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TMI Blog2018 (8) TMI 1259X X X X Extracts X X X X X X X X Extracts X X X X ..... s deduction from income computed under the head ‘Profits and Gains of Business or Profession‘ , while interest paid by the assessee u/s 30(4) of MVAT Act, 2002 shall be disallowed while computing income chargeable to tax under the head ‘Profits and Gains of Business or Profession‘. - Decided partly in favor of revenue. Disallowance u/s 14A r.w.r. 8D - assessee did not earned exempt income during the year - Held that:- if no exempt income is earned by the assessee during the previous year relevant to the impugned assessment year , no disallowance u/s 14A of the 1961 Act is called for - Decided against the revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... or invoking disallowance u/s 14A, it is not material that the assessee should have earned exempt income during the financial year under consideration?" The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the ACIT 9(3)(2) be restored. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.' 3. The brief facts of the case are that the assessee is engaged in the business of manufacturing and marketing of textiles, garments and fashion accessories. 4. There are two issues which are subject matter of dispute between rival parties in this appeal filed by Revenue before the tribunal. The first issue concerns itself with disallowance of alleged VAT penalty of ₹ 24,29,583/- and second issue concerns itself with disallowance of ₹ 1,28,59,715/- u/s 14A of the 1961 Act read with Rule 8D of the Income-tax Rules, 1962. The learned CIT(A) granted relief with respect to both these issues and hence Revenue is aggrieved which is manifested by filing this appeal before tribunal. 5. VAT penalty: The first issue concerns itself with disallowance of VAT penalty of ₹ 24,29,583/- paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice of the assessee that certain purchases and sale invoices were not genuine and they were in-fact accommodation entries. It was submitted that investigation officer directed the assessee to file revised returns and show the liability in respect of such invoices as if these invoices were not genuine. The assessee submitted that due to withdrawal of VAT input tax credit/set off , the assessee had to pay interest of ₹ 27,43,480/- under the provisions of Section 30(2) and 30(4) of the MVAT Act , 2002. It was submitted that the due to such VAT reversal by way of withdrawal of input-tax credit, the amount paid was on account of interest and penalty. The assessee extracted relevant provision of MVAT Act, 2002 before learned CIT(A) and submitted as hereunder:- '(4) If-(a) after the commencement of - (i) audit of the business of the dealer in respect of any period, or (ii) inspection of the accounts, registers and documents pertaining to any period, kept at any place of business of the dealer, or (iii) entry and search of any place of business or any other place where the dealer has kept his accounts, registers, documents pertaining to any period or stock of goods, (b) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the refund gets reduced, (vi) If the dealer files one or more returns (which were overdue) or a revised return on or after 1st July 2009as a result of any of the aforesaid proceedings or in consequence with the intimation sent, then it is mandatory to pay interest @25 per cent on the tax found due as per such return or revised return (vii) If the dealer does not agree with the observations and tax liability shown in the intimation and thereby decides not to file the return or revised liability, then assessment proceedings would be initiated which may attract penalty u/s.29(3) at 100% of the tax found due. (vii) In case a dealer files revised return and pays 25% interest u/s.30(4), then penalty u/s. 29(3) shall not be levied, (ix) The overdue return means a return which is due but filed after the commencement of the proceedings stated in (b) above, (x) It is hereby clarified that the proceedings in case of Business Audit shall be deemed to have been commenced on the date on which dealer has received the letter from the concerned officer seeking the apportionment for the Business Audit or on the date of receipt of Form-603 whichever is earlier, (xi) In case of search and entry, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner of Income Tax' 2008 - TMI - 5409 - Supreme Court, the Apex Court held that whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under Sec.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 under Section 37(1} of the Income Tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature. In 'Lachmandas Mathurdas V. Commissioner of Income Tax' -2008 - TMI - 6074 - Supreme Court the question before the Apex Court was whether interest paid on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same is compensatory or penal in nature. It further held that taxing statutes normally have two impost for delayed payment. One is the imposition of interest, which is automatic and the second is the imposition of penalty for which only notice is automatic for the delayed period, the imposition is compensator in nature. In the present case no doubt the word 'penalty' has been used in clause 18G but if the lease deed is read and the provisions of the HP General Sales Tax Act together, it is apparent that the parties to the lease deed decided that though the sales tax in fact was to be deposited by the State it would be deposited on its behalf by the assessee. If the same was not paid the dealer became liable to pay simple interest at 12% per annum for the delay of one month and thereafter 18% per annum till the default continues. The Tribunal held that it is more than obvious that this interest was not payable by way of penalty but by way of compensation to compensate the State for the interest which it would have been liable to pay under Section 17A." The learned CIT(A) observed from the provisions of Section 30(4) of the MVAT 2002 that no where the word 'Penalty' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra VAT Act, 2002. Our attention is again drawn to provisions of Section 30(2) and 30(4) of MVAT Act, 2002. Our attention was also drawn to para 6.3.3 and 6.3.4 of learned CIT(A) appellate order dated 23.12.2016. Thus, the learned AR made prayers for upholding the appellate order passed by learned CIT(A). 