2011 (12) TMI 410 - AT - Income Tax

Disallowance of Rs.12,46,272/- made by the Learned Assessing Officer on interest free advances made to sister concerns - According to AO the assessee diverted interest bearing funds towards interest free advances to sister concerns for non-business purposes. Had the assessee not advanced interest free advances, the funds would have been available to the assessee and its interest cost would have been reduced - The company has got own capital of Rs.37.40 crores as against outstanding loan of Rs.3.63 crores (excluding Rs.20 lacs given as deposit to Palss Properties) given to the sister concern as on 30.3.2006. - in the instant case the assessee has conclusively proved that the amount has been paid to subsidiary companies for the purpose of business and no part of the amount of advance has been utilized by the Directors for their personal purpose and the entire amount has been utilized for the purpose of business, therefore, no proportionate disallowance of interest, in our opinion, can be made in the instant case - Decided in favor of the assessee Regarding disallowance of Rs.22,28,082/- pertaining to the assessment year 2006-07 claimed by the appellant during the course of assessment proceedings - Held that the assessee has filed a letter before the A.O. giving details of the prior period expenses to be considered in A.Y. 2006-07 which the assessee has suo motu disallowed in A.Y. 2007-08 - assessee in the impugned case has made a claim for the deduction of expenditure by way of submitting written submission before the A.O. which has not been adjudicated by the A.O. A specific ground taken before the ld. CIT(A) has not been adjudicated by him - Decided in favor of the assessee by way of remand to AO Regarding punitive charges as payments and not an offence or prohibited by law - According to the A.O., as per the provisions of Explanation to Sec. 37 any expenditure incurred by an assessee for any purpose which is an offence or prohibited by law shall not be deemed to have been incurred for the purposes of business and no deduction shall be allowed - It is the case of the Revenue that the same being a penalty paid to the Railways for violation of the rules and regulations, explanation to section 37(1) is attracted and therefore the same should be disallowed - Held that the punitive charges paid by the assessee to Railways for overloading of the wagons is compensatory in nature, therefore, the same cannot be disallowed by invoking the provisions of Explanation to section 37(1) - Decided in favor of the assessee

Issues Involved:
1. Disallowance of interest-free advances to sister concerns.
2. Disallowance of indirect expenses under Section 14A read with Rule 8D.
3. Non-adjudication of expenses pertaining to the assessment year 2006-07.
4. Non-adjudication of the initiation of penalty proceedings under Section 271(1)(c).
5. Charging of interest under Sections 234B and 234C.
6. Treatment of "punitive charges" paid to Indian Railways.

Detailed Analysis:

1. Disallowance of Interest-Free Advances to Sister Concerns:
The assessee contested the disallowance of Rs. 12,46,272/- made by the Assessing Officer (A.O.) on interest-free advances to sister concerns. The A.O. argued that the assessee diverted interest-bearing funds for non-business purposes, thereby increasing its interest cost. The CIT(A) upheld this disallowance, stating that the assessee failed to prove the advances were made from its own funds and lacked business expediency. However, the Tribunal found that the assessee had sufficient interest-free funds and maintained a mixed account. Citing the Bombay High Court decision in CIT v. Reliance Utilities and Power Ltd. and the Supreme Court decision in S.A. Builders Ltd., the Tribunal held that no disallowance was warranted since the advances were for business purposes and not for personal benefit. The Tribunal directed the A.O. to delete the disallowance.

2. Disallowance of Indirect Expenses under Section 14A read with Rule 8D:
The assessee did not press this ground. Consequently, it was dismissed as not pressed.

3. Non-Adjudication of Expenses Pertaining to the Assessment Year 2006-07:
The assessee claimed expenses of Rs. 22,28,082/- for the assessment year 2006-07, which were initially disallowed in the subsequent year. The CIT(A) did not adjudicate this ground. The Tribunal noted that the A.O. and CIT(A) failed to address this claim. Citing the Supreme Court decision in Goetze (India) Ltd. v. CIT, the Tribunal remanded the issue back to the A.O. to verify and decide the allowability of the expenses after giving the assessee an opportunity to be heard.

4. Non-Adjudication of the Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal found this ground to be premature and dismissed it accordingly.

5. Charging of Interest under Sections 234B and 234C:
The Tribunal noted that charging interest under Sections 234B and 234C is mandatory and consequential. Therefore, this ground was dismissed.

6. Treatment of "Punitive Charges" Paid to Indian Railways:
The Revenue contested the CIT(A)'s decision to treat "punitive charges" as compensatory rather than penal. The A.O. had disallowed Rs. 1,01,85,788/- paid to Indian Railways for overloading, considering it penal in nature. The CIT(A) found that these charges were allowed by the Railways and were compensatory, not penal. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court in Prakash Cotton Mills P. Ltd. and the Punjab and Haryana High Court in CIT v. Hero Cycles Ltd., which allowed similar charges as business expenses. The Tribunal also referenced the Nagpur Bench decision in Western Coalfields Ltd., concluding that the punitive charges were compensatory and allowable under Section 37(1).

Conclusion:
The appeal by the assessee was partly allowed for statistical purposes, and the appeal by the Revenue was dismissed. The Tribunal provided detailed justifications for each issue, ensuring adherence to relevant legal precedents and principles.

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