TaxTMI 
TaxTMI 
2017 (11) TMI 186
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....s raised in this year and the applicability of section 43B of the Income Tax Act to statutory payments. 1.2 The learned CIT(A) erred in not deleting the disallowance of penal interest of Rs. 86,72,759/- (which is compensatory in nature) on additional sales tax demand of relating to AY 2006-07 as prior period income (expenses) by the AO by holding it as penalty. 2. That the above grounds are independent and without prejudice to each other. 3. That the appellant seeks leave to add, amend, alter, abandon or substitute any of the above grounds at the time of hearing of appeal." 3. The grounds raised in the appeal of the Revenue in ITA No. 3692/Del/2014 are reproduced as under: "1. The DCIT, Circle-3(1), New Delhi, is hereby directed to file appeal in the above mentioned case before the ITAT, New Delhi on the following ground of appeal. 1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the disallowance of Rs. 48,71,000/- made on account of interest expenses being capital in nature. 2. The appellant craves leave for reserving the right to amend, modify, alter, ad or forego any ground(s) of appeal at any time before or during ....
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....allowable in the year of payment in terms of section 43B of the Act, irrespective of the method of accounting followed by the assessee. Regarding the amount of Rs. 86,72,759/-, the assessee contended that though it was termed as 'penalty', it was in the nature of interest for compensating the Commercial Tax Department for delay in the paying taxes due beyond the stipulated period and, thus, it was allowable in terms of Explanation -1 below section 37 of the Act. The Assessing Officer did not accept the contention of the assessee and disallowed the amount of Rs. 1,22,18,792/- as expenditure not related to the year under consideration. The amount of Rs. 86,72,759/- was also held as disallowable on the ground that penalty for delayed payment of sales tax was not deductible expenditure in view of the decision of the Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Ltd. vs. CIT, (1967) ITR 57 (SC) and Hon'ble Delhi High Court decision in the case of CIT Vs. Bharat Steel Tubes Limited (1997) 226 ITR 750 (Del.). The Ld. CIT-(A) allowed the payment of tax amounting to Rs. 35,45,033/- on paid basis in terms of section 43B of the Act, however, upheld the finding of the Assessing Of....
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....02 ITR 164 (Guj). Therefore, the same cannot be allowed in the year in which demand is raised due to non applicability of the provisions of Section 43B. However, the Hon'ble Rajasthan High Court in Shreepipes Vs. CIT(2007) 162 Taxman 442 (Raj) has held that interest payable to Sales Tax determined is tax i.e. interest accrued on delayed payments of Sales Tax under the Rajasthan Sales Tax Act, 1954, is part of tax within the meaning of Section 43B. However, Penal Interest is in the nature of penalty for infraction of law & therefore, cannot be allowed otherwise, as per the expenditure to Section 37(1) of the Act. In Haji Aziz & Abdul Shakoor Bros Vs. CIT(1961) 41 ITR 350 (SC), it was held that a penalty imposed for breach of any law during the course of trade etc., cannot be described as a commercial loss. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. Infraction of law is not a normal incident of business & therefore, no expense which is paid by way of penalty for a breach of law can be said to be an amount wholly & exclusively laid out....
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....the tax. The Ld. counsel drawn our attention towards section 30 of the Jharkhand VAT Act, 2005. The Ld. counsel submitted that penalty is imposed to compensate the delay in payment of VAT by the assessee and therefore, being in the nature of compensatory penal interest, same is allowable under section 37 of the Act. 6.4 On the other hand, Ld. Senior Departmental Representative (Sr. DR) drawn our attention to various clauses of Sec. 30 of Jharkhand VAT Act, 2005 and submitted that penalties have been levied in addition to the tax and interest payable by the assessee and therefore same were not compensatory in nature and therefore, not allowable in terms of Explanation -1 to section 37 of the Act. 6.5 We have heard the rival submission and perused the relevant material on record. The relevant Explanation to Section 37 of the Act, which has specified non-allowance of payments in the nature of penalty, is reproduced as under: "37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business ....
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....es five thousand in a year. Explanation - Return for this purpose shall mean and include the Monthly Abstract, Return for any tax period, Revised Return(s) as well as the Annual Return." 6.8 It is evident from clear language of the relevant section that the penalty levied is not compensatory in the nature, as it is for default of failure to furnish return under the VAT Act. Accordingly, contention of the learned counsel in respect of amount of penalty of Rs. 5000 is rejected. 6.9 Regarding the second amount of Rs. 35,07,407.40 paid as penalty for delayed filing of form i.e. G-VAT 409 under section 63(3) of the Jharkhand VAT Act, 2005, the Ld. counsel himself has admitted as not being in the nature of compensatory. For clarity, the relevant section of the Jharkhand VAT Act is reproduced as under: "63. Audit of Accounts:- (1) Where in any particular year, the gross turnover of a dealer exceeds 40 lakh rupees or such other amount as the prescribed authority may, by a Notification in the Official Gazette specify, then such dealer shall get his Accounts audited for the purpose of this Act, in respect to that year, by an ―Accountantǁ or ―Tax Practitionersǁ, wi....
