2023 (10) TMI 1053 - AT - Income Tax

Nature of expenses - Allowable expenses u/s 37(1) - Interest and late fee on TDS, Late payment penalty charges, Interest on margin trading facility - AO had made disallowance treating the aforesaid expenses as being penal in nature, not allowable u/s 37(1) in the absence of the assessee being able to furnish any evidence to substantiate its claim that expenses were incurred wholly and exclusively for the purpose of business of the assessee - HELD THAT - There was no basis with the AO/ld.CIT(A) to hold that these expenses were in the nature of penalty/expenses for any purpose being an offence or which is prohibited by law, not allowed in terms of Explanation to section 37(1) - that we completely agree with assessee that narration of these expenses, as noted by the AO/CIT(A) does not reveal any such nature of the expenses as far as interest on margin trading facility or TDS is concerned. And as for the late payment and penal charges also, the nomenclature mentioning late payment also, there was no basis to arrive at a conclusion that all referred to penalty paid by the assessee, that too infringement of any law. The books of accounts admittedly were all produced before the AO, and the ledger account of these expenses also did not reveal any such fact so as to arrive at a finding that these expenses were disallowable being penalty in nature. The ledger account of these expenses, coupled with the explanation of the assessee that these expenses were incurred for the purpose of business of the assessee substantially substantiated the claim of the assessee. Assessee being in the nature of trading in shares and securities, the expenses incurred on account of interest on margin facility and late payment to brokers is undoubtedly incurred in the course of business. There was no requirement for the assessee to prove they were not in the nature of penalty, disallowable u/s 37(1). We hold that the disallowance of aforementioned expenses holding the same to be penal in nature, is without any basis and without appreciating the facts on record. Decided in favour of assessee.

Summary

Issues involved:
The appeal against the order passed by the ld.Commissioner of Income Tax(Appeals) under section 250(6) of the Income Tax Act, 1961 dated 13.12.2022 pertaining to the Asst. Year 2018-19.

Grounds raised by the assessee for adjudication:
1. The order passed by AO and confirmed by NFAC is bad in law and required to be quashed.
2. NFAC erred in confirming addition of Rs. 159058/- on account of interest and late fees of IDS.
3. NFAC erred in confirming late payment and penalty charges of Rs. 3092199/-.
4. NFAC erred in confirming addition of Rs. 1571902/- on account of interest on margin trading facility.
5. NFAC ought to have adjudicated the appeal on merits rather than dismissing it in limine.

Details of the judgment:
The AO had disallowed expenses treating them as penal in nature, not allowable under section 37(1) of the Act due to lack of evidence from the assessee. The ld.CIT(A) confirmed the disallowance. The assessee contended that all expenses were incurred for business purposes, supported by ledger accounts and documents. The ld.DR supported the order of the ld.CIT(A) citing lack of evidence from the assessee.

Upon review, it was found that the expenses were related to the business of dealing in shares and securities, not penalties. The ledger accounts and explanations provided by the assessee substantiated the business purpose of the expenses. The expenses were held to be incurred in the course of business and not in the nature of penalties, thus allowable under section 37(1) of the Act.

Therefore, the disallowance of expenses amounting to Rs. 48,23,159/- was deemed baseless, untenable in law, and directed to be deleted. All grounds raised by the assessee were allowed, resulting in the appeal being allowed. The order was pronounced in the Court on 10th October, 2023 at Ahmedabad.