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of <h1>Tribunal allows compensatory interest, upholds CIT(A) on offsetting interest income, rejects revenue's appeal.</h1> <h3>M/s. Bokaro Power Supply Co. Ltd. Versus DCIT, Circle -3 (1), New Delhi</h3> M/s. Bokaro Power Supply Co. Ltd. Versus DCIT, Circle -3 (1), New Delhi - Tmi Issues Involved:1. Disallowance of additional sales tax demand and penal interest as prior period expenses.2. Deletion of disallowance of interest expenses being capital in nature.Issue-wise Detailed Analysis:1. Disallowance of Additional Sales Tax Demand and Penal Interest as Prior Period Expenses:The assessee challenged the disallowance of Rs. 86,72,759/- paid to the Sales-tax Department for the assessment year 2006-07, which included a sales tax demand and penalty. The assessee argued that the demand was raised during the current year, making it a statutory payment allowable under section 43B of the Income Tax Act. The CIT(A) allowed the payment of tax amounting to Rs. 35,45,033/- but upheld the disallowance of Rs. 86,72,759/- as it was considered a penalty for infraction of law. The tribunal analyzed the nature of the penalties and interest under various sections of the Jharkhand VAT Act, 2005:- Penalty for delay in filing revised VAT return (Rs. 5,000/-): The tribunal found this penalty was not compensatory and upheld its disallowance.- Penalty for delayed filing of G-VAT 409 (Rs. 35,07,407.40/-): The assessee admitted this penalty was not compensatory, and the tribunal upheld its disallowance.- Penalty for delayed payment of VAT Tax (Rs. 35,13,907.06/-): This penalty was found to be in addition to tax and interest, thus not compensatory, and its disallowance was upheld.- Interest under section 30(1) (Rs. 16,46,444.96/-): This interest was considered compensatory for the delay in tax payment and was allowed as a deductible expense.The tribunal concluded that out of Rs. 86,72,759.42, an amount of Rs. 70,26,314.46 was disallowed, and Rs. 16,46,444.96 was allowed.2. Deletion of Disallowance of Interest Expenses Being Capital in Nature:The revenue challenged the deletion of disallowance of Rs. 48,71,000/- made on account of interest expenses being capital in nature. The assessee had raised additional capital and loans for expansion and incurred interest expenses of Rs. 471.39 lakhs. It earned interest of Rs. 411.14 lakhs from banks, out of which Rs. 48.71 lakhs was from deposits related to the expansion and was adjusted against capital work in progress (CWIP). The CIT(A) allowed the netting off of interest based on the principle upheld by the Delhi High Court in cases like CIT vs. Sasan Power Ltd. and NTPC Power Company Limited vs. CIT. The tribunal upheld the CIT(A)'s decision, noting that the interest earned on funds linked with the setting up of the plant is in the nature of capital receipt and should be set off against pre-operative expenses.Conclusion:The tribunal partly allowed the appeal of the assessee by allowing the compensatory interest of Rs. 16,46,444.96 and upheld the CIT(A)'s decision on netting off interest income against capital expenses, thus dismissing the revenue's appeal.
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