPLICATION, ASSESSMENT AND COLLECTION OF RE GULARIZATION FEE (CHENNAI METROPOLITAN AREA) RULES, 1999 AS FAR AS APPLICABLE TO THE CONSTRUCTIONS MADE AFTER 22.2.199 9 ARE HEREBY DECLARED ULTRA VIRES ARTICLES 14 AND 21 OF T HE CONSTITUTION. ALL ORDERS FOR REGULARIZATION OF SUC H BUILDINGS (CONSTRUCTED AFTER 28.2.999) PASSED PURSUANT TO THE AMENDING PROVISIONS STAND QUASHED. IT ALSO DIRECTED THAT THE REGULARIZATION FEE COLLEC TED SHOULD BE KEPT ASIDE IN A SEPARATE FUND AND NOT TO BE MERGED WITH THE GENERAL ACCOUNT OF THE STATE OF TAMIL NADU OR ITS A GENCIES AND THIS FUND SHALL BE USED TO ALLEVIATE THE SUFFERINGS OF THE AFFECTED ITA 493 TO 495/10 :- 5 -: CITIZENS IN CONSULTATION WITH THE MONITORING COMMIT TEE'. FROM THE ABOVE FACTS, IT BECOMES CLEAR THAT THE REG ULARIZATION FEE PAID BY TILE ASSESSEE AND CAPITALIZED IN ITS BO OKS FOR CLAIMING DEPRECIATION AMOUNTS TO PAYMENTS MADE NOT ALLOWABLE UNDER THE LAW AND HENCE THE DEPRECIATION CLAIM STAN DS DISALLOWED' 6. SIMILAR IS THE CASE IN THE OTHER TWO YEARS EXCEPT F OR THE AMOUNT PAID. 7. IT WAS ARGUED BY THE LD.AR THAT ALTHOUGH THE CMDA H AS NOT ISSUED ANY SUCH NOTICE, STILL IN THE LIGHT OF THE H ON'BLE JURISDICTIONAL HIGH COURTS DECISION, IF THE PAYMENT IS TREATED AS A PENALTY, EVEN THEN IT IS ALLOWABLE EXPENDITURE. IN SUPPORT, RELIANCE HAS BEEN PLACED ON THE DECISION OF HON'BLE DELHI HIGH COURT RENDERED IN THE CASE OF CIT VS LOKE NATH & CO.(CONSTRUCTION, 147 ITR 624, IN W HICH IT HAS BEEN HELD AS UNDER: HELD, AFFIRMING THE DECISION OF THE TRIBUNAL, THAT THE SUM OF ` 4 LAKHS WAS A PERMISSIBLE DEDUCTION IN ARRIVING AT TH E PROFITS OF THE BUSINESS OF THE ASSESSEE, THE OUTGOING BEING ALLOW ABLE IN ONE ASSESSMENT YEAR. THE FIRST PROVISO TO S.195 SOFTE NED THE RIGOUR OF THE SECTION BY PROVIDING THAT INSTEAD OF REQUIRI NG DEMOLITION OR ALTERATION OF THE BUILDING NOT CONFORMING TO THE SA NCTION OR THE BYE-LAWS, THE NDMC MIGHT ACCEPT BY WAY OF COMPENSAT ION SUCH SUM AS IT MIGHT DEEM REASONABLE. THAT SECTION ENSURED THAT THE RESTRICTIONS TO BE OBSERVED BY BUILDERS WE RE ENFORCEABLE EITHER BY ALTERATION OR DEMOLITION OR BY ACCEPTING SUMS BY WAY OF COMPENSATION. SECTION 195 DID NOT CREATE ANY PENAL OFFENCE. OFFENCES AND PUNISHMENT WERE CREATED BY OTHER SECTI ONS SUCH AS SS. 192 AND 192A, S. 199, S. 219 AND S. 221 AND POWER TO COMPOUND THE OFFENCES WAS CONFERRED BY S. 229. THE ACT DREW A DISTINCTION BETWEEN AN OFFENCE WHICH COULD BE COM POUNDED AND A DISOBEDIENCE FOR WHICH THE NDMC COULD ACCEPT COMPENSATION. THE COMPENSATION WAS FOR THE BREACH O F A ITA 493 TO 495/10 :- 6 -: REGULATORY PROCEDURE IN THE MATTER OF EX POST FACTO SANCTION OF A BUILDING CONSTRUCTED IN DEVIATION OF A SANCTIONED P LAN OR WHERE THE SANCTION HAD LAPSED. THE EX POST FACTO SANCTION OBTAINED SHOWED THAT THERE WAS NO BREACH OF A PROVISION AGAI NST PUBLIC POLICY AND THE ACCEPTANCE OF THE COMPENSATION COULD NOT BE FOR ANY ILLEGAL ACT AGAINST PUBLIC POLICY. ON THE ACCEP TANCE OF THE COMPENSATION THERE WAS CONDONATION OF DISOBEDIENCE OF A PROCEDURAL REQUIREMENT: THE COMPENSATION WAS NOT A PENALTY