2017 (11) TMI 186 - AT - Income Tax

Addition of penal interest paid to Sales-tax Department - Held that - On perusal of the clause 30(1) above, it is evident that amount paid is toward interest at the rate of 1% per month, for the period from the tax payable has become due to the date of payment or to the date of order of assessment whichever is earlier. Thus, the interest amount paid is towards delay in payment of tax, is compensatory in nature. Penalty of ₹ 5,000/- for the default under section 30(4)(d) of the Jharkhand VAT Act, 2005, has already been upheld by us as not in the nature of compensatory. Accordingly, the amount of ₹ 16,46,444.96 being compensatory in the nature, is allowable in terms of the decision of the Hon ble Supreme Court in the case of Swadeshi Cotton Mills Ltd. Vs.CIT (1997 (5) TMI 5 - SUPREME Court). In view of above discussion, we summarise that out of amount of ₹ 86,72,759.42, amount of ₹ 70,26,314.46 is directed to be disallowed and amount of ₹ 16,46,444.96 is directed to be allowed. The ground of the appeal of the assessee is accordingly partly allowed. Disallowance of interest on account of interest expenses being of capital nature - Held that - The interest earned on money received from share capital was temporarily placed in fixed deposits, which has been held as interest in the nature of capital receipt liable to be set off against preoperative expenses. In the instant case also identical issue of netting off of interest income earned on borrowed money deposited in banks, against the interest expenditure during construction is involved, thus, respectfully following the decision of the Tribunal in the case of Bokaro Power Supply Company Pvt. Ltd. (2015 (1) TMI 45 - ITAT DELHI) we uphold the finding of the learned CIT-(A) on the issue in dispute and accordingly, the ground No.1 of appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Disallowance of additional sales tax demand and penal interest as prior period expenses.
2. Deletion of disallowance of interest expenses being capital in nature.

Issue-wise Detailed Analysis:

1. Disallowance of Additional Sales Tax Demand and Penal Interest as Prior Period Expenses:

The assessee challenged the disallowance of ?86,72,759/- paid to the Sales-tax Department for the assessment year 2006-07, which included a sales tax demand and penalty. The assessee argued that the demand was raised during the current year, making it a statutory payment allowable under section 43B of the Income Tax Act. The CIT(A) allowed the payment of tax amounting to ?35,45,033/- but upheld the disallowance of ?86,72,759/- as it was considered a penalty for infraction of law. The tribunal analyzed the nature of the penalties and interest under various sections of the Jharkhand VAT Act, 2005:

- Penalty for delay in filing revised VAT return (?5,000/-): The tribunal found this penalty was not compensatory and upheld its disallowance.
- Penalty for delayed filing of G-VAT 409 (?35,07,407.40/-): The assessee admitted this penalty was not compensatory, and the tribunal upheld its disallowance.
- Penalty for delayed payment of VAT Tax (?35,13,907.06/-): This penalty was found to be in addition to tax and interest, thus not compensatory, and its disallowance was upheld.
- Interest under section 30(1) (?16,46,444.96/-): This interest was considered compensatory for the delay in tax payment and was allowed as a deductible expense.

The tribunal concluded that out of ?86,72,759.42, an amount of ?70,26,314.46 was disallowed, and ?16,46,444.96 was allowed.

2. Deletion of Disallowance of Interest Expenses Being Capital in Nature:

The revenue challenged the deletion of disallowance of ?48,71,000/- made on account of interest expenses being capital in nature. The assessee had raised additional capital and loans for expansion and incurred interest expenses of ?471.39 lakhs. It earned interest of ?411.14 lakhs from banks, out of which ?48.71 lakhs was from deposits related to the expansion and was adjusted against capital work in progress (CWIP). The CIT(A) allowed the netting off of interest based on the principle upheld by the Delhi High Court in cases like CIT vs. Sasan Power Ltd. and NTPC Power Company Limited vs. CIT. The tribunal upheld the CIT(A)'s decision, noting that the interest earned on funds linked with the setting up of the plant is in the nature of capital receipt and should be set off against pre-operative expenses.

Conclusion:

The tribunal partly allowed the appeal of the assessee by allowing the compensatory interest of ?16,46,444.96 and upheld the CIT(A)'s decision on netting off interest income against capital expenses, thus dismissing the revenue's appeal.