2022 (1) TMI 296 - HC - Income Tax

Punitive charges paid to the Railways - Allowable Revenue expenditure u/s 37 - whether the punitive charges paid to the Railways for alleged violation of the provision of Indian Railway Act could be allowable as expenditure? - whether deduction can be claimed by the assessee in respect of such expenditure? - HELD THAT - This issue has been decided in favour of the respondent/assessee by following the decision of the Hon ble Supreme Court in Prakash Cotton Mills Pvt. Ltd. 1993 (4) TMI 3 - SUPREME COURT wherein it was held that the payment made to the Railway for overloading of wagons is compensatory in nature and can be allowed under explanation to Section 37(1) of the Act. Furthermore, on facts the Tribunal noted that when the respondent/assessee loads the goods for dispatch through railway wagons actual measurement of weight cannot be done due to absence of weighing bridge at the originating station. Thus, we find that the Tribunal rightly decided the issue in favour of the respondent/assessee.

Summary

Issues:
1. Allowability of punitive charges paid to Railways under Section 37 of the Income Tax Act, 1961.
2. Treatment of Net Present Value (NPV) paid to Forest department as capital or revenue expenditure.

Issue 1: Allowability of Punitive Charges:
The appeal by the revenue questioned the Tribunal's order regarding the allowability of punitive charges paid to Railways under Section 37 of the Income Tax Act. The Tribunal relied on the decision in Prakash Cotton Mills Pvt. Ltd. to determine that such payments are compensatory in nature and can be allowed under Section 37(1) of the Act. The Tribunal noted the absence of weighing bridges at the originating station, affecting the actual measurement of weight when goods are loaded for dispatch. Consequently, the Tribunal ruled in favor of the respondent/assessee, indicating that the charges were compensatory and allowable as expenditure. The substantial questions of law (a), (b), and (c) were answered against the appellant/revenue, upholding the Tribunal's decision.

Issue 2: Treatment of Net Present Value (NPV):
The second set of substantial questions of law (d) and (e) raised concerns about the treatment of NPV paid to the Forest department. The Tribunal referred to previous judgments in similar cases, including one involving the respondent/assessee's group company. The judgment highlighted the Supreme Court's stance on similar matters, emphasizing that the NPV payment was a compensation for using forest land for non-forest purposes. The payment was considered a revenue expenditure aimed at removing obstacles for the assessee's business operations, rather than granting new rights. Drawing a distinction from a case involving a prospecting license fee, the judgment reiterated that the NPV payment did not extend the area of mining operations but facilitated existing operations. Consequently, the appeal filed by the revenue was dismissed, and the substantial questions of law (d) and (e) were answered against the revenue, following the precedent set by previous decisions.

In conclusion, the High Court of Calcutta, in the judgment delivered by Justices T. S. Sivagnanam and Hiranmay Bhattacharyya, upheld the Tribunal's decisions on both issues. The allowability of punitive charges paid to Railways and the treatment of NPV as a revenue expenditure were analyzed in detail, citing relevant legal precedents and emphasizing the compensatory nature of the payments. The judgment provides clarity on the interpretation of the Income Tax Act, 1961, regarding such expenditures and sets a precedent for future cases involving similar issues.