8. We have considered rival contentions and perused the material on record including case laws relied upon. We have observed that the assessee is engaged in the business of manufacturing and marketing of textiles, garments and fashion accessories. There was a search and survey operations conducted by the Enforcement Branch of the Maharashtra VAT Authorities against the assessee in the last week of September 2011. During the course of search and survey operations conducted by the Enforcement Branch of Maharashtra VAT Authorities, it transpired that the assessee indulged in alleged bogus purchases by way of accommodation entries wherein the assessee had wrongly claimed input tax credits on these alleged bogus purchases and these inadmissible input tax-credits was set off by the assessee against its output VAT liabilities which led to short payment of output tax by the assessee to MV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion within the time as required by or under this Act, shall be liable to pay by way of simple interest, in respect of each of such years, in addition to the amount of tax payable in respect of such year, a sum calculated at the prescribed rate on the amount of such tax for each month or part thereof for the period commencing on the 1st April of the respective year to the date of the payment of tax. The amount of such interest shall be calculated by taking into consideration the amount of, and the date of, such payment, when the payment is made on different dates or in parts or is not made. When, as a result of any order passed under this Act, the said amount of tax is reduced, the interest shall be reduced accordingly and where the said amount is enhanced, 1[the interest on the enhanced amount shall be calculated mutatis-mutandis upto the date of such order]: Provided that, in respect of any of such years, 2[the amount of interest payable] under this sub-section shall not exceed the amount of tax found payable for the respective year. (2) A registered dealer who has failed to pay the tax within the time specified by or under this Act, shall be liable to pay by way of simple int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on any date after the 30th September of the year to which revised return relates. 1st October of the year, to which annual revised return relates. (d) Certificate of registration granted, effective from any date after the 30th September of the year to which revised return relates. effective date of registration. (e) Certificate of registration cancelled, effective on any date prior to the 30th September of the year to which revised return relates. effective date of cancellation of registration.] (3) In the case of a registered dealer, in whose case, any tax other than the tax on which interest is leviable under sub-section (2) has remained unpaid upto one month after the end of the period of assessment, such dealer shall be liable to pay by way of simple interest, 5[a sum calculated at the prescribed rate on the amount of such tax] for each month or part thereof from the date next following the last date of the period covered by an order of assessment till the date of the order of assessment and where any payment of such unpaid tax whether in full or part is made on or before the date of the order of assessment, the amount of such interest shall be calculated by taking in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 2002 which is a Section immediately preceding to Section 30 of MVAT Act, 2002 levying interest under the MVAT Act, 2002. The said Section 29 of MVAT Act, 2002 is also reproduced hereunder in its entirety:- '29. Imposition of penalty in certain instances:- 1[(1) ***] 1[(2) ***] 1a[ (2A) While or after passing any order in respect of any dealer under any provisions of this Act, it appears to the Commissioner that, the dealer has failed to apply for registration as required under this Act or has carried on business as a dealer without being registered in contravention of the provisions of this Act, then the Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose upon him, by way of penalty, a sum equal to the amount of tax payable by the dealer for the period during which he has carried on business as a dealer without being registered in contravention of the provisions of this Act.] (3) 2[While or after passing any order] under this Act, in respect of any person or dealer, the Commissioner, on noticing or being brought to his notice, that such person or dealer has concealed the particulars or has knowingly furnished inaccurate particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him, a penalty equal to 5[five thousand rupees]. 5a[(7A) In case of a dealer, who has filed late return on or after the 1st August 2012, and has also paid the late fee, under sub- section (6) of section 20, the penalty in respect of such return, if any, imposed under sub-section (8) of this section, as it existed, shall not be recovered.] 