IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “D”
BEFORE SHRI R.K. PANDA, A.M. AND SHRI VIJAY PAL RAO, J.M.
ITA No. 847/Mum/2010
Assessment year 2006-07
M/s Taurian Iron & Steel Co. Pvt. Ltd.,
302-A, Poonam Chambers,
Mumbai – 400 018.
PAN AAACT 4814 A
Appellant
Vs.
Addl. Commissioner of Income Tax,
Range 4(3), Mumbai.
Respondent
ITA No. 1613/Mum/2010
Assessment year 2006-07
Asst.Commissioner of Income Tax,
Range 4(3), Mumbai.
Appellant
Vs.
M/s Taurian Iron & Steel Co. Pvt. Ltd.,
302-A, Poonam Chambers,
Mumbai – 400 018.
PAN AAACT 4814 A
Respondent
Assessee by: Shri J.P. Bairagra
Revenue by: Shri C.G.K. Nair
Date of hearing: 28.11.2011
Date of pronouncement: 14.12.2011
ORDER
PER R.K. PANDA A.M.
These are cross appeals. The first one filed by the assessee and the second one filed by the Revenue and are directed against the order dt. 08.12.2009 of the CIT(A)- 8, Mumbai relating to A.Y. 2006-07. These appeals were heard together and are being disposed of by this common order for the sake of convenience.
ITA No. 847/Mum/2010 (By assessee)
2. Ground of appeal No. 1 by the assessee reads as under:-
“On the facts & in the circumstances of the case & in law, the Learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of Rs. 12,46,272/- made by the Learned Assessing Officer on interest free advances made to sister concerns.”
2.1 Facts of the case in brief are that during the course of assessment proceedings, the A.O. noted that the assessee has given interest free advances to the following subsidiary companies under the same management:
1. Bajla Exports Rs. 73,40,000/-
2. Palss Properties P. Ltd. Rs. 22,75,765/-
3. Taurian Engg. P. Ltd. Rs. 2,87,53,221/-
Rs.3,83,68,986/-
The A.O. asked the assessee to explain as to why proportionate interest on advances given to above mentioned parties should not be disallowed. The assessee explained that it has not taken any specific borrowing/loans for making advances to sister concern. It has got sufficient funds in the form of share capital, share application money and free reserve and surplus. The company has got own capital of Rs. 37.40 crores as against outstanding loan of Rs. 3.63 crores (excluding Rs. 20 lacs given as deposit to Palss Properties) given to the sister concern as on 30.3.2006. Therefore, it cannot be said that the loan/advance given to sister concerns are out of borrowed funds. It was submitted that it was out of common funds from where the money has been advanced to the sister concerns. 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 & 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 such interest free loans were claimed as deduction by the sister concerns.
2.4 However, the ld. CIT(A) was also not convinced with the explanation given by the assessee. He observed that the assessee was not able to show that its own funds were advanced to sister concerns. Further, there is no business expediency in advancing loan by the assessee to its sister concern. He also rejected the argument of the assessee that if it would have charged interest, then the interest expenditure in the hands of the sister concerns would have been taken as expenses. According to him, under the income Tax Act each person is separate. Making sister concerna profitable or otherwise by advancing interest free loan by the assessee to its sister concern cannot be treated to be a business expediency. He accordingly upheld the action of the A.O. Aggrieved with such order of the ld. CIT(A), the assessee is in appeal before us.
