2023 (9) TMI 541 - AT - Income Tax

Revision u/s 263 - delayed payment - assessee had entered into an agreement with Director of Town Country Planning Haryana whereby it was supposed to make the payments of external development charges (EDC). Such charges were not deposited with the Town Country Planning within the due date stipulated in the agreement but rather payment was delayed - In the opinion of ld. Pr. CIT, this expenditure ought to have been disallowed to the assessee by the ld. Assessing Officer on the ground that it is penal in nature - HELD THAT - We are of the view that Explanation appended to Section 37 of the Income Tax Act contemplates that if any expenditure is being incurred by an assessee on an item, which is prohibited by law, then, such expenditure will not be allowed as a deduction to the assessee. The payment herein was not for infringement of any law. Thus according to us, it is a compensatory payment, which does not fall in the category of any penalty. CIT has misconstrued the nature of this interest payment as a penalty and termed the assessment order as erroneous, which has caused prejudice to the interest of revenue by not charging of tax on this amount. Since we have held that it is not in the nature of penalty, rather a compensatory in nature, therefore, the deduction of this amount deserves to be allowed to the assessee and the AO has allowed it. AO has not committed any error and his order cannot be termed as erroneous, which has caused prejudice to the interest of revenue. Thus we allow this appeal of the assessee and quash the 263 order impugned herein. Appeal of assessee allowed.

Summary

Issues involved:
The appeal against the order of the Principal Commissioner of Income Tax-3, Kolkata under section 263 of the Income Tax Act, 1961 in A.Y. 2015-16.

Analysis of the Judgment:

Issue 1: Adjournment Application Rejected
The appellant, under Corporate Insolvency Resolution Process (CIRP), sought an adjournment due to approval of Resolution Process by NCLT. The Tribunal rejected the adjournment request and proceeded with the hearing with the assistance of ld. CIT(DR).

Issue 2: Nature of Expenditure
The impugned order considered an interest payment of Rs. 47,50,000/- as expenditure, arising from a delayed payment of external development charges (EDC) to Town & Country Planning Haryana. The Principal Commissioner viewed this as a penal expenditure and deemed it disallowable, causing prejudice to revenue.

Issue 3: Interpretation of Income Tax Act
The Tribunal analyzed the Explanation appended to Section 37 of the Income Tax Act, which disallows expenditure incurred on items prohibited by law. It determined that the interest payment was compensatory, not penal, as it was not for infringing any law. Consequently, the deduction of this amount was allowed to the assessee, as the Assessing Officer had correctly permitted it.

Conclusion:
The Tribunal held that the interest payment was compensatory, not penal, and thus the Assessing Officer's decision to allow the deduction was correct. The impugned order under section 263 was deemed unsustainable, and the appeal of the assessee was allowed, quashing the order.

This judgment highlights the importance of correctly interpreting the nature of expenditures under the Income Tax Act to determine their deductibility, ensuring fairness in tax assessments.