AI Drafter 
TaxTMI 
TaxTMI 
2018 (8) TMI 1259
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....ppeal raised by Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called 'the tribunal') read as under:- "1. 'Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 24,29,583/- u/s 37 of the Income-tax Act by treating the VAT paid as alleged penalty for violation of law?" 2. "Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition made by the AO on account of penalty levied by the Sales Tax Department for violation of law committed by assessee, which qualifies u/s 37 of the Income-tax Act ?" 3. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in granting relief to assessee u/s 14A of the Income-tax Act, 1961 by holding that no exempt income was earned during the year under consideration. Therefore no disallowance can be made u/s 14A of the Income- tax Act?" 4. "Whether on the facts and in the circumstances of the case, and in law, the Ld. CIT(A) erred in granting relief to assessee u/s 14A of the Income-tax Act, 1961 without appreciatin....
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....rovisions of the 1961 Act . The AO asked the assessee to explain the same as to why the said amount be not disallowed, vide latter dated 23.03.2015, as under:- "It is seen from Clause 17(e) of Tax Audit Report in Form No..3CD that the Accountant had certified that there was a penalty of Rs. 24,29,553/- which is to be disallowed as per Income Tax Provisions. However no such disallowance is made in the Computation of Income. In this context furnish the details of such penalty and show-cause why the same, should not be added to income returned." In reply the assessee submitted that the penalty was paid to buy peace with the Sales Tax Department on the amount of tax for bogus purchases. The AO observed that this was a penalty levied by Sales Tax Department for violation of law committed by the assessee which need to be disallowed u/s. 37 of the 1961 Act and which also was certified by the Chartered Accountant in the tax audit report , this led to the additions to the tune of Rs. 24,29,583/- to the income of the assessee by way of disallowance of the said amount of penalty by the AO , vide assessment order dated 28.03.2015 passed by the AO u/s 143(3) of the 1961 Act for AY 2....
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....nt of the additional tax pay able as per the return or, as the case may be, revised return.} Following amendments were made to Sec.30(4) of MVAT Act vide "Trade Cir.No.22 T 0/2009": "Interest @25% on additional tax liability - Addition of Section 30(4):- (a) Under the VAT system...... (b) Therefore, now it is provided that a dealer would be liable to pay an additional interest @25% on the additional tax payable, as per the return or the revised return and such interest shall be levied if a dealer files one or more return(s) (which was overdue) or revised return(s) under any of the following circumstances:- (i) after the commencement of the business audit, or (ii) inspection of the accounts, registers and documents, kept at anyplace of business of the dealer, or (iii) entry and search of any place of business etc., or (iv) in consequence of the intimation sent under section 63(7). The assessee further submitted before learned CIT(A) as under: It is further clarified that: (i) This interest shall be in addition to any other interest leviable under other provisions of the Act. (ii) The 25% interest shall be calculated o....
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....aid by the assessee in certain circumstances. Such interest is basically compensatory in nature, which is backed by the following case laws:- In 'Mahalakshmi Sugar Mills Co. V Commissioner of Income Tax - (2008) - TMI -58; Supreme Court the Apex Court was dealing with section 10(2}(xv) of the Indian Income Tax Act, 1961, which is identical to section 37 of the Income Tax Act. In the said case, the assessee had been held liable to pay interest under the U.P. Sugarcane Cess Act because of delayed payment of cess. The U.P. Act also provided that penalty could also be levied under such circumstances. The Apex Court, in this case, held that the interest payable on an arrear of cess under section 3(3) is in reality part and parcel of the liability to pay cess. It is an accretion to the cess. The arrear of cess carries interest; if the cess is not paid within the prescribed period a larger sum will become payable as cess. The enlargement of the cess liability is automatic under section 3(3). No specific order is necessary in order that the obligation to pay interest should accrue. The liability to pay interest is certain as the liability to pay cess. As soon as the prescribed....
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....ling with the question as to whether damages paid for delayed payment of employees contribution to employees' provident fund was compensatory or penal. The court following the judgement in ' Prakash Cotton Mills Ltd.' - 2008 - TMI -54QQ - Supreme Court remitted the matter to the High Court for reconsideration in the light of the observation made therein. In 'Commissioner of Income Tax V. H. P. State Forest Corporation' - 2000 (Q) TMI X24 - HIMACHAL PRADESH HIGH COURT the assessee is an undertaking of H.P. Government. The trees to be felled are handed over by the Forest Department to the Forest Corporation, The Corporation pays royalty to the State Government at rates which are finalized by the Pricing Committee constituted by the State Government. The Corporation is liable to pay interest on belated payment of royalty and other amounts payable to the Corporation. The Forest Department is liable to pay sales tax on royalty but in actual fact this amount is actually deposited by the Forest Department in favour of the Corporation. The assessee claimed deduction of the amounts paid as interest on royalty, sales tax etc. The Assessing Officer rejected the cl....
