9911796707
TMI Blog2011 (12) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... /- pertaining to the assessment year 2006-07 claimed by the appellant during the course of assessment proceedings - Held that: the assessee has filed a letter before the A.O. giving details of the prior period expenses to be considered in A.Y. 2006-07 which the assessee has suo motu disallowed in A.Y. 2007-08 - assessee in the impugned case has made a claim for the deduction of expenditure by way of submitting written submission before the A.O. which has not been adjudicated by the A.O. A specific ground taken before the ld. CIT(A) has not been adjudicated by him - Decided in favor of the assessee by way of remand to AO Regarding 'punitive charges' as payments and not an offence or prohibited by law - According to the A.O., as per the provisions of Explanation to Sec. 37 any expenditure incurred by an assessee for any purpose which is an offence or prohibited by law shall not be deemed to have been incurred for the purposes of business and no deduction shall be allowed - It is the case of the Revenue that the same being a penalty paid to the Railways for violation of the rules and regulations, explanation to section 37(1) is attracted and therefore the same should be disallowed - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerns. It was submitted that the company has also taken interest free unsecured loan of Rs.7.05 lacs from sister concerns. It was accordingly argued that no disallowance should be made. In the alternate contention it was submitted that since the average cost of borrowing was 6.50% per annum therefore the amount of interest which at best can be disallowed comes to Rs.12,46,272/-. 2.2 However, the A.O. was not convinced with the explanation given by the assessee. According to him the assessee diverted interest bearing funds towards interest free advances to sister concerns for non-business purposes. Had the assessee not advanced interest free advances, the funds would have been available to the assessee and its interest cost would have been reduced. He accordingly disallowed interest of Rs.12,46,272/-. 2.3 Before the ld. CIT(A) the assessee reiterated the same submissions as made before the A.O. It was submitted that although the funds are mixed, the advances were made out of its own funds of share capital and free reserves and surplus of Rs.37.40 crores. It was further submitted that there was business expediency in advancing loans to the sister concern and no interest on suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities. The copy of balance sheet of TEPL filed in the paper book was shown to substantiate the same. Relying on the decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd. reported in 158 Taxman 74 he submitted that no interest should be disallowed if the money has been advanced to sister concerns for commercial expediency. It can be disallowed only if the money advanced to the sister concerns are utilized by the directors for their personal benefits. As regards the observation of the A.O. that had the assessee not advanced the interest free advances, these funds would have been available to the assessee and its interest cost would have reduced, he submitted that the Revenue cannot justifiably claimed to put itself in the arm chair of the businessman or in the position of the Board of Directors. The decision of the Hon'ble Delhi High court in the case of CIT v. Dalmia Cement (Bharat) Ltd. reported in 254 ITR 377 was cited according to which the authorities must not look at the matter from their own view point but that of a prudent businessman. He submitted that the sister concerns and the assessee are assessed to tax on their taxable income and therefore there is no que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial expediency. Since in the instant case the assessee has conclusively proved that the amount has been paid to subsidiary companies for the purpose of business and no part of the amount of advance has been utilized by the Directors for their personal purpose and the entire amount has been utilized for the purpose of business, therefore, no proportionate disallowance of interest, in our opinion, can be made in the instant case. The various decisions of the tribunal relied on by the ld. counsel for the assessee also support the case of the assessee. In this view of the matter we set aside the order of the ld. CIT(A) and direct the A.O. to delete the disallowance of Rs.12,46,272/-. 6. Ground No. 2 relates to the disallowance of indirect expenses of Rs.2087/- and interest of Rs.2194/- made by the A.O. u/s 14A read with Rule 8D. 6.1 The ld. counsel for the assessee did not press this ground for which the ld. D.R. has no objection. Accordingly, this ground is dismissed as not pressed. 7. Ground No. 3 by the assessee reads as under:- "On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income-tax (Appeals) erred in not adjudicating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it relates to. He accordingly submitted that the issue may be restored to the file of the A.O. for fresh adjudication. 7.2. The ld. D.R., on the other hand, submitted that since neither the A.O. nor the CIT(A) has adjudicated the issue, therefore, the same has to be restored to the file of the A.O. or CIT(A) for fresh adjudication. 7.3. After hearing both the sides we find the assessee has filed a letter before the A.O. giving details of the prior period expenses to be considered in A.Y. 2006-07 which the assessee has suo motu disallowed in A.Y. 2007-08. However, we find the A.O. has neither accepted nor rejected the claim of the assessee. Even though a specific ground as per ground of appeal No. 5 attached to form No. 35 was taken before the ld. CIT(A) we find the ld. CIT(A) has also not adjudicated the same. The Hon'ble Supreme Court in the case of Goetze (India) Ltd. (supra) has held that the power of the A.O. is restricted to entertaining claim for deduction otherwise than by a revised return and did not impinge on the power of the Appellate Tribunal u/s 254 of the Income Tax Act, 1961. The assessee in the impugned case has made a claim for the deduction of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing questioned by the A.O. regarding the allowability of the same, the assessee vide letter dtd. 31.12.2008 replied as under:- "The Company has incurred punitive charges which paid to the Indian railways due to overloading of goods in the wagon while sending the goods through railways wagons from railway siding to Ports or from one siding to other sidings. There is an economy of scale while