PAYMENT TO SAVE THE ASSESSEE FROM CRIMINAL LIABILIT Y OR PROSECUTION OR TO COMPOUND ANY OFFENCE COMMITTED BY THE ASSESSEE. THE PAYMENT OF ` 4 LAKHS WAS MADE IN THE COURSE OF THE ASSESSEE'S BUSINESS OF CONSTRUCTION OF THE BUIL DING WHICH WAS ULTIMATELY TO BE SOLD AS A BUSINESS OF THE ASSE SSEE, INASMUCH AS WITHOUT PAYING THIS AMOUNT THE ASSESSEE COULD NOT COMPLETE THE BUILDING ACCORDING TO THE PLANS LAWFUL LY. THE PAYMENT WAS VITAL FOR THE BUSINESS OF THE ASSESSEE WHICH CONSISTED IN THE CONSTRUCTION OF THE BUILDING AND I TS SALE FLAT- WISE. THE EXPENDITURE WAS FOR SAVING OF THE LOSS OF THE ALTERATION OF THE CLOSING STOCK OF THE ASSESSEE. THE EXPENSES INCURRED WERE TO PRESERVE OR, IN OTHER WORDS, TO SAVE IT FRO M EXTINCTION. A PORTION OF THE BUILDING WAS SAVED FROM ALTERATION O R DEMOLITION AND REMAINED AS BUSINESS STOCK AVAILABLE FOR SALE F LAT-WISE. THE PAYMENT WAS NOT IN THE NATURE OF PENALTY FOR INFRAC TION OF LAW AND WAS A PERMISSIBLE DEDUCTION IN ARRIVING AT THE BUSINESS PROFITS OF THE ASSESSEE. 8. ON THE CONTRARY, THE LD.CIT/DR HAS RELIED ON THE DE CISION OF HON'BLE KARNATAKA HIGH COURT RENDERED IN THE CASE O F CIT VS MAMTA ENTERPRISES, 266 ITR 356 (KAR.) IN WHICH THE HON'BL E COURT HAS HELD SUCH FEES AS A PENALTY. IN THIS POSITION, WE ARE I N A QUANDARY AND FEEL IT FIT AND JUSTIFIED TO RESTORE THIS ISSUE TO THE F ILE OF THE ASSESSING OFFICER TO CONSIDER THIS ISSUE AFRESH FROM ALL ANGL ES. BUT WE MAY MENTION THAT THE ISSUE OF REOPENING TAKEN IN ASSESS MENT YEAR 2004-05 WILL BE ALIVE AND CAN BE RAISED AGAIN, IF SO ADVISE D. ITA 493 TO 495/10 :- 7 -: 9. IN THE RESULT, THE ALL THE THREE APPEALS FILED BY T HE ASSESSEE STAND ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON SD/- (N.S. SAINI) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER BY SEPARATE ORDER SD/- (N.S.SAINI) AM 23.12.2011 DATED: DECEMBER, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ITA 493 TO 495/10 :- 8 -: PER N.S. SAINI, A.M. 10. DESPITE BEST PERSUASION OF MYSELF, I AM NOT AB LE TO AGREE WITH THE FINDING AND CONCLUSION AS DRAWN BY THE LD. JUDI CIAL MEMBER AND I WRITE MY ORDER AS UNDER: 11. IN THE INSTANT CASE, THE UNDISPUTED FACT IS TH AT THE ASSESSEE CONSTRUCTED A HOSPITAL BUILDING. THE ASSESSEE WAS R EQUIRED TO PAY ` 18,41,787/- TO THE CMDA UNDER SECTION 113A OF THE T AMIL NADU TOWN AND COUNTRY PLANNING ACT, 1961 BY AMENDING ACTS 31 OF 2000, 17 OF 2001 AND 7 OF 2002 AND CONSEQUENT AMENDMENTS TO THE APPLICATION, ASSESSMENT AND COLLECTION OF REGULARIZATION FEE [CH ENNAI METROPOLITAN AREA) RULES, 1989 AS REGULARIZATION FE E AS CONSTRUCTION OF THE HOSPITAL BUILDING DEVIATED FROM THE SANCTION ED PLAN. THE ASSESSEE TREATED THE SAME AS PART OF THE COST OF HO SPITAL BUILDING AND ON SUCH COST CLAIMED DEPRECIATION UNDER SECTION 32 OF THE ACT. 12. THE LOWER AUTHORITIES FINDING THE SAID AMOUNT AS PENALTY AND PLACING RELIANCE ON THE DECISION OF THE HONBLE KAR NATAKA HIGH COURT IN THE CASE OF CIT VS. MAMTA ENTERPRISES, 266 ITR 3 56 (KAR.) EXCLUDED THE SAME FOR CALCULATING DEPRECIATION UNDER SECTION 32 OF THE ACT. IN MY