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....2015 passed u/s 143(3), vide appellate order dated 23.12.2016 passed by learned CIT(A). Thus, in nut-shell the assessee succeeded before learned CIT(A) as the appeal of the assessee was allowed by learned CIT(A). 7. The Revenue is aggrieved by the relief granted by learned CIT(A) and has now come in an appeal before the tribunal. The Ld. DR opened the arguments by stating that as per Section of 37 of 1961, Act, penalty is not allowable as deduction while computing income under the provisions of the 1961 Act and it was submitted that provisions of Section 30(2) and 30(4) of MVAT Act, 2002 which stipulate interest on VAT defaults is nothing but penal in nature and the said interest cannot be allowed as deduction while computing income under the provisions of the 1961 Act keeping in view provision of section 37 of the Act. It was submitted that the assessee made bogus purchases which were in the nature of accommodation entries which were detected by investigation wing of MVAT authorities and the input credit/set off as was claimed by the assessee was reversed under the direction of investigation wing. The learned DR brought to our attention provision of Section 30(2) and 30(4) of t....
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....credit set off towards output tax liabilities towards VAT as originally claimed by the assessee and to pay additional tax arising from such withdrawal along with interest as stipulated u/s 30(2) and 30(4) of the MVAT Act, 2002. At this stage , the assessee had two choices either to contest these allegations of availment of wrong input tax credit by entering into litigation with MVAT department and the other option was to file revised return under MVAT Act, 2002 while search and survey operations were still underway after paying additional tax as well paying interest as stipulated u/s 30(2) and 30(4) of the 1961 Act. The assessee chose not to enter litigation with MVAT department as it wanted to buy peace and end litigation under the MVAT Act, 2002 and chose second option of paying additional tax which was earlier underpaid due to alleged wrong claim of input tax credit availed on alleged bogus purchase bills , which additional tax is now paid along with payment of interest u/s 30(2) and 30(4) of the MVAT Act, 2002. This interest liability u/s 30(4) was computed @ of 25% on additional tax payable by the assessee due to withdrawal of wrong inadmissible claim of input tax credit of VA....
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....vided that, in relation to the tax payable according to 3[the return, fresh return or as the case may be], 4[fresh return or revised return], the said dealer shall, notwithstanding anything contained in any other provision of this Act, be deemed not to have paid the amount of such tax within the time he is required by or under the provisions of this Act to pay it if he has not paid the full amount of such tax on or before the last date prescribed for furnishing of such return and accordingly, if he has not paid the full amount of such tax or has paid only the part of the amount of such tax by such date, he shall be liable under this clause for payment of interest after such date on the full or part, as the case may be, of the amount of tax which has not been paid by such date and where a dealer has furnished a 4[fresh return or revised return] and the amount of tax payable as per the 4[fresh return or revised return] exceeds the amount of tax payable as per the original return, then for the purposes of this sub-section, the dealer shall be deemed to have been required to pay the excess amount of tax at the time he was required to pay the tax as per the original return and according....
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....ax is reduced, then the interest shall be reduced accordingly and where the said amount is enhanced, then interest on the enhanced amount shall be calculated mutatis mutandis up to the date of such order from the said date next. 6[(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 consequence of any intimation issued under sub- section (7) of section 63, the dealer files one or more returns or, as the case may be, revised returns in respect of the said period, then he shall be liable to pay by way of interest, in addition to the amount of tax, if any, payable as per the return or, as the case may be, revised return, a sum equal to 25 per cent. of the additional tax payable as per the return or, as the case may be, revised return.] 7[Provided that, interest u....
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....able to tax or has concealed or has knowingly misclassified any transaction liable to tax or has knowingly claimed set-off in excess of what is due to him, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose upon him, in addition to any tax due from him, a penalty 2a[not exceeding the amount of tax due but not less than twenty five per cent. of] the amount of tax found due as a result of any of the aforesaid acts of commission or omission. (4) Where any person or dealer has knowingly issued or produced any document including a false bill, cash memorandum, voucher, declaration or certificate by reason of which any transaction of sale or purchase effected by him or any other person or dealer is not liable to be taxed or is liable to be taxed at a reduced rate or incorrect setoff is liable to be claimed on such transaction, the Commissioner may, after giving, the person 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 the amount of tax found due as a result of any of the aforesaid acts of commission or omission....