3. The ld. counsel for the assessee referring to pages 54 to 57 of the paper book submitted that the various submissions made by the assessee and the decisions cited were not at all considered by the ld. CIT(A). He submitted that the assesse company had Rs. 37.40 crores as its share capital and free reserve out of which an amount of Rs. 3.63 crores (excluding Rs. 20 lacs given as deposit to Palss Properties Pvt. Ltd.) has been given as interest free advances to the sister concerns and no borrowed fund has been utilized for such interest free advances. He submitted that the company has a fungible bank account and therefore it is not correct to say that any specific interest bearing funds were given to the sister concerns. The decision of the Hon’ble Bombay High court in the case of CIT v. Reliance Utilities and Power Ltd. reported in 313 ITR 340 was cited by the ld. counsel for the assessee. He submitted that the assessee had given an amount of Rs. 2.88 crores out of the total interest free funds of Rs. 3.84 crores to Taurian Engg. Pvt. Ltd. (TEPL), a sister concern which is a subsidiary of the assessee company. He submitted that TEPL is a company engaged in the business of manufacturing of crushing plant/screening plant and the said funds given by the assessee has been utilized for their business purpose only. During the year TEPL had just started its business operations and the borrowed funds were fully utilized by TEPL for the purpose of its business activities. 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 question of shifting the tax liability leading to any revenue leakage. He submitted that the ld. CIT(A), however, has not considered any of the submissions made by the assessee and simply confirmed the disallowance made by the A.O. The ld. counsel for the assessee also relied on various decisions given in the paper book.
4. The ld. D.R., on the other hand, heavily relied on the order of the A.O. and ld. CIT(A).
5. We have considered the rival arguments made by both the sides, pursued the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the plethora of decisions cited by the ld. counsel for the assessee. There is no dispute to the fact that share holders fund and free reserves in the assessee company is Rs. 37.40 crores and it has made interest free advances of Rs. 3.63 crores (excluding Rs. 20 lacs given as deposit to Palss Properties). There is also no dispute to the fact that the assessee is maintaining mixed account. The submission of the ld. counsel for the assessee that the amount of Rs. 2.88 crores advanced to TEPL have been utilized by them for their business purpose and no part of the same has been diverted for personal benefit of the directors remains uncontroverted. We find the Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. reported in 313 ITR 340 has held that if there are funds available both interest free and overdraft and/or loan taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds are sufficient to meet the investments. Since in the instant case, the interest free funds i.e. shareholders funds and free reserves and surplus are much higher than the interest free advances made to the sister concerns and since the assessee is maintaining a mixed bank account, therefore, in view of the decision of the Hon’ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd. (supra) no disallowance of proportionate interest can be made.
5.1 Further the case of the assessee is also squarely covered by the decision of Hon’ble Supreme Court in the case of S.A. Builders (supra) according to which disallowance of proportionate interest cannot be made if the interest free advances have been made to the sister concerns for commercial 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 & in the circumstances of the case & in law, the Learned Commissioner of Income-tax (Appeals) erred in not adjudicating the ground of appeal taken before him on the issue of not allowing the expenses by the Learned Assessing Officer of Rs. 22,28,082/- pertaining to the assessment year 2006-07 claimed by the appellant during the course of assessment proceedings.”
7.1 The ld. counsel for the assessee submitted that the assesse is following ercantile system of accounting. The expenses pertaining to the year under consideration amounting to Rs. 22,28,082/- which were originally debited to the P&L account for the year ended 31.03.2007 were suo-motu disallowed by the assessee in the computation of total income for the A.Y. 2007-08. Since the time of filing of the revised return for A.Y. 2006-07 had expired the assessee filed revised computation before the A.O. during the course of assessment proceedings for A.Y. 2006-07 claiming the expenditure. Referring to paper book page 40, he drew the attention of the Bench to Column No. 6 of the letter addressed to the A.O. Referring to paper book page 43, he drew the attention of the Bench to the details of prior period expenses disallowed in F.Y. 2006-07 to be considered in F.Y. 2005-06. He submitted that although a specific ground as per ground No. 5 was raised before the ld. CIT(A), he has not adjudicated the same. Referring to the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. v. CIT reported in 284 ITR 323 (SC) and the decision of Hon’ble Delhi High Court in the case of CIT v. Jai Prabolic Springs reported in 306 ITR 42 (Del), he submitted that the Tribunal has power to allow deduction for expenditure to the assessee to which it was otherwise entitled to even though no claim was made by the assessee in the return. Referring to the decision of the Tribunal in the case of M/s Indian Steel & Allied Industries v. ACITT in ITA No. 3097/Mum/06 order dtd. 10.8.2009 for A.Y. 2005-06, he submitted that the Tribunal in the said decision relying on the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. (supra) has restored the issue to the file of the A.O. with a direction to allow the claim of deduction of gratuity which were not claimed either in the original return or in the revised return. Referring to the decision of the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT reported in 82 ITR 363, he submitted that the expenditure has to be allowed in the year to which 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 (
8. Ground No. 4 by the assessee reads as under:-
“On the facts & in the circumstances of the case & in law, the Learned Commissioner of Income-tax (Appeals) erred in not adjudicating the ground of appeal taken before him on the issue of initiation of the penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961 by the Learned Assessing Officer.”