OPINION, THE ASSESSEE HAS NOT CLAIMED DEDUCTION OF THE AFORESAID AMOUNT AS REVENUE EXPENDITURE AND THEREFORE PROVISI ON OF SECTION 37 ITA 493 TO 495/10 :- 9 -: IS NOT APPLICABLE AND CONSEQUENTLY, THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IS DISTINGUISHABLE AND NOT APP LICABLE. THE ACTUAL COST OF THE ASSET HAS BEEN DEFINED IN SECTIO N 43(1) OF THE ACT. THE SAID SECTION, NOWHERE REQUIRES EXCLUSION OF SUC H PART OF THE COST, WHICH IS PENALTY IN NATURE. AS THE GENUINENESS OF T HE EXPENDITURE IS NOT IN DOUBT AND AS THE SAID EXPENDITURE WAS INCURR ED IN RELATION TO THE CONSTRUCTION OF THE HOSPITAL BUILDING, WHICH IS USED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, IN MY CONSIDER ED VIEW, THE DEPRECIATION UNDER SECTION 32 IS ALLOWABLE WITH REF ERENCE TO THE ACTUAL COST WITHOUT THE EXCLUSION OF THE AFORESAID AMOUNT. 13. IN MY CONSIDERED OPINION, AS ON MERIT, THE ISS UE IS DECIDED IN FAVOUR OF THE ASSESSEE, THE GROUND RELATING TO THE VALIDITY OF REOPENING OF THE ASSESSMENT IN THE ASSESSMENT YEAR 2004-05 BECOMES MERELY ACADEMIC IN NATURE AND THEREFORE INFRUCTUOUS AND REQUIRES NO SEPARATE ADJUDICATION BY US. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED. SD/- (N.S. SAINI) ACCOUNTANT MEMBER DATED 23.12.2011 VM/- ITA 493 TO 495/10 :- 10 -: IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT THIRD MEMBER ITA NOS.493, 494 & 495(MDS)/2010 ASSESSMENT YEARS : 2004-05, 2005-06 & 2006-07 DR. K.SENTHILNATHAN, PLOT NO.1499, 6 TH MAIN RD., ANNA NAGAR, CHENNAI-40. PAN AADPK0449A. VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE XIV, CHENNAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R.MUGUNTHAN, F.C.A. RESPONDENT BY : SHRI KEB RENGARAJAN, JR.STANDING C OUNSEL DATE OF HEARING : 15 TH FEBRUARY, 2012 DATE OF ORDER : 15 TH FEBRUARY, 2012 O R D E R PER DR.O.K.NARAYANAN, VICE-PRESIDENT: THERE ARE THREE APPEALS. THESE APPEALS RELATE TO THE ASSESSMENT YEARS 2004-05, 2005-06 AND 2006-07. THE APPEALS ARE FILED BY DR. K.SENTHILNATHAN, THE ASSESSEE. TH EY ARE ITA 493 TO 495/10 :- 11 -: DIRECTED AGAINST THE ORDERS OF THE COMMISSIONER OF INCOME- TAX(APPEALS)-XII AT CHENNAI, ALL DATED 28-1-2010. 2. THE ASSESSEE HAD CONSTRUCTED A HOSPITAL BUILDING. IT WAS LATER FOUND OUT THAT THE ASSESSEE HAD VIOLATED CERTAIN REGULATIONS OF CHENNAI METROPOLITA N DEVELOPMENT AUTHORITY (CMDA) IN CONSTRUCTING THE SA ID HOSPITAL BUILDING. MEANWHILE, THE GOVERNMENT OF TA MIL NADU ISSUED AN ORDINANCE TO ADD A NEW SECTION 113A INTO THE TAMIL NADU TOWN AND COUNTRY PLANNING ACT, 1971, WHE REBY THE STATE GOVERNMENT MAY REGULARIZE DEVIATIONS MADE IN CONSTRUCTING BUILDINGS. IN THE LIGHT OF THAT ORDIN ANCE AND THE NEWLY BROUGHT IN SECTION, THE ASSESSEE OPTED FOR REGULARIZATION OF THE VIOLATION. THE VIOLATION ALL EGED IN THE HANDS OF THE ASSESSEE IN CONSTRUCTING THE HOSPITAL BUILDING WAS THUS REGULARIZED ON PAYMENT OF ` 18,41,787/- TO CMDA AS REGULARIZATION FEE. THIS AMOUNT WAS PAID BY THE ASSESSEE IN THE PREVIOUS YEAR 2003-04, RELEVANT TO THE ASSES SMENT YEAR 2004-05. 