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....avention of section 60 shall be forfeited to the State Government. If the Commissioner, in the course of any proceeding under this Act or otherwise, has reasons to believe that any person has become liable to a penalty or forfeiture or both penalty and forfeiture of any sum under this sub-section, he may serve on such person a notice in the prescribed form requiring him on a date and at a place specified in the notice to attend and show cause why a penalty or forfeiture or both penalty and forfeiture of any sum as provided in this sub-section should not be imposed on him. The Commissioner shall thereupon hold an inquiry and shall make such order as he thinks fit. When any order of forfeiture is made, the Commissioner shall publish or cause to be published a notice thereof for the information of the persons concerned giving such details and in such manner as may be prescribed.] 11[(11) No order levying penalty under the foregoing provisions of this section shall be passed in respect of any period after 12[eight years] from the end of the year containing the said period.] 13[(11A) Notwithstanding anything contained in sub-section (11), penalty under this se....
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....ecided after going through various provisions of the statute and to see the intentions of law makers behind placing of such provisions in the statute. This interpretation of the statute is well settled legal proposition which has been so held by catena of judgments of Hon'ble Superior Courts which case laws are also cited in preceding para's of this order and are not repeated here. We have also carefully gone through the provision of section 29 and 30 of the MVAT Act 2002. We have observed that Section 29 of the MVAT Act ,2002 prescribes penalties for various offences/defaults under MVAT Act, 2002 , while section 30 of MVAT Act, 2002 which is immediately succeeding Section to Section 29 of MVAT Act, 2002 deals with the interest for various delays in making payment of VAT . We have observed that Section 30(2) of the MVAT Act, 2002 stipulates payment of simple interest in case VAT is not paid within due date as prescribed under MVAT Act, 2002 . However, Section 30(4) of MVAT Act, 2002 prescribes interest which is in addition to interest payable u/s 30(2) of MVAT Act, 2002 and is to be paid after commencement of some special event such as audits, inspection, survey , search etc under ....
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....MVAT Act, 2002 which is in-fact penal in nature having germane to infraction of law while filing of original return of VAT which led to under payment of VAT originally. The reason is not far to seek as the liberty of paying 25% of additional tax u/s 30(4) of the MVAT Act, 2002 of its own even after commencement of special event such as audit, inspection, survey and search etc is given by way of one more opportunity to the dealer to come clean voluntarily after the commencement of audit , inspection , survey , search etc. as stipulated u/s 30(4) of the MVAT Act, 2002 by paying this penal interest computed @25% of tax sought to be evaded in addition to paying up the tax sought to be evaded and interest u/s 30(2) of MVAT Act, 2002 towards delayed payment of VAT which interest u/s 30(2) is compensatory in nature . It is also pertinent to mention that before special event commences as is stipulated u/s 30(4) by way of audit, inspection, survey and seizure etc. and the dealer observes that there is some omission or incorrect statement in original return of VAT filed with MVAT authorities, the dealer can always come forward and file revised returns after complying with stipulated conditio....
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....ngly or not while filing original return of VAT under MVAT Act,2002. The assessee in the instant case came after the commencement of search and survey operation being conducted against assessee in the last week of September 2011 by MVAT authority came forward to file revised return by withdrawing inadmissible and wrong credit of input tax credit set off against output VAT payable in order to come clean and buy peace with MVAT department with a view to end litigation and the assessee also paid compensatory interest u/s 30(2) to MVAT department for delay in payment of this additional tax under MVAT computed from the original due date of payment of this MVAT liability due to availment of wrong input tax credit on alleged bogus purchases till the said additional tax liability of VAT was paid to MVAT department and the assessee also paid penal interest u/s 30(4) of the MVAT Act,2002 in terms of the scheme of the Act to buy peace and to end litigation as also to safeguard against possible levy of penalty u/s 29(3) of the MVAT Act, 2002 which would in any case be minimum 25% but which could extend to 100% of the tax so evaded in the event of having adverse outcome of litigation with MVAT ....
