2018 (4) TMI 1882 - AT - Income Tax

Disallowance of payment on account of EDO Charges - allowable expenditure u/s 37 or penal in nature as interest has been charged by concerned authority for delay - AO has disallowed the same considering it penal in nature - HELD THAT - License the agreement allows assessee to make payments in installments subject to making an additional payment at 12% per annum on the unpaid portion of the amount - in case of any delay in payment of instalments in the manner agreed upon, as on due date, additional interest of 3% per annum would be chargeable, which assumes the nature of penalty. CIT (A) allowed interest paid by assessee as per the agreement at 12% as a part of business expenditure however disallowed interest paid over and above 12%, as additional payment of 3% is not covered in the normal course of the payment by assessee. It was held that the additional interest of 3% is penal in nature for failure to make payment of installment on time. No infirmity in such observation of Ld. CIT (A) - Decided against revenue.

Summary

Issues involved:
- Disallowance of EDO Charges by AO
- Absence of the assessee during hearings
- Disallowance of interest expenses by AO
- Appeal against the order of Ld. CIT (A)

Disallowance of EDO Charges by AO:
The appeal was filed by the revenue against the order passed by Ld. CIT (A) for assessment year 2012-13. The AO disallowed a payment of 1,70,22,000/- made by the assessee on account of EDO Charges, considering it penal in nature. The AO held that the interest expenses debited by the assessee were penal in nature due to delayed payment. The assessee, a real estate developer, argued that the payment was towards interest payable on EDC charges as per the license agreement. The Ld. CIT (A) examined the facts and evidence on record, concluding that the interest payment related to the agreement was not covered under section 43B of the Act and allowed 1,70,22,000/- as a business expenditure but disallowed 4,26,000/- as penalty.

Absence of the assessee during hearings:
The appeal hearings were adjourned multiple times due to the absence of the assessee or their representative. Despite notices being issued, the assessee failed to appear, indicating a lack of interest in representing the case. The tribunal decided to proceed with the appeal in the absence of the assessee based on the conduct observed.

Disallowance of interest expenses by AO:
The AO disallowed interest expenses of 1,74,48,000/- debited by the assessee towards delayed payment of IDC/EDC charges to the Haryana Government. The AO considered this interest on EDC as penal in nature and hence disallowed it. The Ld. CIT (A) reviewed the submissions and evidence provided by the appellant, noting that the interest payment was part of the agreement where the appellant opted for installments and was not covered under section 43B of the Act. The Ld. CIT (A) allowed the interest payment of 1,70,22,000/- as a revenue expenditure but disallowed 4,26,000/- as a penalty.

Appeal against the order of Ld. CIT (A):
The revenue appealed against the order of Ld. CIT (A) before the tribunal. The Ld. Sr. DR argued that the interest paid by the assessee should not be considered as normal business expenditure. However, the tribunal upheld the observations of Ld. CIT (A), affirming the disallowance of the additional interest of 3% as penal in nature. The tribunal dismissed the grounds raised by the revenue, upholding the decision of Ld. CIT (A) and ultimately dismissing the appeal filed by the revenue.