3. THE RETURN FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2004-05 WAS INITIALLY PROCESSED UND ER ITA 493 TO 495/10 :- 12 -: SECTION 143(1). LATER ON, THE ASSESSMENT WAS COMPL ETED ON A REGULAR BASIS. THEREAFTER, IN THE COURSE OF ASSE SSMENT PROCEEDINGS FOR THE ASSESSMENT YEAR 2005-06, IT WAS NOTICED THAT THE REGULARIZATION FEE PAID BY THE ASSESSEE HA S BEEN CAPITALIZED AND ADDED TO THE COST OF THE HOSPITAL B UILDING AND THE ASSESSEE HAS CLAIMED DEPRECIATION ON THAT ENHAN CED BUILDING COST. THE ASSESSING OFFICER FOUND THAT TH E ORDINANCE ISSUED BY THE GOVERNMENT OF TAMIL NADU WA S STRUCK DOWN BY THE HONBLE MADRAS HIGH COURT AS UNCONSTITUTIONAL AND, THEREFORE, THE SANCTITY OF TH E REGULARIZATION HAS BEEN VITIATED AND IN SUCH CIRCUM STANCES THE NATURE OF REGULARIZATION FEE BECAME PENAL. AS THE PAYMENT MADE BY THE ASSESSEE AS REGULARIZATION FEE WAS IN THE NATURE OF A PENALTY, THE SAME CANNOT BE ALLOWED TO BE ADDED TO THE COST OF THE BUILDING. SO MUCH SO, THE ASSESSING AUTHORITY HELD THAT THE ASSESSEE WAS NOT ENTITLED F OR DEPRECIATION ON THAT ADDITIONAL AMOUNT CAPITALIZED BY THE ASSESSEE. THEREFORE, THE ASSESSING AUTHORITY REOPE NED THE ASSESSMENT FOR THE ASSESSMENT YEAR 2004-05 AND DISA LLOWED THE DIFFERENTIAL AMOUNT OF DEPRECIATION. CONSEQUEN TLY, HE ITA 493 TO 495/10 :- 13 -: DISALLOWED THE DIFFERENTIAL DEPRECIATION FOR THE AS SESSMENT YEARS 2005-06 AND 2006-07 AS WELL. IN FIRST APPEAL S, THE ABOVE ORDERS WERE CONFIRMED BY THE COMMISSIONER OF INCOME-TAX(APPEALS). 4. THE ASSESSEE CAME IN SECOND APPEALS BEFORE THE TRIBUNAL. THE LEARNED JUDICIAL MEMBER, WHO AUT HORED THE ORDER, FOUND THAT THE ASSESSEE IS RELYING ON TH E JUDGMENT OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. N.M.PARTHASARATHY, 212 ITR 105 AS WELL AS THE JUDGM ENT OF THE HONBLE DELHI HIGH COURT RENDERED IN THE CASE O F CIT VS. LOKE NATH & CO.(CONSTRUCTION), 147 ITR 624, IN THE LIGHT OF WHICH THE ASSESSEE CONTENDED THAT EVEN IF THE PAYME NT WAS CONSTRUED AS PENALTY, IT WAS STILL ALLOWABLE AS AN EXPENDITURE. THE LEARNED JUDICIAL MEMBER FURTHER OBSERVED THAT T HE REVENUE IS RELYING ON THE JUDGMENT OF THE HONBLE K ARNATAKA HIGH COURT RENDERED IN THE CASE OF CIT VS. MAMTA ENTERPRISES, 266 ITR 356, WHEREIN THE COURT HAS CHARACTERIZED SUCH PAYMENT AS IN THE NATURE OF PENA LTY. 5. IN THE LIGHT OF THE ABOVE ARGUMENTS, THE HONBL E JUDICIAL MEMBER HELD THAT HE WAS IN A QUANDARY TO D ECIDE THE ITA 493 TO 495/10 :- 14 -: ISSUE AS SUCH, AND AS A REMEDIAL MEASURE, RESTORED THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR RECO NSIDERATION. AS THE CONTENTIOUS ISSUE HAS BEEN REMITTED BACK TO THE ASSESSING AUTHORITY, HE LEFT OPEN THE QUESTION OF R EOPENING OF THE ASSESSMENT FOR THE ASSESSMENT YEAR 2004-05 WITH A PERMISSION TO THE ASSESSEE TO AGITATE THE ISSUE, IF SO DESIRED. 6. THE LEARNED ACCOUNTANT MEMBER COULD NOT AGREE WITH THE ORDER PASSED BY THE LEARNED JUDICIAL MEMBER. THE LEARNED ACCOUNTANT MEMBER HELD THAT THE ACTUAL COST OF AN ASSET HAS TO BE ASCERTAINED IN TERMS OF SECTION 43(1) OF THE INCOME-TAX ACT, 1961. THE SAID SECTION NOWHERE REQUIRES EXCLUSION OF SUCH PART OF THE COST OF AN ASSET, WHI CH IS PENALTY IN NATURE. HE OBSERVED THAT THE GENUINENES S OF THE EXPENDITURE IS NOT IN DOUBT AND EXPENDITURE WAS IN FACT INCURRED AND, THEREFORE, IT FORMED PART OF THE COST OF CONSTRUCTION OF THE HOSPITAL BUILDING, WHICH IS USE D BY THE ASSESSEE FOR CARRYING ON HIS BUSINESS. 