2012 (6) TMI 482 - AT - Income Tax

Disallowance in respect of compounding fee under the sales-tax Act, debited to the account head sales tax - the assessee s contention that the compounding fee was not penal in nature, but only to avoid litigation - Held that - As decided in Haji Aziz & Abdul Shakoor Bros v. CIT 1960 (11) TMI 15 (SC) that only those disbursements as made for the purpose of business, i.e., that enable a person to carry on the business and to earn profit in that business would form a permissible deduction. An amount paid for infraction of law is not allowable, being not a normal incident of business.If a person carries on his business activity in a manner that renders him liable to penalty, it cannot be said to be a commercial loss, which could be claimed as a deductible expense - The finding/s by the ld. CIT(A), is, again, without any basis either in law or in fact/s - the composition fee being paid in addition to the amount of tax and interest thereon, is not understood as to how he holds that there is no difference in the amount that the assessee would have been liable to pay in any case, i.e., even if the impugned transactions were disclosed as inter-state sales in the first place, instead of, and as against, inter-branch transfers - assessee has not clarified this aspect providing for payment of fee at an amount equal to the amount of tax sought to be evaded, and to which his attention was specifically adverted to during hearing - in favour of revenue. Disallowance of freight on raw material - AO disallowed the same as being not verifiable - Held that - CIT(A)considered the expenditure incurred represented unloading expenses on raw material as the entire amount had been paid to labour, and for which proper vouchers, though self- made, are available - against revenue. Deletion of disallowance of the assessee s claim for additional depreciation - AO contested non-furnishing of the eligibility certificate from the Chartered Accountant - Held that - The assessee had filed eligibility certificate along with the return of income during the course of the assessment proceedings - the entire depreciation, including additional depreciation u/s. 32(1)(iia), is to be deducted in computing the written down value of the relevant block of assets u/s. 43(6) the CIT(A), after admitting the assessee s claim has rightly restored the matter back to the file of the AO for the consideration of the same on merits - against revenue.

Summary

Issues Involved:
1. Disallowance of compounding fee under the sales-tax Act.
2. Disallowance of freight on raw material.
3. Disallowance of additional depreciation claim.

Detailed Analysis:

1. Disallowance of Compounding Fee under the Sales-Tax Act:

The primary issue here is whether the compounding fee of Rs. 12,15,130/- paid under Section 72 of the Rajasthan Sales Tax Act, 1994, can be considered as a deductible business expenditure. The Revenue contends that this fee, paid for breaches of law, cannot be deducted as it is not incurred in the normal course of business. The assessee, however, argues that the fee was paid to avoid litigation and should be deductible under Section 37(1) of the Income Tax Act, 1961.

The Tribunal observed that the primary facts are undisputed, and the fee was indeed paid under Section 72 of the Sales Tax Act. The Tribunal referred to the Supreme Court's decision in Haji Aziz & Abdul Shakoor Bros v. CIT, which clarified that expenses incurred for breaches of law are not deductible as they are not considered a normal business expense. The Tribunal noted that the compounding fee is penal in nature, as it is paid in lieu of penalties and prosecution for tax evasion, which is not deductible under any section of the Income Tax Act. The Tribunal thus reversed the CIT(A)'s decision and upheld the disallowance of the compounding fee.

2. Disallowance of Freight on Raw Material:

The second issue concerns the disallowance of Rs. 47,371/- out of the total claim of Rs. 4,14,620/- for freight on raw material. The Assessing Officer (AO) disallowed this amount as it was not verifiable, but the CIT(A) allowed it on the basis that the expenditure was incurred for unloading raw material and was supported by proper vouchers, albeit self-made.

The Tribunal found no infirmity in the CIT(A)'s order and upheld the allowance of the freight expenditure, agreeing that the payments were adequately supported by vouchers and were incurred for business purposes.

3. Disallowance of Additional Depreciation Claim:

The final issue involves the disallowance of an additional depreciation claim of Rs. 4,76,943/-. The AO disallowed this claim because it was not made in the original or revised return of income and lacked the required Chartered Accountant's certificate. The CIT(A) allowed the claim, stating that the certificate was furnished during the assessment proceedings, and the claim, being a statutory allowance, should be allowed.

The Tribunal agreed with the CIT(A) that the non-furnishing of the certificate along with the return did not invalidate the claim, as it was later submitted during the assessment. However, the Tribunal noted that the CIT(A) should have examined the claim on its merits rather than allowing it prima facie. The Tribunal thus restored the matter to the AO to examine the additional depreciation claim on its merits, ensuring compliance with the conditions specified under Section 32(1)(iia) of the Income Tax Act.

Conclusion:

In conclusion, the Tribunal:
- Upheld the disallowance of the compounding fee under the Sales Tax Act.
- Confirmed the allowance of freight on raw material.
- Restored the issue of additional depreciation claim to the AO for examination on merits.

The Revenue's appeal was thus partly allowed and partly allowed for statistical purposes.