2018 (1) TMI 850 - AT - Income Tax

Disallowance as the overloading charges - whether it is nothing but a penalty as per Provision of section 73 of the Indian Railway Act 1989 - Held that - This issue raised by the revenue in this appeal is squarely covered in favour of the assessee by the decision of ITAT Mumbai bench in the case of Taurian Iron & Steel Co.(P)Ltd (2011 (12) TMI 410 - ITAT Mumbai) after considering the decision in the case of Prakash Cotton Mills P.Ltd. (1993 (4) TMI 3 - SUPREME Court) and also the nature of railway punitive charges held that the payments made to the railways for overloading of the wagons is compensatory in nature and cannot be disallowed under Explanation to Section 37(1) of the Act. Addition u/s 14A - Held that - In the light of the uncontroverted factual details with regard to availability of own funds the disallowance of interest expenses in terms of Rule 8D(2)(ii) of the Rules was rightly deleted by CIT(A). As far as disallowance under Rule 8D(2)(III) of the Rules is concerned the CIT(A) has followed the decision of the Tribunal in the case of REI Agro Ltd (2013 (9) TMI 156 - ITAT KOLKATA)and has directed the AO to exclude investments which did not yield tax free income while working out the average value of investment. We find no grounds to interfere with the order of CIT(A). No merits in the ground raised by the revenue.

Summary

Issues Involved:
1. Disallowance of railway punitive charges under Explanation to Section 37(1) of the Income Tax Act, 1961.
2. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Railway Punitive Charges:
The primary issue was whether the railway punitive charges paid by the assessee could be disallowed under Explanation to Section 37(1) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the charges, treating them as expenses incurred for an offense or prohibited by law. The assessee contended that these charges were compensatory in nature, not penal, and therefore should not be disallowed. The assessee explained that the charges were levied due to overloading beyond permissible limits, which was a common practice permitted by the railways on payment of additional freight termed as punitive charges.

The CIT(A) agreed with the assessee, relying on previous judgments, including those from the ITAT Mumbai Bench and the Supreme Court, which held that such charges were compensatory and not penal. The CIT(A) concluded that the charges were additional freight for overloading and did not fall within the ambit of Explanation to Section 37(1).

The Tribunal upheld the CIT(A)'s decision, referencing similar cases and judgments, including the ITAT Mumbai Bench's decision in the case of M/s Taurian Iron & Steel Co. and the ITAT Kolkata Bench's decision in the case of DCIT vs M/s. Feegrade & Company Pvt. Ltd. The Tribunal emphasized that the charges were compensatory and not for any offense or prohibited by law, thus not disallowable under Section 37(1).

2. Disallowance under Section 14A read with Rule 8D:
The second issue involved the disallowance of expenses under Section 14A read with Rule 8D, related to earning tax-free dividend income. The AO disallowed ?4,30,385, including interest expenses, under Rule 8D. The assessee argued that the investments were made from its own funds, not borrowed funds, and thus no interest disallowance was warranted. The assessee also contended that only investments yielding dividend income during the relevant year should be considered for disallowance under Rule 8D(2)(iii).

The CIT(A) agreed with the assessee, noting that the assessee had substantial own funds exceeding the investments and relied on the decisions of the Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. and CIT vs. HDFC Bank Ltd. The CIT(A) deleted the interest disallowance and directed the AO to exclude investments that did not yield dividend income while computing the average value of investments for Rule 8D(2)(iii).

The Tribunal upheld the CIT(A)'s decision, confirming that the disallowance of interest expenses was rightly deleted given the availability of own funds. The Tribunal also supported the CIT(A)'s direction to the AO to exclude non-yielding investments, in line with the ITAT Kolkata Bench's decision in REI Agro Ltd vs DCIT.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming that the railway punitive charges were compensatory and not disallowable under Section 37(1), and that the disallowance under Section 14A was correctly computed by excluding non-yielding investments and considering the availability of own funds. The judgments were pronounced on 10.01.2018.