2020 (11) TMI 815 - AT - Income Tax

Addition under the head Railways Punitive charges - Whether compensatory in nature and allowable u/s 37 - observation of the A.O that punitive charges for overloading was penal in nature - HELD THAT - Since the identical issue has been decided by the Coordinate bench in favour of the assessee by allowing the claim of damages in own case 2018 (10) TMI 672 - ITAT KOLKATA , respectfully relying upon the same we find no infirmity in the order passed by the Ld CIT(A) so as to warrant interference. Hence in the absence of any merit found in the appeal preferred by the revenue, the same is hereby dismissed. Addition u/s 14A r.w.r 8D - HELD THAT - As in own case 2018 (10) TMI 672 - ITAT KOLKATA not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee's appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case. Hon ble Jurisdictional High Court in CIT vs. M/s Ashika Global Securities Ltd 2018 (7) TMI 1425 - CALCUTTA HIGH COURT and also the judgement passed by the Coordinate Bench and respectfully relying upon the same we find no infirmity in the order passed by the Ld CIT(A) in deleting the addition made under section 14A r.w.r.8D so as to warrant interference. Appeal of the Revenue is dismissed.

Issues Involved:
1. Deletion of addition under the head 'Railways Punitive charges' treating them as compensatory and allowable under Section 37 of the Income Tax Act.
2. Deletion of addition under Section 14A read with Rule 8D concerning disallowance of expenditure related to exempt income.

Detailed Analysis:

1. Deletion of Addition under 'Railways Punitive Charges':
The first issue pertains to whether the Commissioner of Income Tax (Appeals) [CIT(A)] was correct in deleting the addition of ?5,26,28,266 under the head 'Railways Punitive charges' by treating them as compensatory in nature and allowable under Section 37 of the Income Tax Act. The Assessing Officer (AO) had considered these charges as penal in nature.

During the hearing, the counsel for the assessee submitted that this issue was covered in the assessee's own case for the assessment year 2013-14, where a similar addition was deleted. The Revenue relied on the AO's order.

The Tribunal referred to the earlier order dated 05.10.2018, where it was held that the punitive charges paid to railways for overloading of wagons were compensatory in nature. The Tribunal noted that these charges are termed 'punitive' by the railways but are essentially additional freight charges due to overloading, which is not an offense or prohibited by law. The Tribunal cited various judicial decisions, including the Supreme Court's ruling in Mahalaxmi Sugar Mills Co. and Prakash Cotton Mills Pvt. Ltd., which established that compensatory charges are allowable under Section 37(1).

The Tribunal upheld the CIT(A)'s order, confirming that the punitive charges were indeed compensatory and allowable as business expenditure. Hence, the ground raised by the Revenue was dismissed.

2. Deletion of Addition under Section 14A read with Rule 8D:
The second issue involves the deletion of an addition of ?69,66,774 under Section 14A read with Rule 8D. The AO had made this disallowance considering it as expenditure related to exempt income.

The Tribunal noted that this issue was also covered in the assessee's own case for the assessment year 2014-15. The assessee argued that only investments that yielded exempt income during the year should be considered for disallowance under Rule 8D(2)(ii). The Tribunal referred to the jurisdictional High Court's decision in CIT vs. M/s Ashika Global Securities Ltd., which supported the assessee's contention.

The Tribunal observed that the assessee had substantial capital and reserves compared to the investments generating exempt income, and no interest expenditure was directly attributable to such investments. The Tribunal also referred to the decision in REI Agro Ltd., which clarified that only investments yielding exempt income should be considered for disallowance under Rule 8D.

The Tribunal found no infirmity in the CIT(A)'s order, which directed the AO to re-compute the disallowance considering only those investments that yielded exempt income. Consequently, the ground raised by the Revenue was dismissed.

Conclusion:
The Tribunal dismissed the Revenue's appeal on both grounds. It upheld the CIT(A)'s decision to treat the 'Railways Punitive charges' as compensatory and allowable under Section 37 and confirmed the deletion of disallowance under Section 14A read with Rule 8D by considering only investments that yielded exempt income. The judgment was pronounced in the open court on 20.11.2020.

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