2022 (10) TMI 825 - AT - Income Tax

Tribunal Upholds CIT(A)'s Decision on Disallowance of Punitive Charges

DCIT, Circle-2 (1), Bhubaneswar Versus M/s Serajuddin & Co. (P) Ltd.

The Tribunal upheld the decision of the ld. CIT(A) to delete the disallowance of punitive charges under Section 37(1) of the Act. It was determined that ... Expenses under the head punitive charges - punitive charges was the charges levied by the East Coast Railway for transport of the excess material as prescribed by the railways - whether allowable expenditure u/s 37(1)? - CIT-A deleted the addition - HELD THAT:- The term “prohibited by law” as occurring to Explanation 1 to Section 37(1) of the Act has been explained by the Hon’ble Supreme Court in the case of Apex Laboratories (P.) Ltd., [2022 (2) TMI 1114 - SUPREME COURT] as after considering the term “prohibited by law” came to the conclusion that such acts which would wholly undermine public policy and which would defeat the object of a statute or is an illegality which goes to the root of the matter, the expenditure in relation to the same is not allowable. If one is to understand the concept of punitive charges, clearly the punitive charges are plain and simple overloading charges. These charges are not levied on account of any act done by an assessee in violation of any law, nor it is a fine levied on the assessee for an infraction of the law much less the doing of a prohibited activity. This being so, we are of the view that the ld. CIT(A) was right in deleting the disallowance as made by the AO. Appeal of the revenue stands dismissed. Issues:- Disallowance of punitive charges under Section 37(1) of the ActAnalysis:The appeal was filed by the revenue against the order of the ld. CIT(A)-1, Bhubaneswar, concerning the disallowance of an amount paid as punitive charges by the assessee in the profit and loss account for the transport of excess material by the East Coast Railway. The ld. CIT-DR argued that the punitive charges were in violation of railway rules and therefore disallowed by the AO under Explanation 1 to Section 37 of the Act. The ld. CIT(A), however, relying on precedents, deleted the disallowance. The revenue contended that the charges were akin to fines and penalties, citing various legal judgments to support the disallowance.In response, the ld. AR referred to a Mumbai Bench Tribunal order, emphasizing that the charges were permissible under the Ministry of Railways notification and not in violation of any law. The Tribunal observed that the charges were overloading charges, not prohibited by law, and allowed the expenses. The Tribunal clarified the term 'prohibited by law' as explained by the Supreme Court, stating that punitive charges in this case were not related to any illegal activity or violation of law, thus justifying the deletion of the disallowance by the ld. CIT(A).The Tribunal distinguished the present case from legal precedents cited by the revenue, highlighting that those cases involved clear infractions of law, unlike the situation of overloading charges in the current appeal. The Tribunal concluded that the punitive charges were not in violation of any law, and therefore, the ld. CIT(A)'s decision to delete the disallowance was upheld. Consequently, the appeal of the revenue was dismissed, confirming the findings of the ld. CIT(A) on the issue of disallowance of punitive charges under Section 37(1) of the Act.