6[(8) * * * ] (9) 7[(a) * * *] 7[(b) * * *] (c) Where a dealer has filed a return 8[***] and such return is found to be not 9[complete and self consistent], then the Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, by order in writing, a penalty of rupees one thousand. The levy of penalty shall be without prejudice to any other penalty which may be imposed under this Act. 10[(10) Where a person or dealer has collected any sum by way of tax in contravention of the provisions of section 60,- 1. he shall be liable to pay a penalty not exceeding two thousand rupees, and 2. in addition, any sum collected by the person or dealer in contravention of section 60 shall be forfeit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [ [Explanation 1.]-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] *** ***' The assessee is claiming that the interest paid u/s 30(2) and 30(4) of MVAT Act, 2002 to be compensatory in nature and claiming that the same be allowed as business deduction while computing income from business but the Revenue is claiming the same to be penal in nature being hit by explanation 1 to Section 37(1) of the 1961 Act and not allowable as business deduction. We are also conscious of the fact that nomenclature or description used by law makers in the statute is not decisive of its true nature and character and the fact whether the said levy is compensatory or penal in nature is to be decided after going through various provisions of the statute and to see the intentions of law makers be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 2002. It is also pertinent to mention that if the assessee would have chosen to litigate under these circumstances then in the adverse situation and eventuality of the assessee losing out the legal battle with MVAT authorities, not only the assessee would have been burdened with the additional tax owing to underpayment of VAT while filing VAT return originally and with interest u/s 30(2) of MVAT Act, 2002 for withholding/ delay in payment of VAT beyond prescribed due date under MVAT Act, 2002 but the assessee in such adverse eventuality of losing out the legal battle with MVAT authorities would have also been additionally visited and burdened with Penalty as is stipulated u/s 29(3) of the MVAT Act, 2003 which shall not be less than 25% but which may extend to 100% of the additional tax sought to be concealed or evaded by the assessee. Thus, it is very clear that the lawmakers have provided for a mandatory penal interest by virtue of provisions of Section 30(4) of the MVAT Act, 2002 to the tune of 25% of the tax sought to be evaded although nomenclature 'interest' is used in MVAT Act, 2002 which is in-fact penal in nature having germane to infraction of law while filing of ori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has its germane to the infraction of law committed by dealer whether knowingly or not earlier while the original return of VAT was filed with MVAT authorities as the said return was filed with incorrect tax liability determined, wherein the MVAT authorities were deprived of their legitimate dues of VAT due to such wrong claim in the original return filed with MVAT authorities. It is also pertinent to mention that this interest u/s 30(4) of MVAT Act, 2002 @25% of additional is penal in nature because once the audit, inspection,survey , search etc. starts , then it is very difficult for the dealer to get away with any concealment or incorrect filing of particulars in the return of VAT originally filed and hence being cornered with the commencement of special event, an opportunity is provided in the statute itself to come clean otherwise the dealer will be burdened later with penalty as provided u/s 29(3) of the MVAT Act which can extend to 100% of the tax evaded. So, the fact remains that this is penal interest to come clean from the infraction of law earlier committed whether knowingly or not while filing original return of VAT under MVAT Act,2002. The assessee in the instant case c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the VAT returns. While on the other hand the levy of interest u/s 30(2) of MVAT Act, 2002 is simple interest for delaying or withholding the payment of VAT beyond the prescribed due date from MVAT authorities and has germane to compensate MVAT department for withholding of their dues of tax being unpaid within stipulated time as prescribed in the statute and this levy of interest u/s 30(2) is compensatory in nature . Thus, we hold that the ld. CIT (A) has rightly concluded that the interest payable u/s 30(2) of MVAT Act, 2002 is not penal in nature but rather it's compensatory in nature for delaying / withholding payment of VAT beyond the time prescribed under MVAT Act , 2002 and is an allowable deduction as business deduction for withholding statutory dues from the MVAT department. But so far as interest u/s 30(4) of the MVAT Act, 2002 is concerned , in our considered view, the learned CIT(A) erred in holding the same to be compensatory in nature while in our considered view , interest paid by the assessee u/s 30(4) of MVAT Act, 2002 which is in addition to interest payable u/s 30(2) of MVAT Act, 2002 is penal in nature and cannot be allowed as business deduction keeping in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is given by the statute itself to the dealers to come clean voluntarily once events like audit, inspection, search , survey etc as stipulated u/s 30(4) of MVAT Act, 2002 commences and thereafter liability for additional tax arose. This reflected that the lawmakers did not intended to use harsh word 'penalty' in the statute itself against such dealers who wanted to come clean with a view to buy peace even post commencement of special events such as audit, inspection, survey , search etc by paying up additional tax, interest u/s 30(2) and 30(4), as the word used in Section 30(4) is instead 'interest' . The Penalty is defined as punishment imposed for violation of law, rule or contract while interest is to compensate for use of money. The State of