2018 (1) TMI 597 - AT - Income Tax

Disallowances as the overloading charges u/s 37 -whether this is nothing but a penalty as per provision of section 73 of the Indian Railway Act, 1989 - stand of the assessee was that these payments were not in the nature of penalty for infringement of law and were purely in the nature of compensatory charges and therefore cannot be disallowed under Explanation to section 37(1) - Held that - The expenses were not allowed as deduction. We are of the view that in the facts and circumstances of the present case the claim of the assessee for deduction was rightly allowed by CIT(A). We therefore uphold the order of CIT(A) and dismiss ground no.1 raised by the revenue. Assessee as an employer withheld the provident fund contribution payable by its employees from their salaries payable, as their share of contribution to Provident Fund (PF) and Employees State Insurance (ESI) - whether the order of the CIT(A) is erroneous because it relied on the sec.43B(b) of the Act whereas the present issue is involved with Sec.36(1)(va) read with 2(24)(x) ? - Held that - Employees contribution to PF paid on or before the due date of filing the return of income u/s 139(1) of the Act should be allowed as deduction. SEE CIT vs Vijayshree Ltd. 2011 (9) TMI 30 - CALCUTTA HIGH COURT Additions u/s 14A - Held that - In the light of the uncontroverted factual details with regard to availability of own funds the disallowance of interest expenses in terms of Rule 8D(2)(ii) of the Rules was rightly deleted by CIT(A). As far as disallowance under Rule 8D(2)(iii) of the Rules is concerned, the CIT(A) has followed the decision of the Tribunal in the case of REI Agro Ltd. (2013 (9) TMI 156 - ITAT KOLKATA) and has directed the AO to exclude the investments which did not yield tax free income, while working out the average value of investment. We find no grounds to interfere with the order of CIT(A).

Summary

Issues Involved:
1. Disallowance of Railway Punitive Charges under Explanation to Section 37(1) of the Income Tax Act, 1961.
2. Deduction of Employees' Contribution to Provident Fund (PF) and Employees State Insurance (ESI) under Section 36(1)(va) read with Section 43B of the Income Tax Act, 1961.
3. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

Detailed Analysis:

1. Disallowance of Railway Punitive Charges under Explanation to Section 37(1) of the Income Tax Act, 1961:
The primary issue was whether the punitive charges paid by the assessee to the railways for overloading wagons could be disallowed as a deduction under Explanation to Section 37(1) of the Income Tax Act. The Assessing Officer (AO) contended that these charges were penalties and thus not allowable as deductions. The assessee argued that these charges were compensatory in nature, not penalties for any offense or infringement of law, and were paid due to infrastructural constraints at the loading stations. The CIT(A) and the Tribunal agreed with the assessee, citing previous judgments and notifications from the Ministry of Railways that supported the view that such charges were compensatory. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

2. Deduction of Employees' Contribution to Provident Fund (PF) and Employees State Insurance (ESI) under Section 36(1)(va) read with Section 43B of the Income Tax Act, 1961:
The second issue involved the deductibility of employees' contributions to PF and ESI, which were paid by the assessee after the due date prescribed under the relevant laws but before the due date of filing the return of income under Section 139(1) of the Act. The AO disallowed the deduction, but the CIT(A) allowed it, relying on the decision of the Delhi High Court in CIT vs AIMIL Ltd., which held that such contributions should be allowed if paid before the due date of filing the return. The Tribunal upheld the CIT(A)'s decision, noting that the Calcutta High Court had also taken a similar view in the cases of M/s. Akzo Nobel India Ltd. and CIT vs Vijayshree Ltd., thereby dismissing the revenue's appeal.

3. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962:
The third issue was related to the disallowance of expenses under Section 14A read with Rule 8D, which pertains to the expenditure incurred in relation to income that does not form part of the total income. The AO made a disallowance of ?3,52,568, which included interest expenses and other expenses. The assessee argued that it had sufficient own funds to cover the investments and that only investments yielding exempt income should be considered for disallowance. The CIT(A) agreed with the assessee, deleting the disallowance of interest expenses and directing the AO to recompute the disallowance of other expenses by excluding non-dividend-yielding investments. The Tribunal upheld the CIT(A)'s decision, finding no grounds to interfere with the order.

Conclusion:
The Tribunal dismissed the revenue's appeal on all three grounds, upholding the CIT(A)'s decisions regarding the disallowance of railway punitive charges, the deduction of employees' contributions to PF and ESI, and the disallowance under Section 14A read with Rule 8D. The Tribunal's decision was pronounced in the open court on 10.01.2018.