7. THE LEARNED ACCOUNTANT MEMBER THEREAFTER REFERRED TO THE JUDGMENT OF THE HONBLE KARNATAKA H IGH COURT IN THE CASE OF CIT VS. MAMTA ENTERPRISES, 266 ITR 3 56. HE ITA 493 TO 495/10 :- 15 -: FOUND THAT THE COURT WAS EXAMINING THE DEDUCTIBILIT Y OF A PENALTY PAID BY THE ASSESSEE UNDER SECTION 37. THE LEARNED ACCOUNTANT MEMBER OBSERVED THAT IN THE PRESENT CASE THE ASSESSEE WAS NOT CLAIMING THE REGULARIZATION FEE PA ID BY HIM AS A DEDUCTION UNDER SECTION 37. HE IS CLAIMING ON LY DEPRECIATION UNDER SECTION 32 AS PART OF THE COST O F CONSTRUCTION OF THE BUILDING. THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT WAS DELIVERED IN THE CONTEXT O F SECTION 37 AND NOT IN THE CONTEXT OF SECTION 32. THEREFORE , HE HELD THAT THE SAID JUDGMENT OF THE HONBLE KARNATAKA HIG H COURT IS NOT APPLICABLE TO THE PRESENT CASE. 8. THE LEARNED ACCOUNTANT MEMBER ACCEPTED THE CONTENTION OF THE ASSESSEE AND HELD THAT THE ASSESS EE IS ELIGIBLE FOR DEPRECIATION ON THE AMOUNT OF REGULARI ZATION FEE, AS PERMISSIBLE UNDER SECTION 32. HE ALLOWED THE AP PEALS OF THE ASSESSEE ON MERIT. AS THE ISSUE HAS BEEN DECID ED ON MERIT IN FAVOUR OF THE ASSESSEE, THE LEARNED ACCOUN TANT MEMBER DID NOT PROCEED FURTHER TO DECIDE THE VALIDI TY OF THE REOPENING OF THE ASSESSMENT FOR THE ASSESSMENT YEAR 2004- ITA 493 TO 495/10 :- 16 -: 05, AS ACCORDING TO HIM, THE ISSUE HAS BECOME JUST ACADEMIC. 9. IN SHORT, THE LEARNED JUDICIAL MEMBER REMANDED THE ISSUE BACK TO THE ASSESSING AUTHORITY, WHEREAS THE LEARNED ACCOUNTANT MEMBER ALLOWED THE APPEALS FILED BY THE ASSESSEE. 10. IN VIEW OF THE DIFFERENCE OF OPINION AS STATED ABOVE BETWEEN THE MEMBERS OF THE TRIBUNAL, THE MATT ER WAS TO BE REFERRED TO A THIRD MEMBER. ACCORDINGLY, THE LEARNED JUDICIAL MEMBER FRAMED THE POINT OF DIFFERENCE AS U NDER AND REFERRED THE SAME TO THE HONBLE PRESIDENT OF THE T RIBUNAL UNDER SECTION 255(4) OF THE ACT:- WHETHER THE ASSESSEE IS ELIGIBLE FOR CLAIMING DEPRECIATION ON A SUM OF ` 18,41,787/- PAID TO CMDA UNDER THE PROVISIONS OF SECTION 133A OF THE TAMIL NADU TOWN AND COUNTRY PLANNING ACT, 1971 (AS AMENDED VIDE AMENDING ACTS 31 OF 2000, 17 OF 2001 AND 7 OF 2002) WHICH WAS DECLARED ULTRA VIRES AND STRUCK DOWN BY THE HONBLE JURISDICTIONAL HIGH ITA 493 TO 495/10 :- 17 -: COURT, IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE OR NOT? 11. THE LEARNED ACCOUNTANT MEMBER FRAMED DIFFERENT POINTS AS UNDER AND REFERRED TO THE HONB LE PRESIDENT OF THE TRIBUNAL:- 1. WHETHER THE PAYMENT OF ` 18,41,787/- MADE TO CMDA UNDER THE PROVISIONS OF SECTION 133A OF THE TAMIL NADU TOWN AND COUNTRY PLANNING ACT, 1971 (AS AMENDED VIDE AMENDING ACTS 31 OF 2000, 17 OF 2001 AND 7 OF 2002), WHICH WAS NOT REFUNDABLE TO THE ASSESSEE FORMS PART OF THE COST OF HOSPITAL BUILDING TO THE ASSESSEE OR NOT