Maharashtra is considered to be business friendly state and this gesture of using word 'interest' as against 'penalty' is reflection of the trust reposed by State in business community as every error or wrong claim in the original return may not be intentional and knowingly made to evade taxes and it could be due to an unintentional error while interpreting law or due to ignorance of law etc. . It is also well settled proposition of law th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gains of Business or Profession' keeping in view Explanation 1 to Section 37(1) of the 1961 Act. This ground filed by the Revenue is partly allowed. The AO is directed to bifurcate the payments as between interest paid by the assessee u/s 30(2) and 30(4) of the MVAT Act, 2002 respectively and allow interest paid u/s 30(2) of MVAT Act, 2002 as deduction from income computed under the head 'Profits and Gains of Business or Profession' , while interest paid by the assessee u/s 30(4) of MVAT Act, 2002 shall be disallowed while computing income chargeable to tax under the head 'Profits and Gains of Business or Profession'. We order accordingly. 9. The second issue concerned itself with disallowance of expenditure to the tune of ₹ 1,28,59,715/- u/s. 14A of the 1961 Act r.w.r. 8D of the Income-tax Rules, 1962. The AO during the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the 1961 Act observed from the annual accounts that the assessee had made investment in shares/mutual funds, the dividend income of which is exempt u/s 10 of the 1961 Act. The AO asked the assessee to furnish complete details of exempt income earned along with details of expenditure incurred in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee Company. Considering the totality of the facts of the case, the computation of disallowance to be made u/s.14A is required to be made as per Rule-8D of I.T.Rules. In accordance with the aforesaid Rule, the computation of disallowance to be made u/s. 14A in the case of assessee company is as under:- The disallowance u/s.14A/Rule 8D shall be aggregate of the following Amount (Rs.) 1. Amount of expenses directly related to such income * Nil 2. Amount of the interest expenses indirectly attributable to such income, in accordance with the formula AxB/C, where A. Total interest expenditure minus direct interest expenditure on such income 197222797 - Rs. Nil = 197222797 (A) B. Average of such investment on the first and last day of previous year 154839923+154839923 =154839923 (B)/2 C. Average of total assets on first and last day of previous year 2816408353+2237238713 =2526823533 (C)/2 AxB/C 1,20,85,515 3. 0.5% of the 'B' above 7,74,200 Total disallowance U/S.14A 1,28,59,715 10. Aggrieved with the decision of the AO which culminated into an assessment order dated 28.03.2015 passed by the AO u/s 143(3) of the 1961 Act for AY 2012-13, the assessee filed first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on the above undisputed fact between rival parties. The AO invoked provision of Section 14A of the 1961 Act and made disallowance of ₹ 1,28,59,715/- under Rule 8D(2)(ii) and(iii) of the 1962 Rules . The learned CIT(A) deleted the additions relying on the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd.(supra) . We have observed that Hon'ble Delhi High Court has held in the case of Cheminvest Limited(supra) held that in case no exempt income is received by the tax-payer during relevant year under consideration, no disallowance of expenditure u/s 14A of the 1961 Act is warranted. We are reproducing the relevant extract of decision of Hon'ble Delhi High Court in the case of Cheminvest Limited(supra) , as under: "23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year, with which, we are concerned, in the present appeal. 9. In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act. 9.1 The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision. 10. In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. 10.1 Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. 10.2 Mr.Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D. 10.3 According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. 10.4 Rule 8 D, in our view, cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income. 8. He relied upon a Circular issued by the Central Board of Direct taxes in Circular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub section (1) thereof to income 'under the act' and not 'of the year' and a disallowance under s.14A r.w.Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year. 9. We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in Commissioner of Income Tax v. Maharashtra Sugar Mil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who is present in this Court, informs us that he had in fact argued that the Rule was clarifactory in nature and would apply retrospectively, and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules. 15. However, it is, our view, as indicated above, independent of the reasoning given in Redington (India) Ltd. case (supra) that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act. 15.1 Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue. 15.2 In any event, the Tribunal, via, the impugned judgment has remitted the matter to the Assessing Officer. 15.3 Therefore, for the foregoing reasons, we are of the view, that no interference is called for qua the impugned judgment. 16. To our minds, questions of law, which could have arisen are already covered by the judgment of a Co-ordinate Bench of this Court rendered in Redington (India) Ltd. case (supra). 17. The appeal is accordingly, dismissed. However, there shall be no order as to costs." Respectfully following the ratio of aforesaid decision of Hon'ble High Courts including decision ..... 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