8.1. We find the above ground is pre-mature at this juncture. Accordingly, the same is dismissed.
9. Ground No. 5 by the assessee reads as under:-
“On the facts & in the circumstances of the case & in law, the Learned Commissioner of Income-tax (Appeals) erred in not adjudicating the ground of appeal taken before him on the issue charging interest u/s 234B & 234C of the Income Tax Act, 1961 by the Learned Assessing Officer on the additions made at the time of assessment.”
9.1 After hearing both the sides we are of the considered opinion that charging of interest u/s 234B & 234C is mandatory and consequential in nature. A`ccordingly, this ground by the assessee is dismissed. ITA No. 1613/Mum/2010 (By the Revenue)
10. The only effective ground raised by the Revenue 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 treating ‘punitive charges’ as payments and not an offence or prohibited by law without appreciating the fact that ‘punitive charges’ are levied to deter people from overloading by levying charges in excess of normal freight and they are penal in nature.”
10.1 Facts of the case in brief are that during the course of assessment proceedings the A.O. noted that the assessee has debited punitive charges of Rs. 1,01,85,788/- in its P&L account. On being 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 goods (Iron ore) are in open condition, the same are loaded in wagon by the company on some estimate basis which varies from the railways measurement when it goes to railway weightment bridge for weight measurement. If it is found excess, it cannot be unloaded. Even if it is unloaded, cost of unloading & shifting the goods will be higher as compared to punitive leviable by the railways. Demurrage & punitive are synonyms in nature. It is further stated that manner of determination of amount of punitive charges cannot determine the nature of expenses. These compensation charges are incurred/paid for breach of contract not for breach of law. From the above it is sunmarized as under:-
- The goods are loaded in good faith/good intention that it will not exceed the permissible capacity.
- Even if punitive charges arise, it is beneficial to the Company in terms of freight cost & time factor as compared to goods sent through other mode of transport a there is limited availability of wagons (Rake). It is commercially viable. If goods are sent through railways, there is cost saving as well as saving of time further handling loss will be decreased as compare to road transport.
- It arises due to breach of contract not for breach of law.
- These charges are not in the nature of penalty for infraction of law.
- It is purely commercial expenses i.e. compensatory in nature.
- It is paid as per the scheme of Railway, circular is attached here with. Hence the assessee is aware of punitive and under good faith/intention has paid under scheme of the circular. Hence it is a incident of business laid out and expended wholly and exclusively for the purposes of the business (Ref CJT v. Ahmedabad Cotton Mfg. Co. Ltd. [1993] 7) Taxman 56/[1 994] 205 ITR 163 (SC).)
- In addition to above the punitive charges includes the normal charges i.e. basic freight. In view of above, punitive charges incurred by the assessee should be allowed as expenses u/s. 37(1) of the Income Tax Act by treating the same as incurred wholly & exclusively for the’ business of the assessee. Copy of determination of punitive charges are enclosed for your reference.
