2024 (7) TMI 633 - AT - Income Tax

Nature of expenditure - Payment made towards environmental compensation is to be construed as penal in nature or just a payment in compensatory in nature - adjustment u/s. 143(1)(a) - HELD THAT - Such question is quite debatable and according to our understanding, this cannot fall within the ambit of section 143(1), where arithmetical mistakes and adjustment of incorrect claim are to be looked into by a software while processing the return. It would be a different position, if assessment of the assessee was taken for scrutiny and after confronting the assessee, the AO would have decided this issue but in our understanding in a proceeding u/s 143(1), such disallowance cannot be made. AO has nowhere examined the order of the Pollution Control Board asking the assessee to make the payment. Every payment made by the assessee would not be in penal in nature, therefore, disallowance is not sustainable. We allow this ground of appeal and delete the disallowance.

Summary

Issues:
Whether a payment made towards environmental compensation is penal or compensatory in nature.

Analysis:
The appeal was filed by the assessee against the order of the ld. Addl./JCIT(Appeals)-12, Mumbai regarding the assessment year 2020-21. The primary issue revolved around the nature of a payment made by the assessee towards environmental compensation, whether it should be considered penal or compensatory. The assessee claimed the payment to be compensatory, while the ld. Assessing Officer disallowed the claim during the processing of the return under section 143(1). The dispute was whether such disallowance was justified.

The assessee contended that the Central Processing Centre (CPC) should have made any necessary adjustments under section 143(1) if an incorrect claim was apparent from the return. The assessee referred to the Memorandum to Finance Bill, 2008 and Finance Bill, 2016 to support this argument. The Memorandum highlighted the amendments empowering adjustments based on information available in the return, expanding the scope of adjustments under section 143(1)(a)(ii). The appellant also relied on relevant judgments to support their case.

The Appellate Tribunal analyzed the situation and concluded that the nature of the payment, whether penal or compensatory, was a question of fact. They reasoned that in a proceeding under section 143(1), where arithmetical mistakes and incorrect claims are addressed by a software, the determination of the nature of the payment was beyond the scope of such proceedings. The Tribunal noted that the ld. Assessing Officer did not examine the order of the Pollution Control Board directing the payment. They emphasized that not every payment made by the assessee would be penal in nature, and without proper examination, disallowance was not justified. Consequently, the Tribunal allowed the ground of appeal and deleted the disallowance, ultimately ruling in favor of the assessee.

In conclusion, the Tribunal's decision highlighted the importance of distinguishing between penal and compensatory payments, emphasizing the need for a factual assessment in such cases. They clarified the limitations of section 143(1) proceedings in addressing complex issues like the nature of payments, ensuring a fair and just outcome based on the specific circumstances of the case.