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....at the rate of 2% per month on the tax and interest payable. The penal amount being in addition to the interest payable for delay in deposit of the tax, it cannot be said as compensatory in the nature and accordingly, we reject the contention of the Ld. counsel in this regard and hold the amount of Rs. 35,13,907.06 as disallowable in terms of Explanation -1 to section 37 of the Act. 6.13 As regard to the payment of Rs. 16,46,444.96, the relevant clause of section 30(1) of the Jharkhand VAT Act, 2005 is reproduced as under: "(1) If a dealer required to file return under sub-Section (1) or sub-Section (2) of Section 29, (a) fails without sufficient cause to pay the amount of tax due as per the return for any tax period; or (b) furnishes a revised return under sub-Section (3) of Section 29 showing a higher amount of tax to be due than was shown by him in the original return; or (c) fails to furnish return; such dealer shall be liable to pay Interest and penalty** in respect of; (i) the tax payable by him according to the return; or (ii) the difference of the amount of tax according to the revised return; or (iii) the tax payable for the period for which he has fai....
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....tc. by way of margins or giving advances etc. for the purpose of expansion. The assessee company adjusted/credited said interest of Rs. 48.71 lakhs against "expenses during construction", which were capitalized to capital work in progress(CWIP) and balance interest of Rs. 362.43 ( Rs. 411.14 - 48.71) Lacs as earned from temporary surplus fund of the operational business was admitted as taxable income. The assessee cited various decisions of the Hon'ble High Courts/Supreme Court and submitted that the assessee has rightly reduced/netted of the interest earned relating to expansion against the expenses during construction, which has been capitalized. The assessee submitted that identical nature of expenses in the immediately preceding year AYs 2008-09 and 2009-10 were deleted by the learned CIT-(A) and accordingly prayed that the interest earned on deposits made related to the new unit (still to commence operation) be treated as capital receipt and be allowed to set off against interest paid on borrowing and other capital expenses during setting up of the unit. According to Assessing Officer, in relation to acquisition of assets, prior to introduction of proviso to section 36 of the ....
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.... among them being that of India Cements Ltd. Vs. CIT(1966) 60 ITR 52(SC); CIT Vs. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj.) & CIT Vs. Tata Chemicals Ltd. (2002) 256 ITR 395 (Bom.), according to which, the whole of the interest, was a 'Revenue' expense. However, on account of the amendment brought in section 36(1)(iii), interest incurred in respect of an asset not put to use is not a Revenue expenditure. Accordingly, the interest expense of Rs. 471.39 before adjustments of credit relating to expansion was capitalized by transfer to 'Incidental Expenses During Construction (IEDC) & in terms of the accounting standards & on the basis of matching principle, the interest of Rs. 48.71 lakhs earned on deposits kept in relation to expansion were credited to/reduced from the IEDC. In the present case, the business of the assessee had already commenced & for many years for existing unit. Keeping in view the principles of consistency & by following the decision of my predecessor, on this issue & also keeping in view the ratio of decision of Hon'ble jurisdictional High Court on the related issue, the AO is directed to allow the netting off of interest before determining the busin....
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....inst pre-operative expenses, is acceptable, since the funds infused in the assessee company by the joint venture partners are inextricably linked with the setting up of the plant and the interest earned cannot be treated as income from other sources. "Indian Oil Panipat Power Consortium Ltd." (supra) is squarely applicable to the present Case, as discussed. This is in consonance with "Bokaro Steel Ltd." (supra), "Karnal Cooperative Sugar Mill" (supra), "CIT Vs. Karnataka Power Corporation", 247 ITR 268 (SC) and "Bongaigaon Refinery and Petro Chemical Co. Ltd. vs. CIT", 251 ITR 329 (SC), wherein also, it has been laid down that any receipt inextricably linked to the setting up of the project is capital receipt not liable to tax and going to reduce the cost of the project, in the present case too, the funds infused by the assessee company were inextricably linked with the setting up of the power plant. Likewise, the interest payment was also capital expenditure, which fact was confirmed by the AO, while observing the entire income of the entire expenditure was capital in nature. 12. All these facts have been duly taken into consideration by the CIT(A) while passing the order under....