10.2 However, the A.O. was not convinced with the explanation given by the assessee. According to him the dictionary meaning of “punitive” is “inflicting or intending to inflict punishment of taxation etc.”. Therefore, the punitive 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 & 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. CIT(A) the assessee submitted that that during the previous year relevant to the assessment year 2006-07, the company was mainly engaged in export of iron ore for which material had to be transported from mines/plant/Railway sidings to the ports through private transporter in trucks and railway wagons provided by Indian Railways. Railway is the only mode of transportation if the person wishes to transport its product through railway & it is commercially cheapest in comparison to other mode of transportation. During the year the company had paid freight of Rs.13.83 Crores to the railways. In addition to that Rs.1,01,85,788/- has been paid as overloading charges towards overloading the goods in the railway wagons which is termed as punitive charges and the same is charged as per the rates fixed by the railways by issuing notification from time to time. In this respect the assessee submitted the following:-
1. The appellant Company has incurred the said expenses during the normal course of business activities carried on.
2. It is purely a commercial expenses incurred by the appellant company during the normal course of business.
3. The railway is permitting/allowing to carry the goods overloaded in the wagons by collecting the overloading charges termed as punitive i.e. it is not prohibited to overload the goods in the wagons.
4. Overloading charges paid to Railways was not in the nature of penalty for violation/infraction of any law but by way of compensation for permitting to overload the goods beyond the permissible limit allowed by the railway administration though the terminology for the same has been given by the railway as punitive.
5. There is no provision for criminal action/personal liabilities/prosecution/confiscation of goods for overloading the goods.
6. The payment as fine/punitive charges was not in the nature of punishment but by way of compensation
7 Overloading is very common in nature, which the railways is allowing/permitting by paying additional freight termed as punitive. In view of above and notification issued by the Railway Board, you will appreciate that punitive charges are paid for overloading the wagon but not for any violation/infraction of law. The heading of terms of punitive charges for overloading itself starts with Punitive charges for overloading”.
10.4 Based on the arguments advanced by 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 f 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 & 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 highest class in case of Situation B’.
(ii) Thus, it is obvious from the notification of Ministry of Railways dated 23.12.2005 that the railway authorities do allow overloading of its rake and it charges 2 or 3 times the freight rate applicable to that commodity as punitive charges’. Though the words used in the notification are ‘punitive charges’, the charges levied by the Indian Railways for carrying the goods in its rake are permitted by Railway authorities itself and the punitive charges are computed as 2 times or 3 times of the freight rates. The punitive charges levied by Railways, in accordance with the notification of Ministry of Railways dated 23.12.2005, for carrying goods in its rakes are not ‘for any purpose which is an offense or which is prohibited by law’. As a matter of fact, the Indian Railways itself permits carrying weight load beyond the permissible carrying capacity subject to payment of higher rate of freight by 2 times or 3 times. Though the words are ‘punitive charges’, they are payment which are neither an offense nor is prohibited by the law rather the payment is in accordance with the law as provided in the notification of Ministry of Railways dated 23.12.2005. It is, therefore, held that Explanation to Section 37 is not applicable and the payment of Rs.1,O1,85,788/- is allowable. Hence, the addition is deleted and Ground No. 4 is allowed. “
Aggrieved with such order of the ld. CIT(A), the Revenue is in appeal before us.
10.5 The ld. D.R. submitted that the punitive charges paid to the Indian Railways due to overloading are purely penalty in nature. Merely because the Railways are allowing the same, it cannot be said that it is not a penalty and it is compensatory in nature. He submitted that since the expenditure incurred by the assessee is an offence as per the Indian Railways Act, therefore, the same should not be allowed as a deduction. Referring to the decisions relied on by the A.O. in the body of the assessment order, he submitted that the A.O. was fully justified in disallowing the punitive charges of Rs. 1,01,85,788/- claimed by the assessee. He accordingly supported by the order of the A.O.
10.6 The ld. counsel for the assessee while supporting the order of the ld. CIT(A) submitted that although the payments made were termed as punitive charges but such payments were routine payments in the nature of additional 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 & 290/Nag/2006 for A.Y. 2002-03 & 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 Railways.
