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Is the income-tax department justified in disallowing depreciation on such fees paid to the authorities?

/ 8 May 2012

 My family business in India is involved in construction of buildings. Recently, the metropolitan development authority pointed out certain irregularities in the construction as the original building plans sanctioned by the authorities were not adhered to. My firm has paid fees to regularise the violation. Is the income-tax department justified in disallowing depreciation on such fees paid to the authorities?

Vinay Kumar, Manama

There is no doubt that the regularisation fee paid to the authority has a direct nexus to the construction of the building. If such building is subsequently used for the purpose of carrying on a business, like a shopping mall, etc, depreciation would be deductible in computing the taxable business income. The reason is that the fee is paid only for the purpose of regularising the violations committed in the course of constructing the building. Such fee would, therefore, be added to the actual cost of the building.

Such regularisation fee is not an unlawful or illegal payment. It is, therefore, includible in the actual cost of the building under section 43(1) of the Income-tax Act, 1961. Hence, depreciation would be allowed under section 32 of the Act. Similar view has been taken by the tax tribunal where regularisation fees were paid and depreciation was claimed thereon.


The writer is a practising lawyer, specialising in tax and exchange management laws of India


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