UNDER SECTION 43(1) OF THE ACT? 2. WHETHER, THE ASSESSEE WAS ENTITLED TO DEPRECIATION UNDER SECTION 32 OF THE ACT IN RESPECT OF THE ENTIRE COST OF HOSPITAL BUILDING INCLUDING T HE ITA 493 TO 495/10 :- 18 -: PAYMENT MADE TO CMDA, WHICH WAS USED BY IT FOR ITS BUSINESS PURPOSE OR NOT? 12. THE HONBLE PRESIDENT NOMINATED ME AS THE THIRD MEMBER TO RESOLVE THE ISSUE IN THE LIGHT OF T HE TWO SETS OF POINTS OF DIFFERENCE REFERRED BY THE HONBLE MEM BERS. IT IS HOW THE ISSUE HAS BEEN PLACED BEFORE ME. 13. I HEARD SHRI R.MUGUNTHAN, THE LEARNED CHARTERE D ACCOUNTANT APPEARING FOR THE ASSESSEE AND SHRI K.E.B.RENGARAJAN, THE LEARNED STANDING COUNSEL APPE ARING FOR THE REVENUE. 14. THERE IS NO DISPUTE ON THE FACTS OF THE CASE. THE ASSESSEE HAD VIOLATED CERTAIN PROVISIONS OF CMD A REGULATIONS WHILE CONSTRUCTING HIS HOSPITAL BUILDIN G. LATER ON, THE GOVERNMENT GAVE AN OPPORTUNITY TO SUCH DEFA ULTERS TO REGULARIZE THE VIOLATIONS BY PAYING REGULARIZATION FEES. AN ORDINANCE WAS ISSUED BY THE GOVERNMENT OF TAMIL NAD U TO OPERATE THE SCHEME. LATER ON, THE HONBLE MADRAS H IGH COURT QUASHED THE ORDINANCE HOLDING IT AS UNCONSTIT UTIONAL. AT THE SAME TIME, THE HONBLE HIGH COURT DID NOT OR DER THE ITA 493 TO 495/10 :- 19 -: REPAYMENT OF THE REGULARIZATION FEES TO THE DEFAULT ERS LIKE THE ASSESSEE. ON THE OTHER HAND, THE HONBLE HIGH COUR T DIRECTED THAT THE REGULARIZATION FEES COLLECTED SHO ULD BE KEPT ASIDE IN A SEPARATE FUND AND TO BE USED TO ALLEVIAT E THE SUFFERINGS OF THE AFFECTED CITIZENS. IT MEANS THAT THE ASSESSEE WAS NOT GOING TO GET BACK THE REGULARIZATI ON FEE PAID BY HIM AT ANY RATE. THEREFORE, IRRESPECTIVE O F THE VALIDITY OF THE ORDINANCE PROCLAIMED BY THE GOVERNMENT OF TA MIL NADU, AS FAR AS THE ASSESSEE IS CONCERNED, THE AMOU NT PAID BY HIM AS REGULARIZATION FEE IS PAID FOR ONCE AND A LL AND THE SAME WILL NOT BE REFUNDED TO THE ASSESSEE. THEREFO RE, AS A MATTER OF FACT, THE SAID AMOUNT OF REGULARIZATION F EE PAID BY THE ASSESSEE FORMS PART OF THE COST OF CONSTRUCTION OF THE HOSPITAL BUILDING. 15. NOW, THE QUESTION IS WHETHER SUCH REGULARIZATI ON FEE PAID BY THE ASSESSEE COULD BE ADDED TO THE COST OF CONSTRUCTION OF THE BUILDING FOR THE PURPOSE OF CLA IMING DEPRECIATION UNDER SECTION 32. THE REVENUE HAS REL IED ON THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT RE NDERED IN THE CASE OF CIT VS. MAMTA ENTERPRISES, 266 ITR 3 56. THE ITA 493 TO 495/10 :- 20 -: SAID DECISION IS NOT APPLICABLE TO THE PRESENT CASE IN HAND. THE HONBLE KARNATAKA HIGH COURT WAS IN FACT EXAMIN ING THE DEDUCTIBILITY OF PENALTY EXPENSES UNDER SECTION 37 OF THE INCOME-TAX ACT, 1961. IN THE PRESENT CASE, THE AS SESSEE HAS NOT MADE ANY SUCH CLAIM OF DEDUCTION UNDER SECT ION 37. THEREFORE, THAT DECISION DOES NOT APPLY TO THE CASE . 