transporting the goods to port through railways as compared to Trucks even if punitive charges are incurred. In the terminology of railways, where commodities are over loaded in railway wagon, the railway administration shall recover punitive charges as per their norms from the consignor, consignee or the endorsee, as the case may be, for the entire distance to be traveled by the train hauling the wagons from the originating stations to the destination point, irrespective of the paint of detection of over loading Though punitive word has been given for such charges for overloading the goods but in commercial parlance it is nor in the nature of penalty for infraction of law. It is purely compensatory in nature. In fact, while loading the goods, exact measurement cannot be made. Since the goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive charges are penal in nature. He observed that the punitive charges are levied as per notification of Ministry of Railways (Railway Board) dtd. 23.12.2005. Punitive charges are levied for overloading in a wagon beyond the permissible carrying capacity of the wagon. He referred to the rate of such punitive charges. According to him, these penal charges are levied for infringement of law and rules of the Railways specifying the permissible carrying capacity. These charges are levied to deter the people from overloading wagons by levying charges in excess of normal freight. According to the A.O., as per the provisions of Explanation to Sec. 37 any expenditure incurred by an assessee for any purpose which is an offence or prohibited by law shall not be deemed to have been incurred for the purposes of business and no deduction shall be allowed. Relying on the decision of Hon'ble supreme Court in the case of Haji Aziz and Abdul Shakoor Bros reported in 41 ITR 350 (SC) and the decision of the Hon'ble jurisdictional High Court in the case of Rohit Pulp and Paper Industries reported in 215 ITR 919 he disallowed the amount of Rs.1,01,85,788/- being penal in nature. 10.3 Before the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, the ld. CIT(A) deleted the addition made by the A.O. by observing as under:- "The overloading charges paid by the appellant to the Railways are paid in the regular course of business in accordance with the notification issued by Ministry of Railways dated 23.12.2005. The notification of Ministry of Railways dated 23.12.2005 provides a Schedule in which 'Situation A' and Situation B provides that of the aggregated payload in a rake exceed the combined permissible carrying capacity of the rake, the punitive charges should be levied as per 'Part-I', 'Part-II, 'Part-III of Situations A and B" It provides that in case of overloading upto 1/2 tonnes, 'punitive charges eligible on the entire weight of loading beyond the permissible carrying capacity shall be nil (as per different tables of Situation A' and Situation B' and in case the weight of commodity exceeds the permissible carrying capacity of the wagon by more than 1/2 tonnes, the punitive charges eligible on the entire weight loading beyond the permissible carrying capacity would be '2 times the freight rates applicable to that commodity in case of Situation A' and 3 times the freight rates applicable to the high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freight charges made to the Railways for overloading the wagons and these payments were made in accordance with law as provided in the notification of Ministry of Railways dtd. 23.12.2005. Referring to the decision of Nagpur Bench of the Tribunal in the case of Western Coalfields Ltd. v. ACIT in ITA No. 289 and 290/Nag/2006 for A.Y. 2002-03 and 2003-04 and ITA No. 261/Nag./2008 for A.Y. 2003-04 order dtd. 30.6.2009, he drew the attention of the Bench to para No. 26 of the said order where the Tribunal under identical circumstances has allowed the claim of the assessee. He submitted that in the said decision, the A.O. has disallowed the overloading charges and under loading charges paid to the Railways. In appeal, the ld. CIT(A) confirmed the action of the A.O. and the Tribunal deleted the addition by holding that the activities of Railways are of commercial in nature and freights are fixed on commercial basis. Merely because the Railways is a Govt. owned institution and works under an Act of Parliament, the nature of overloading charges which are essentially of commercial nature cannot be characterized as of penal nature irrespective of the nomenclature given to such charges by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding the allowability of the punitive charges of Rs.1,01,85,788/- paid to the Railways. It is the case of the Revenue that the same being a penalty paid to the Railways for violation of the rules and regulations, explanation to section 37(1) is attracted and therefore the same should be disallowed. It is the case of the assessee that although the nomenclature of amount paid is punitive charges, however, the same is compensatory in nature since the Railways allow overloading of wagons. 11.1 It has been held by the Hon'ble Supreme Court in the case of Mahalaxmi Sugar Mills Co. [1980] 123 ITR 429 that whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure u/s 37(1) of the Income Tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction u/s 37(1) of the Income Tax Act whenever such examination reveals the concerned impost to be purely compensatory in natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as these expenses are not of he nature of the any illegal/unlawful expenditure. Accordingly, we accept these grounds of the appeal by the assessee also." 11.4 The various decisions relied on by the A.O. and by the ld. D.R. are not applicable to the facts of the present case. In the case of Haji Aziz and Abdul Shakoor Brothers (supra) it was held that fine paid to the Custom Authorities was in fact penalty u/s 167 (8C) of the Customs Act. It was held by the Hon'ble Apex Court that such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. In the case of Rohit Pulp and Paper Industries (supra) the Deputy Collector of Customs had ordered confiscation of goods under section 111(d) of the Customs Act read with section 3 of the Imports and Exports (Control) Order. He gave an option to the assessee under section 125 of the Customs Act to pay in lieu of confiscation, a fine of Rs.35,000. This payment was in the nature of penalty and accordingly it was not allowable as a deduction under section 37 of the Act. However, in the instant case as we ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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