1998 (3) TMI 167 - AT - Income Tax

Summary

Issues:
- Allowance of additional freight claim
- Nature of expenditure - penal or contractual
- Relevant previous year for claiming expenditure

Analysis:

Issue 1: Allowance of additional freight claim
The Revenue appealed against the CIT(A)'s decision to allow the claim of the assessee in respect of additional freight. The appellant explained that the additional freight was due to overloading of wagons by the Coal Authority of India, beyond the control of the assessee. The CIT(A) examined the details and concluded that the penal freight was not for unlawful activity but due to overloading, which was part of the business activity. Citing relevant case law, the CIT(A) disallowed the addition, stating that the amount was expended wholly and exclusively for the purpose of business. The Tribunal agreed with the CIT(A) and held that the penal freight was allowable.

Issue 2: Nature of expenditure - penal or contractual
The Tribunal analyzed whether the expenditure debited as penal freight was penal in nature or a contractual violation. It was determined that the expenditure was not penal but a violation of contract by the Coal Authority of India, not the appellant. The agreement stipulated payment of additional freight charges for overloading, termed as penalty freight. The Tribunal concluded that the expenditure was not penal but a contractual liability, making it allowable.

Issue 3: Relevant previous year for claiming expenditure
The Tribunal deliberated on the relevant previous year for claiming the expenditure. The appellant contended that the liability arose in earlier years, and the claim should relate to the year when the penalty freight bills were raised. The Revenue relied on case law emphasizing that under the mercantile system, deductions should be claimed based on the accrual of liability, not when quantified later. The Tribunal agreed with the Revenue, stating that the CIT(A) did not consider the period to which the liabilities related. Relying on case law, the Tribunal held that the claim should be made in the year when the bills were raised, irrespective of subsequent legal proceedings or stays.

In conclusion, the Tribunal vacated the CIT(A)'s order and restored the AO's decision, allowing the Revenue's appeal. The judgment emphasized the distinction between penal and contractual liabilities, the relevance of the period for claiming expenditures, and the application of the mercantile system of accounting in determining allowable deductions.