16. THE CASE OF THE ASSESSEE IS THAT AS THE AMOUNT PAID BY THE ASSESSEE AS REGULARIZATION FEE FORMED P ART OF THE COST OF CONSTRUCTION OF THE BUILDING, THE SAME SHOU LD BE CONSIDERED FOR GRANTING DEPRECIATION ALLOWANCE UNDE R SECTION 32. SECTION 43(1) OF THE INCOME-TAX ACT, 1961 PROV IDES FOR COMPUTING COST OF ACQUISITION OF ASSETS. THE REGUL ARIZATION FEE PAID BY THE ASSESSEE HAS A DIRECT NEXUS TO THE CONSTRUCTION OF THE HOSPITAL BUILDING. THE REGULAR IZATION FEE WAS PAID ONLY FOR THE PURPOSE OF REGULARIZING THE V IOLATIONS COMMITTED IN THE COURSE OF CONSTRUCTING THE BUILDIN G. THEREFORE, THE ONLY ACCOUNT TO WHICH THE PAYMENT FO R REGULARIZATION FEE COULD BE BOOKED IS THE CONSTRUCT ION ACCOUNT OF THE HOSPITAL BUILDING. THEREFORE, IT IS NEEDLESS TO SAY THAT THE REGULARIZATION FEE PAID BY THE ASSESSE E FORMED ITA 493 TO 495/10 :- 21 -: PART OF THE CONSTRUCTION COST OF THE HOSPITAL BUILD ING. ONCE THAT PARTICULAR PAYMENT FORMED PART OF THE CONSTRUC TION COST OF THE HOSPITAL BUILDING, THE ASSESSEE IS ENTITLED FOR DEPRECIATION ALLOWANCE ON THE ENTIRE COST OF CONSTRUCTION OF THE HOSPITAL BUILDING. THE AMOUNT OF REGULARIZATION FEE PAID BY THE ASSESSEE CANNOT BE EXCLUDED IN COMPUTING THE ELIGIB LE DEPRECIATION ALLOWANCE. THEREFORE, IN THE LIGHT OF THE FACTS OF THE CASE AS WELL AS IN THE LIGHT OF THE PROVISIONS OF LAW STATED IN SECTION 43(1), READ WITH SECTION 32, THE ASSESSE E IS ENTITLED FOR DEPRECIATION. 17. NOW THE QUESTION IS WHETHER THE REGULARIZATION FEE PAID BY THE ASSESSEE PARTAKES THE CHARACTER OF A PENALTY AND IF SO, WHETHER THE SAME CAN BE BOOKED AT ALL AN YWHERE IN THE BUSINESS ACCOUNTS OF THE ASSESSEE. IT IS TO BE SEEN THAT THERE WAS NO PENALTY ON THE PERSON OF THE ASSESSEE. THERE WERE CERTAIN VIOLATIONS AS FAR AS THE BUILDING RULE S WERE CONCERNED. AS A MATTER OF PUBLIC POLICY, THE STATE GOVERNMENT DECIDED TO REGULARIZE SUCH BUILDINGS AND EXONERATE THE DEFAULTERS FROM THE CONSEQUENCES OF T HE VIOLATION OF THE REGULATION, ON PAYING REGULARIZATI ON FEE. ITA 493 TO 495/10 :- 22 -: SUCH A STEP TAKEN BY THE STATE GOVERNMENT HAS BEEN HELD TO BE UNCONSTITUTIONAL BY THE HONBLE JURISDICTIONAL H IGH COURT. BUT EVEN THEN, THE HONBLE HIGH COURT HAS NOT DIREC TED TO REPAY THE AMOUNT TO THE DEFAULTERS. THEREFORE, THE PAYMENT MADE BY THE ASSESSEE HAS BECOME FINAL. THAT PAYMEN T HAS BEEN MADE DIRECTLY IN CONNECTION WITH THE CONSTRUCT ION OF THE HOSPITAL BUILDING, WHICH IS AN ASSET USED BY THE AS SESSEE IN CARRYING ON HIS BUSINESS OR PROFESSION. AS FAR AS THE ASSESSEE IS CONCERNED, IT WAS NOT AN UNLAWFUL PAYME NT. IT CANNOT BE HELD THAT THE PAYMENT COULD NOT BE BOOKED ANYWHERE IN THE BUSINESS ACCOUNTS OF THE ASSESSEE. THE ASSESSEE HAS RIGHTLY BOOKED THE PAYMENT UNDER THE C OST OF CONSTRUCTION OF THE HOSPITAL BUILDING. 18. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, I AGREE WITH THE ORDER OF THE LEARNED ACCOUNTANT MEMB ER THAT THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION ON T HAT AMOUNT OF REGULARIZATION FEE PAID BY HIM, WHICH HAS BEEN C APITALIZED TO FORM PART OF COST OF CONSTRUCTION OF THE HOSPITA L BUILDING. I ALSO AGREE WITH THE LEARNED ACCOUNTANT MEMBER THAT THE ITA 493 TO 495/10 :- 23 -: QUESTION OF REOPENING OF THE ASSESSMENT FOR THE ASS ESSMENT YEAR 2004-05 HAS BECOME JUST ACADEMIC. 19. ACCORDINGLY, THE APPEALS ARE TO BE ALLOWED. 