2020 (7) TMI 456 - AT - Income Tax

Admissibility of interest paid to KSEB towards delayed payment of pole rental charges - Interest amount for the delayed payment of the pole rent payable by the assessee since 2002-03 - allowable expense - HELD THAT - KSEB revised the demand which was accepted by the assessee in the year 2016-17. Thus, the entire dispute was finally settled based on mutual verifications conducted by the parties. This was due the serious anomalies in the apportionment of poles in the urban and in the rural areas. The assessee has placed a copy of the demand raised by KSEB on 28.09.2006 and copy of the order of High Court settling the dispute. In view of the fact that the demand had arisen and liability crystallized during the year, the statutory auditors had disclosed the expenditure under extraordinary item in the financial statements of the company in accordance with the provisions of AS-5 on net profit or loss for the year prior period items and changes in the accounting policies issued by the ICAI considering the largeness of the amount involved. There is no case for the department that the expenditure is in the nature of prior period expenses. The Chennai Bench of the Tribunal in the case of ITO(OSD) vs. Sicgil India Pvt. Ltd. 2009 (3) TMI 239 - ITAT MADRAS-C dealt with a case wherein the contractual liability which was disputed arose in the year of settlement of dispute. In the instant case, the dispute involved was finally settled during the F.Y. 2006-07 relevant to the A.Y. 2007-08. - Decided against revenue. Difference between liability of interest due and penal interest which arose out of the demand by a competent authority - HELD THAT - Supreme Court in the case of Mahalakshmi Sugar Mills Co. vs. CIT 1980 (4) TMI 1 - SUPREME COURT where it was held that the interest for delayed payment of statutory dues is an allowable deduction u/s. 37(1). The same view was taken by Supreme Court in the case of Lachmandas Mathurdas vs. CIT 1997 (12) TMI 16 - SUPREME COURT . Similarly, in the recent decision of the Cochin Bench of the Tribunal in the case of Lakshdweep Development Corporation Limited 2018 (10) TMI 283 - ITAT COCHIN the Tribunal has held that interest on delayed payment of VAT and TDS is only compensatory and is not penal in nature. Therefore, the CIT(A) has correctly deleted the disallowance made for the interest expenditure claimed on delay payment of VAT and TDS. Thus, this ground of appeal of the Revenue is dismissed. Depreciation on Modem - @ 15% OR 60% - HELD THAT - Special Bench of the ITAT, Mumbai has held in the case of Dy.CIT vs. Data Craft ndia Ltd. 2010 (7) TMI 642 - ITAT, MUMBAI that definition of computer should not be restricted to Central Processing Unit of the computer but should also extend to all input and output devices which support computer in the receipt of input on outflow and output to and from the computer. Further, in the following decision of High Courts and Tribunals, it has been held that modem is an integral part of a computer eligible for high rate of depreciation of 60% - Decided against revenue.

Summary

Issues Involved:
1. Admissibility of interest paid for delayed payment of pole rental charges.
2. Difference between liability of interest due and penal interest.
3. Allowability of depreciation on modems at 60%.

Issue-wise Detailed Analysis:

1. Admissibility of Interest Paid for Delayed Payment of Pole Rental Charges:

The first issue concerns the admissibility of interest paid by the assessee for the delayed payment of pole rental charges to KSEB. The Assessing Officer disallowed the interest expense of ?2,37,71,066, considering it a prior period expense and penal in nature. The CIT(A) observed that the dispute over pole rent was settled by the High Court, and the interest charged was compensatory, not penal. The CIT(A) deleted the addition, concluding that the interest liability accrued during the AY 2007-08. The Tribunal upheld the CIT(A)'s decision, stating that the interest was compensatory and deductible under the mercantile system of accounting.

2. Difference Between Liability of Interest Due and Penal Interest:

The second issue addresses whether the interest for delayed payment is penal or compensatory. The Revenue argued that the interest was penal. The Tribunal, however, noted that the interest was computed at a stipulated percentage and was compensatory. Reliance was placed on Supreme Court judgments, including Prakash Cotton Mills vs. CIT and Mahalakshmi Sugar Mills Co. vs. CIT, which held that interest for delayed payment of statutory dues is allowable under Section 37(1) of the Income Tax Act. The Tribunal dismissed the Revenue's appeal, affirming that the interest was compensatory.

3. Allowability of Depreciation on Modems at 60%:

The third issue pertains to the rate of depreciation allowable on modems. The Assessing Officer restricted depreciation to 15%, while the assessee claimed 60%. The CIT(A) allowed 60% depreciation, relying on the ITAT Hyderabad decision in Ushodaya Enterprises Ltd., which held that modems, as integral parts of computers, are eligible for higher depreciation. The Tribunal upheld the CIT(A)'s decision, citing various legal precedents, including the Special Bench of ITAT Mumbai in Dy.CIT vs. Data Craft India Ltd., which supported higher depreciation for computer peripherals like modems.

Conclusion:

The Tribunal dismissed both appeals of the Revenue, confirming the CIT(A)'s decisions on all issues. The interest for delayed payment of pole rent was deemed compensatory and deductible, and modems were eligible for 60% depreciation. The judgments were pronounced in the open court on 4th March 2020.