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2018 (8) TMI 1259 - AT - Income TaxDisallowance u/s 37(1) towards VAT paid as alleged penalty for violation of law - penalty levied by the Sales Tax Department for violation of law - whether this interest payable u/s 30(2) and 30(4) of MVAT Act, 2002 is compensatory or penal in nature. - Held that - after going through the relevant provisions of the MVAT Act, 2002 and other material on record, we have no hesitation to hold that interest paid by the assessee u/s 30(4) of the MVAT Act, 2002 is penal in nature as it has its germane to infraction of law by the dealer while filing original return of VAT and the interest paid u/s 30(4) of MVAT Act, 2002 cannot be allowed as deduction while computing income under the head Profits and Gains of Business or Profession keeping in view Explanation 1 to Section 37(1) of the 1961 Act. The AO is directed to bifurcate the payments as between interest paid by the assessee u/s 30(2) and 30(4) of the MVAT Act, 2002 respectively and allow interest paid u/s 30(2) of MVAT Act, 2002 as deduction from income computed under the head Profits and Gains of Business or Profession , while interest paid by the assessee u/s 30(4) of MVAT Act, 2002 shall be disallowed while computing income chargeable to tax under the head Profits and Gains of Business or Profession . - Decided partly in favor of revenue. Disallowance u/s 14A r.w.r. 8D - assessee did not earned exempt income during the year - Held that - if no exempt income is earned by the assessee during the previous year relevant to the impugned assessment year , no disallowance u/s 14A of the 1961 Act is called for - Decided against the revenue.
Issues Involved:
1. Disallowance of VAT penalty under Section 37 of the Income-tax Act, 1961. 2. Disallowance of expenditure under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962. Issue-wise Detailed Analysis: 1. Disallowance of VAT Penalty: The first issue concerns the disallowance of VAT penalty of ?24,29,583/- paid by the assessee under the Maharashtra Value Added Tax, 2002 (MVAT Act, 2002). The Assessing Officer (AO) observed from the Tax Audit Report that the assessee had paid this amount as a penalty, which was not disallowed in the return of income. The AO considered this payment as a penalty for the violation of law and disallowed it under Section 37 of the Income-tax Act, 1961. The assessee contended that the amount was paid as interest under Sections 30(2) and 30(4) of the MVAT Act, 2002, and not as a penalty. The CIT(A) found that the word 'penalty' is not mentioned in Section 30(4) of the MVAT Act and concluded that the amount was an additional tax liability, allowing the claim of the assessee. However, the tribunal held that while interest under Section 30(2) of the MVAT Act, 2002 is compensatory and allowable as a business deduction, the interest under Section 30(4) is penal in nature. The tribunal directed the AO to bifurcate the payments between interest under Sections 30(2) and 30(4) of the MVAT Act, 2002, allowing the former and disallowing the latter as a business deduction. 2. Disallowance of Expenditure under Section 14A: The second issue pertains to the disallowance of expenditure amounting to ?1,28,59,715/- under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962. The AO observed that the assessee had made investments in shares/mutual funds, which could generate exempt income, and made the disallowance despite the assessee not earning any exempt income during the relevant year. The AO relied on the CBDT Circular No. 5/2014 and other judicial precedents to justify the disallowance. The CIT(A), however, deleted the disallowance, relying on the decision of the Hon'ble Delhi High Court in Cheminvest Ltd. v. CIT, which held that if no exempt income is earned during the relevant year, no disallowance under Section 14A is warranted. The tribunal upheld the CIT(A)'s decision, citing various judicial precedents, including the Hon'ble Delhi High Court's decision in Cheminvest Ltd. and the Hon'ble Bombay High Court's decision in Pr. CIT v. Ballarpur Industries Limited. The tribunal concluded that in the absence of exempt income, no disallowance under Section 14A is called for, dismissing the Revenue's appeal on this ground. Separate Judgments: The tribunal delivered separate judgments for the assessment years 2009-10 and 2012-13, applying the same principles to both years regarding the disallowance under Section 14A. Conclusion: The appeal of the Revenue for AY 2012-13 was partly allowed concerning the disallowance of VAT penalty, while the appeal for AY 2009-10 was dismissed. The tribunal upheld the CIT(A)'s decision that no disallowance under Section 14A is warranted in the absence of exempt income for both assessment years.
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