2023 (8) TMI 426 - AT - Income Tax

Addition on interest expenditure - interest paid @ 9% is not allowable in view of the provisions contained in the Explanation (1) to Sec. 37(1) of the Act - scope of principle of consistency - CIT(A) deleted the addition as interest paid pursuant to Court decree was not towards penalty for infraction of any law, but was a purely commercial arrangement under a civil suit, which was filed in order to protect the business interests of the assessee - Whether the same was penal in nature and hence not allowable u/s 37? - HELD THAT - The assessee had entered into compromise agreement with Nakoda developers towards re-purchase of land sold to the said party and this compromise agreement was done purely to protect the business interests of the assessee. The flow of transactions was on account of the business exigencies of the assessee company and the aforesaid arrangements and the consequential compromise agreement were done pursuant to the business exigencies of the assessee s business. We are of the considered view that CIT(Appeals) has correctly observed that the payment of interest was not made towards any infraction of law and therefore, the same is allowable u/s 37 of the Act. Though the principal of Res Judicata is not applicable in income tax proceedings, but, looking into the instant facts, when on identical facts similar disallowance has not been made in any of the earlier or later years by the Department, following the principle of consistency as laid down in the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT the Department should not disallow interest payment for this year as well. We are in agreement with the contentions put forth by assessee that when on identical facts, the Department has not made any disallowance in respect of interest payments, which the assessee has been consistently paying over a period of 10 years i.e. both in the past years as well as for the future assessment years, then the Department is precluded from making disallowance on the same set of facts in the impugned year under consideration. Appeal of the Department is dismissed.

Summary

Issues Involved:
1. Legality of interest expenditure disallowed under Section 37(1) of the Income Tax Act.
2. Disallowance of employees' contribution to ESI due to delayed payment.

Summary of Judgment:

Issue 1: Legality of Interest Expenditure
The Revenue appealed against the order of the Commissioner of Income Tax (Appeals)-3, Vadodara, which deleted the addition of Rs. 1,62,00,000/- made on interest expenditure. The Assessing Officer (AO) had disallowed this interest, considering it penal in nature and thus not allowable under Section 37(1). The assessee, a company engaged in the hotel and restaurant business, argued that the interest was paid to Nakoda Developers as per a Court's compromise order, which was necessary to protect its business interests. The CIT(A) agreed with the assessee, stating that the interest paid was not for any infraction of law but was a commercial arrangement to repurchase a party plot, Vatika, which was crucial for the business. The Tribunal upheld this view, emphasizing that the interest payment was not penal but compensatory and incurred wholly and exclusively for business purposes. The Tribunal also noted that similar disallowances were not made in earlier or later years, advocating consistency in the Department's approach.

Issue 2: Disallowance of Employees' Contribution to ESI
The assessee contended that minor delays in the payment of employees' contribution to ESI should not result in disallowance. However, the CIT(A) upheld the AO's decision, citing the Gujarat High Court's ruling in the case of CIT Vs Gujarat State Road Transport Corporation, which mandates that such contributions must be credited to the employees' accounts on or before the due date. The Tribunal concurred with this decision, dismissing the assessee's ground of appeal on this issue.

Conclusion
The Tribunal dismissed the Department's appeal, affirming the CIT(A)'s order that allowed the interest expenditure as a deductible business expense and upheld the disallowance related to delayed ESI contributions.