2018 (2) TMI 1967 - AT - Income Tax

Disallowance of penal interest paid to Government of Gujarat - AO was of the opinion that the nature of expenditure is of penalty which is not allowable as per provisions of the Income Tax Act, 1961- HELD THAT - As decided in own case 2012 (11) TMI 351 - ITAT, AHMEDABAD penal interest in the nature of finance charges for late payment of installment/amount could not be equated with penalty imposable due to some infringement of law. The use of the word penal interest as a nomenclature does not mean any penalty for infringement of law. We find that the observations of the CIT(A) that such late payment is against the public policy and amount paid by the same could not be allowed as deductible expenses u/s.37(1A) in view of the explanation to section 37(1), is not sustainable in law. The interest charged at the rate of 2% per month for delayed payment of installment by the assessee-company could not be equated with payment made against the public policy or payment made in contravention of law. We are of the considered view that the interest paid by the assessee on delayed payment of installment to the State of Gujarat is in the nature of financial charges for late payment of installment. In this view of the matter, we hold that no case of disallowance by holding the payment of penal interest as against the public policy could be made out by the department - Decided in favour of assessee. Disallowance of provision for bad and doubtful debts - CIT-A deleted the addition - HELD THAT - It is true that the assessee debited Profit Loss account by ₹ 5,75,00,227/- and credited the provision for bad and doubtful debts. Hon ble Supreme Court in the case of Vijaya Bank vs. CIT 2010 (4) TMI 46 - SUPREME COURT has observed and held that where assessee bank had written off the impugned bad debts in its books by way of a debit to profit and loss account, simultaneously reducing corresponding amount from loans and advances to debtors depicted on assets side in balance sheet at close of year, the assessee-bank was entitled to deduction under section 36(1)((vii) and for that purpose it was not necessary for it to close individual account of each of its debtors in its books - assessee has reduced loans and advances by the provisions thereby fulfilling all the conditions laid down by the Hon ble Supreme Court. Considering these facts in totality, we do not find any error or infirmity in the findings of the CIT(A). - Decided agaist revenue.

Summary

Issues:
1. Deletion of addition of penal interest paid to Government of Gujarat.
2. Deletion of addition of provision for bad and doubtful debts.

Analysis:

Issue 1: Deletion of addition of penal interest paid to Government of Gujarat
The Revenue appealed against the deletion of an addition of ?12.23 crores made on account of disallowance of penal interest paid to the Government of Gujarat. The Assessing Officer disallowed the amount, considering it as a penalty not allowable under the Income Tax Act, 1961. However, the CIT(A) allowed the expenditure, stating it was interest on delayed payment, not a penalty. The Tribunal referred to a similar issue in a previous case and held that the payment was in the nature of financial charges for late payment, not a penalty. Consequently, the Tribunal declined to interfere, and Ground no.1 was dismissed.

Issue 2: Deletion of addition of provision for bad and doubtful debts
The Revenue challenged the deletion of an addition of ?5,75,00,227 made on account of disallowance of provision for bad and doubtful debts. The Assessing Officer disallowed the provision, believing it couldn't be allowed under section 36 of the Income Tax Act, 1961. The CIT(A) deleted the addition, noting that the assessee had actually written off the bad debts, not made a provision. The Tribunal considered a Supreme Court ruling stating that if bad debts were written off in the books, it could be claimed as a deduction. The Tribunal examined the balance sheet and found that the assessee had reduced loans and advances by the provisions, complying with the Supreme Court's conditions. Consequently, the Tribunal upheld the CIT(A)'s decision, and Ground no.2 was dismissed.

In conclusion, the appeal filed by the Revenue was dismissed by the Tribunal in both issues mentioned above.