20. NOW THESE FILES WILL BE PLACED BEFORE THE REGULAR DIVISION BENCH FOR PASSING ORDERS TO FINALL Y DISPOSE OF THE CASE ON A MAJORITY VIEW. SD/- (DR.O.K.NARAYANAN) VICE-PRESIDENT THIRD MEMBER CHENNAI, DATED THE 15 TH FEBRUARY, 2012. V.A.P. ITA 493 TO 495/10 :- 24 -: IN THE INCOME-TAX APPELLATE TRIBUNAL CHENNAI C BENCH, CHENNAI. BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER & SHRI GEORGE MATHAN, JUDICIAL MEMBER I.T.A. NOS. 493, 494 AND 495/MDS/2010 ASSESSMENT YEARS: 2004-05, 2005-06 AND 2006-07 DR. K. SENTHILNATHAN, PLOT NO. 1499, 6 TH MAIN ROAD, ANNA NAGAR, CHENNAI 40. [PAN : AADPK0449A] VS. THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE XIV, CHENNAI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R. MUGUNTHAN, C.A. REVENUE BY : SHRI K.E.B. RENGARAJAN, JR. STANDING COUNSEL DATE OF HEARING : 02.03.2012 DATE OF PRONOUNCEMENT : 02.03.2012 PER N.S. SAINI, ACCOUNTANT MEMBER ON DIFFERENCE OF OPINION BETWEEN MEMBERS CONSTITUTI NG THE BENCH, THE FOLLOWING QUESTIONS WERE FORMULATED AND REFERRED TO THIRD MEMBER UNDER SECTION 255(4): 2. THE LD. JUDICIAL MEMBER FRAMED THE POINT OF DIFF ERENCE AS UNDER AND REFERRED TO THE HONBLE PRESIDENT OF THE TRIBUN AL: WHETHER THE ASSESSEE IS ELIGIBLE FOR CLAIMING DEPR ECIATION ON A SUM OF ` .18,41,787/- PAID TO CMDA UNDER THE PROVISIONS OF SECTION 133-A OF THE TAMIL NADU TOWN AND COUNTRY PLANNING ACT, 1971 (AS AMENDED VIDE AMENDING ACTS 3 1 OF 2000, 17 OF 2001 AND 7 OF 2002), WHICH WAS NOT DECL ARED ITA 493 TO 495/10 :- 25 -: ULTRA VIRES AND STRUCK DOWN THE HONBLE JURISDICTIO NAL HIGH COURT, IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE OR NOT? 3. THE LD. ACCOUNTANT MEMBER FRAMED DIFFERENT POIN TS AS UNDER AND REFERRED TO THE HONBLE PRESIDENT OF THE TRIBUN AL: 1. WHETHER THE PAYMENT OF ` .18,41,787/- MADE TO CMDA UNDER THE PROVISIONS OF SECTION 133-A OF THE TAMIL NADU TOWN AND COUNTRY PLANNING ACT, 1971 (AS AMENDED VID E AMENDING ACTS 31 OF 2000, 17 OF 2001 AND 7 OF 2002) , WHICH WAS NOT REFUNDABLE TO THE ASSESSEE FORMS PART OF TH E COST OF HOSPITAL BUILDING TO THE ASSESSEE OR NOT UNDER SECT ION 43(1) OF THE ACT? 2. WHETHER, THE ASSESSEE WAS ENTITLED TO DEPRECIAT ION UNDER SECTION 32 OF THE ACT IN RESPECT OF THE ENTIR E COST OF HOSPITAL BUILDING INCLUDING THE PAYMENT MADE TO CMD A, WHICH WAS USED BY IT FOR ITS BUSINESS PURPOSE OR NO T? 4. THE HONBLE VICE-PRESIDENT, SITTING AS THE THIR D MEMBER HAS AGREED WITH THE VIEW OF THE ACCOUNTANT MEMBER THAT THE ASSESSEE IS ENTITLED TO DEPRECIATION UNDER SECTION 32 OF THE AC T AND ALSO THE QUESTION OF REOPENING OF THE ASSESSMENT FOR THE ASS ESSMENT YEAR 2004-05 HAS BECOME JUST ACADEMIC. THUS, IN VIEW OF THE MAJORITY OPINION, WE SET ASIDE THE ORDERS OF LOWER AUTHORITI ES AND ALLOW THE APPEALS OF THE ASSESSEE FOR ALL THE YEARS UNDER CON SIDERATION. ITA 493 TO 495/10 :- 26 -: 5. IN THE RESULT, ALL THE THREE APPEALS OF THE ASS ESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 02.03.2012. SD/- SD/- (GEORGE MATHAN) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER CHENNAI, DATED, THE 02.03.2012 VM/- TO: THE ASSESSEE//A.O./CIT(A)/CIT/D.R. VM/-