2009 (9) TMI 695 - AT - Income Tax

Disallowance of expenditure u/s 37 - Payment of penalty for excess load - ''compensatory in nature and not penal''- Gujarat Government has come out with a scheme of Gold Card which entitles every transporters to have overloaded vehicle for that particular month on payment of additional fees fixed for that Gold Card - AO rejected this contention of the assessee that it was normal business expenditure as corresponding income for the same was billed to the parties and that Gujarat Government has come out with a scheme of Gold Card which entitles every transporters to have overloaded vehicle for that particular month on payment of additional fees fixed for that Gold Card. AO also rejected this contention of the assessee that the overloading penalty cannot be equated with the penalty for infringement of law or otherwise, as per the provisions of IT Act. AO took the view that it cannot be held that Gold Card holder can violate the law and claim the expenditure thereof. AO also mentioned that during the course, for AY 2004-05, AO on the similar issue in other case falling in his jurisdiction had called for information u/s 133(6) from the RTO office to ascertain correct nature of penal action. AO further relying upon certain decisions of the Courts held that in the present case of the assessee, the nature of penalty is not compensatory but is for the violation of rudimentary law. AO concluded that this being a cognizable offence and infringement of law and payment being penal in nature and not incidental to the assessee s regular business. He, therefore, disallowed the amount. The CIT(A) confirmed the addition. HELD THAT - In our considered view, the authorities below have not correctly appreciated the facts of the present case. In fact, they have grievously erred in observing that scheme of Gold Card introduced by the Government of Gujarat entitled the transport carriers to carry overload by payment of additional fees was strange in a way there is no Government machinery would encourage violation of infringement of legal provisions. It is evident from the record that on payment of additional amount already fixed by RTOs, they have allowed vehicles to move further which itself shows that amount collected by the RTOs was not payment towards infringement of law but in the nature of compensation. It is pertinent to state here that Government of Gujarat has allowed to carry such excess load and collected only compensatory amount from the assessee which cannot be termed as payment towards infringement of law. It is also relevant to state that laws of State Government allowed the transporters to carry excess load in vehicles in relevant years and hence such payment is not in violation of any law. Thus, Payment of penalty for excess load carried was not for infringement of law but in the nature of compensation in the business activities of transportation of goods. Therefore, Addition made by the AO and confirmed by the CIT(A) is not sustainable and accordingly, we delete the addition. Accordingly, we dismiss ( sic allow) the ground Nos. 1 to 3 of the appeal. Penalty proceedings u/s 271(1)(c) - CIT(A) held that the appellant has really concealed/furnished inaccurate particulars of its income - HELD THAT - We find that the observations of the CIT(A) are unwarranted, unjustified, and hence not sustainable in law. In the instant case, CIT(A) was not required to make such comments because he was deciding the quantum appeal and not the penalty appeal. In our view, the CIT(A) has exceeded his jurisdiction while making such observations. In fact, the CIT(A) should have observed that this ground of appeal is premature and hence I reject the same. Accordingly, we quash the above observations of the CIT(A) on the ground that the same are without jurisdiction and uncalled for. This ground of appeal is allowed.

Issues Involved:
1. Disallowance of expenditure on overload charges.
2. Non-following of the order of CIT(A) for the previous assessment year.
3. Violation of principles of natural justice.
4. Levy of interest under sections 234A, 234B, and 234C of the Income Tax Act.
5. Initiation of penalty under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Expenditure on Overload Charges:
The assessee, a transport contractor, claimed Rs. 17,88,062 as business expenditure for overload charges, which the Assessing Officer (AO) treated as a penalty and disallowed. The AO's decision was based on the audit report and the Supreme Court's ruling in Parmjit Bhasin v. Union of India, which stated that overloading penalties are not compensatory but penal. The AO argued that the payment for overload was a violation of law and not an allowable expenditure under section 37(1) of the Income Tax Act. The CIT(A) upheld this view, stating that penalties for law violations are not deductible expenditures.

2. Non-following of the Order of CIT(A) for the Previous Assessment Year:
The assessee contended that the CIT(A) erred by not following the order of his predecessor for the assessment year 2004-05, where a similar expenditure was allowed. The CIT(A) dismissed this argument, asserting that the facts of the current year were different and the previous order was not binding.

3. Violation of Principles of Natural Justice:
The assessee argued that both lower authorities failed to properly appreciate and consider various submissions and evidence, violating the principles of natural justice. The Tribunal noted that the authorities did not correctly appreciate the facts, particularly the nature of the Gold Card scheme, which allowed transporters to carry overloads on payment of additional fees, suggesting these were compensatory and not penal.

4. Levy of Interest under Sections 234A, 234B, and 234C of the Income Tax Act:
The assessee's counsel submitted that this ground was consequential in nature. The Tribunal held accordingly, implying that the decision on the primary issue would determine the applicability of interest under these sections.

5. Initiation of Penalty under Section 271(1)(c) of the Income Tax Act:
The CIT(A) confirmed the AO's initiation of penalty proceedings under section 271(1)(c), stating that the assessee had concealed or furnished inaccurate particulars of income. The Tribunal found these observations unwarranted and beyond the CIT(A)'s jurisdiction, as he was deciding a quantum appeal, not a penalty appeal. The Tribunal quashed these observations.

Conclusion:
The Tribunal concluded that the overload charges were compensatory in nature and not penal. It deleted the addition of Rs. 17,88,062 and allowed the appeal on grounds 1 to 3. The interest levied under sections 234A, 234B, and 234C was held to be consequential. The Tribunal quashed the CIT(A)'s observations regarding penalty proceedings, allowing ground 5 of the appeal. The appeal was allowed in favor of the assessee.

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