10.7 Referring to the decision of Hon’ble Supreme Court in the case of Prakash Cotton Mills P. Ltd. reported in [1993] 201 ITR 684, a copy of which is placed at paper book page 111 to 115, he drew the attention of the Bench to the following para:-
“The decision of this court in Mahalakshmi Sugar Mills Co. [1980] 123 ITR 429 and the decision of the Division Bench of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 with the views of which we are in complete agreement, are, in our pinion, decisions which settle the law on the question as to when an amount paid by an assessee as interest or damages or penalty could be regarded as compensatory (reparatory) in character as would entitle such assessee to claim it as an allowable expenditure under section 37(1) of the Income-tax Act. Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 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.”
10.8 He submitted that the Railways allow overloading of the wagons. Therefore, it is the commercial decision of the assessee to overload the wagons since the wagons are not available easily and the assessee has to remain in queue. Referring to the decision of Hon’ble Punjab & Haryana High Court in the case of CIT v. Hero Cycles Ltd. reported in 178 Taxman 484 he submitted that penalty paid to State Electricity Board for violating power regulations i.e extra charges paid for drawing extra load in peak hours was allowed as a revenue expenditure. He submitted that the decisions relied on by the A.O. are distinguishable on facts and not applicable to the facts of the present case. He ccordingly submitted that the order of the ld. CIT(A) be upheld and the ground raised by the Revenue should be dismissed.
11. We have considered the rival arguments made by both the sides, pursued the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute in the impugned ground is 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 nature.
11.2 We find the Hon’ble Punjab & Haryana High Court in the case of Hero Cycles Ltd. has upheld the decision of the Tribunal and allowed the deduction of the amount paid to the Electricity Board as penalty for violation of power regulations i.e. extra charges paid for drawing extra load in peak hours.
11.3 We find the Nagpur Bench of the Tribunal in the case of Western Coalfields Ltd. (supra) under identical circumstances has allowed the claim of over loading charges paid to the Railways as revenue expenditure by holding as under:-
“As regards overloading charges, we have to take into consideration the environment in which the companies are operating. Railway is the only mode of transportation if the person wishes to transport its product through railway. This fact is important because such activities of railways is of commercial in nature and freights are fixed on commercial basis. If we look the issue in its perspective, then, what emerges is that if these were private carriers also and if the assessee would have paid identical charges to them, the same would have been allowed as a normal business expenditure especially when there is no dispute that these expenses have been incurred in the course of business operations and, therefore, merely because the Railways is a Govt. owned Institution and works under an Act of Parliament, and nature of overloading charges which are essentially of commercial nature cannot be characterized as of penal nature irrespective of nomenclature given to such charges by the railways. Further, it is not in dispute that the quantity treated as overloading has been unloaded by the railways nor it has been a case of violation of safety rules/norms, hence, the overloading so incurred cannot be equated with traveling without ticket, hence, the said contentions of the ld. D.R. are rejected. It is also noted that such overloading is not correct due to a deliberate act on the part of the assessee but due to lack of infrastructure and nature of commodity, hence, the ratio of the decision of the Hon’ble Punjab & Haryana High court in the case of Hero Cycles Ltd. (supra) is squarely applicable. It is also a settled judicial principle that substance of the matter should be looked into and be given to the nomenclature given by the Railway to such charges. The object of Explanation 1 also supports the claim of the assessee 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
12. In the result, the appeal filed by the assessee is partly allowed for statistical purpose and the appeal filed by the Revenue is dismissed.
Order pronounced on 14.12.2011.
Sd/- Sd/-
(VIJAY PAL RAO) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, dated 14.12.2011
RK
Copy to…
1. The appellant
2. The Respondent
3. The CIT(A) –8, Mumbai
4. The CIT – 4, Mumbai
5. The DR Bench, “D”
6. Master File
// Tue copy//
BY ORDER
DY/ASSTT. REGISTRAR
ITAT, MUMBAI
