2019 (10) TMI 898 - AT - Income Tax

Disallowance of expenditure u/s 37(1) - Amount paid as penalty for using electricity during restricted hours - HELD THAT - Without opting for continuous power supply, the assessee was found in usage of energy during restricted hours (above 15% of contracted load), prohibited by law, thereby, it was levied to pay penalty, which cannot be treated as just like payment of electricity charges, but, it is an offence committed by the assessee against which, the assessee was penalized. As per Explanation to section 37(1) of the Act, any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. This Explanation would squarely apply to the facts of the assessee's case and the amount paid being penalty, the AO was justified in disallowing the same and rightly confirmed by the ld. CIT(A). Thus, the ground raised by the assessee stands dismissed. Disallowance of payment made to Sales Tax Department - HELD THAT - Payment made to Sales Tax Department by way of interest which is compensatory in nature for belated filing of return and payment of taxes thereon. We have also gone through the order of the Joint Commissioner (Appeals) First, Commercial Tax, Uttarakhand, in assessee s own case, wherein, it was amply clear and elaborately discussed the circumstances under which penalty was levied, more particularly, against levy of penalty by the AO Commercial Tax , the assessee preferred further appeal. Therefore, the penalty payment made by the assessee and disallowed by the Assessing Officer was rightly confirmed by the ld. CIT(A). Thus, the ground raised by the assessee stands dismissed. Rejection of alternative plea of proportionate deduction under section 80IC - HELD THAT - Expenditure which is an offence or prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure and made it clear that only that expenditure which is related to business activity would come under the purview of the aforesaid circular of the CBDT. CIT(A) further held that the expenditure had already been incurred and therefore, but for the disallowance under the Income Tax Act, would not increase the profit in the hands of the assessee. Thus, the ld. CIT(A) has held that as the disallowance under Explanation to section 37(1) of the Act is deemed to have not been incurred for the purpose of business, they cannot be considered for the purpose of computing profits of the business of the assessee, thereby, the question of claiming any deduction under section 80IC of the Act does not arise. In the appellate order, the ld. CIT(A) has narrated correct position of law and penalty payment made by the assessee, cannot be claimed as an allowable expenditure. In view of the above facts, the alternative plea raised by the assessee stands dismissed.

Summary

Issues:
1. Disallowance of payment made to Uttaranchal Power Corporation
2. Disallowance of payment made to Sales Tax Department
3. Rejection of alternative plea of proportionate deduction under section 80IC of the Income Tax Act

Issue 1: Disallowance of payment made to Uttaranchal Power Corporation
The appellant challenged the disallowance of payment made to Uttaranchal Power Corporation, arguing that the penalty paid should not be disallowed. The Assessing Officer found a violation of norms by the appellant, leading to a penalty. The penalty amount was brought to tax as it was not allowable under section 37(1) of the Income Tax Act. The Commissioner (Appeals) confirmed the disallowance. The Tribunal examined the case, considering the penalty as a result of the appellant's offense against the law, not a regular payment. The Tribunal upheld the disallowance, citing the Explanation to section 37(1) of the Act.

Issue 2: Disallowance of payment made to Sales Tax Department
The appellant contested the disallowance of penalty payment made to the Sales Tax Department. The Assessing Officer disallowed the amount based on the Explanation to section 37(1) of the Act. The Commissioner (Appeals) upheld the disallowance after considering the circumstances under which the penalty was levied. The Tribunal reviewed the arguments but affirmed the disallowance, stating that the penalty payment was rightly confirmed.

Issue 3: Rejection of alternative plea of proportionate deduction under section 80IC
The appellant sought a deduction under section 80IC of the Act, claiming that confirmation of disallowances would increase their income, making them eligible for the deduction. The appellant referenced a CBDT Circular to support their claim. However, the Commissioner (Appeals) held that the disallowances, being related to offenses or prohibited by law, cannot be considered for computing profits and, therefore, the deduction under section 80IC was not applicable. The Tribunal agreed with the Commissioner (Appeals) and dismissed the alternative plea.

In conclusion, the Tribunal dismissed the appeal filed by the assessee, upholding the disallowances and rejecting the plea for a proportionate deduction under section 80IC of the Income Tax Act.