2013 (11) TMI 897 - AT - Income Tax

Penalty levied by RBI the company entered into a loan agreement with one, M/s. N. B. Investment Ltd., Mauritius (the lender) for an external commercial borrowing (ECB) of USD - Held that - delay for a few days in informing the RBI in respect of a foreign loan transaction carried out Following Haji Aziz & Abdul Shakoor Bros. vs. CIT 1960 (11) TMI 15 - SUPREME Court Any expense which is paid by way of penalty for a breach of the law cannot be said to be an amount wholly and exclusively laid for the purpose of the business - The nature of levy is in respect of a contravention of a provision of law - The penalty is not compensatory in nature therefore not deductible u/s. 37(1) Fee paid to ROC Held that - The nature of the expenditure, whether capital or revenue, would vary depending not on the purpose for which it stands incurred, but on its timing - Such expenditure is capital in nature Following Brooke Bond India Ltd. v. CIT 1997 (2) TMI 11 - SUPREME Court - The amount is to form a part of the company s own capital, and there is no repayment obligation in its respect, so that it is toward providing an enduring benefit, a part of its capital structure - The deduction u/s.35D is allowed by the statute only for the reason that the said expenditure is capital in nature Decided against Revenue. Disallowance of interest on bank deposits Held that - The interest on bank deposits is considered as assessable u/s.56 - The assessee could be allowed setting off of the interest income against the interest on borrowed capital Following Sanghvi Jewellery Mfg. Co. (P.) Ltd. v. ITO 2011 (11) TMI 514 - ITAT MUMBAI - There is no definite finding in the matter on record as to the source of the capital invested in bank deposits, i.e., borrowed or otherwise The issue was restored for fresh decision.

Summary

Issues:
1. Disallowance of penalty levied by RBI and fees paid to ROC.
2. Disallowance of interest on bank deposits.

Issue 1: Disallowance of penalty levied by RBI and fees paid to ROC:

The appeal raised four grounds focusing on two main issues. The first issue was the disallowance of a penalty of Rs.5 lakhs imposed by RBI and fees of Rs.6,30,180 paid to ROC. The appellant argued that the penalty was unjust as the default was by the bank, not the appellant. The appellant emphasized that the penalty was procedural and should not be considered a contravention of law, citing relevant legal precedents. Regarding the fees paid to ROC for increasing authorized capital, the appellant contended that it was a revenue expenditure as the company was already in business. Additionally, the appellant claimed that both amounts were eligible for deduction under section 10AA. However, the Revenue supported the disallowances, stating they were legally justified. The tribunal ruled that the penalty was for a contravention of law and not compensatory, thus not deductible under section 37(1). The tribunal also found the appellant's arguments on the second disallowance untenable, stating that the expenditure for raising capital was capital in nature. However, the tribunal accepted the appellant's alternate plea, allowing the disallowances to be eligible for deduction under section 10AA.

Issue 2: Disallowance of interest on bank deposits:

The second issue pertained to the disallowance of interest on bank deposits amounting to Rs.8,02,702. The appellant claimed that the interest income should be set off against interest on borrowed capital. The tribunal noted that the interest on bank deposits did not fulfill the conditions for exemption under section 10B. The tribunal agreed with the CIT(A) that the interest income should be assessed under section 56 as income from other sources. The appellant's argument for setting off interest income against interest on borrowed capital was considered valid by the tribunal. However, the tribunal emphasized the need for the appellant to provide evidence regarding the source of the bank deposits, whether borrowed or otherwise, to allow the set off. The tribunal directed the issue back to the Assessing Officer for further examination based on the appellant's submissions.

In conclusion, the tribunal allowed the appeal on specific terms related to the disallowance of penalty and fees, as well as the treatment of interest on bank deposits, providing detailed legal analysis and directions for further assessment by the Assessing Officer.