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.... 30(2) of MVAT Act, 2002 is penal in nature and cannot be allowed as business deduction keeping in view provisions of Explanation 1 to Section 37(1) of the 1961 Act, vide our detailed discussions and reasoning as set out above. Our view is strengthened by the fact that interest u/s 30(4) of MVAT Act, 2002 is in addition to interest payable u/s 30(2) of MVAT Act, 2002 which is held by us to be compensatory in nature and secondly in case the assessee choses path of litigation with MVAT authorities wherein additional tax liability had arisen after commencement of audit, inspection, survey , search instead of filing revised return along with payment of this interest u/s 30(4) in addition to additional tax and interest u/s 30(2) of MVAT Act, 2002, then in the eventuality of the assessee losing out in the legal battle with MVAT Authorities , the assessee will , inter-alia, be visited with penalty u/s 29(3) of MVAT Act, 2002 which shall be not less than 25% of the amount of tax found to be evaded and which may extend to 100% of the said tax so sought to be evaded apart from interest u/s 30(2) and additional tax so sought to be evaded. Thus, by asking assessee to pay this interest @25% of ....
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.... while interpreting law or due to ignorance of law etc. . It is also well settled proposition of law that ignorance of law is not an excuse and dealer has to be cautious and well versed with law before filing its VAT returns. It is also pertinent to mention that before special event commences as is stipulated u/s 30(4) by way of audit, inspection, survey and seizure etc. , and the dealer observes that there is some omission or incorrect statement in original return of VAT filed with MVAT authorities, the dealer can always come forward and file revised returns after complying with stipulated conditions u/s 20(4) of the MVAT Act, 2002, for which there is only stipulation to pay interest u/s 30(2) of the MVAT Act,2002 for delayed payment of VAT apart from paying additional tax liability u/s 20(5) of MVAT Act, 2002 which was originally short paid due to such omission or incorrect statement in the original return filed with the MVAT authorities and no further interest such as stipulated u/s 30(4) of the 1961 Act is stipulated under the aforesaid circumstances of filing revised return voluntarily by the dealer before the commencement of audit, inspection ,search , survey etc. . This also....
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.... to furnish complete details of exempt income earned along with details of expenditure incurred in relation to earning of an exempt income . It was also asked by the AO to give working of disallowance of expenditure within provisions of Section 14A of the 1961 Act r.w.r. 8D of the 1962 Rules and explain why said provisions be not invoked to make disallowance of expenditure incurred in relation to earning of an exempt income. The assessee submitted that it has not incurred any expenditure in relation to investments made in shares/mutual funds for earning an exempt income. The AO observed that assessee had made investments in the shares/mutual funds which have potential of earning an income in the form of dividend which is exempt from tax. The AO observed that despite the assessee not earning exempt income during the relevant previous year , still disallowance u/s 14A of the 1961 Act is required to be made as the investments in shares made by the assessee are capable of generating exempt income. For this proposition, the AO relied on CBDT circular no. 5/2014. It was observed by AO that investments decisions in present market scenario need constant analysis and efforts. It was observe....
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....rieved 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 appeal with learned CIT(A) who considered the submissions of the assessee and came to conclusion that in case no exempt income is earned by the assessee during the previous year relevant to the impugned assessment year , no disallowance can be made of the expenditure incurred within provisions of Section 14A of the 1961 Act .The learned CIT(A) relied upon decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd. (ITA 749/2014) and decision of Mumbai-tribunal in the case of Daga Global Chemicals Limited v. ACIT in ITA no. 5592/Mum/2012 to arrive at that decision and consequently deleted the additions to the tune of Rs. 1,28,59,715/- as were made by the AO u/s 14A of the 1961 Act r.w.r. 8D of the 1962 Rules, vide appellate order dated 23.12.2016 passed by learned CIT(A). 11. Aggrieved by the relief granted by learned CIT(A), the Revenue has come in an appeal before the tribunal. The Ld. DR relied upon assessment order passed by the AO . The Ld DR submitted that even if there is no exempt income ....
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....udible 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 not apply if no exempt income is received or receivable during the relevant previous year." The Hon'ble Delhi High Court in the case of Joint Investments Private Limited (supra) held that disallowance of expenditure incurred in relation to earning of an exempt income cannot exceed an exempt income. The relevant extract of the decision of Hon'ble Delhi High Court in the case of Joint Investments Private Limited(supra) is reproduced hereunder: "9. ...... By no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case." The Hon'ble Bombay High Court in the case of Pr. CIT v. Ballarpur Industries Limited reported in 2016(TMI)TMI 1039 has ....
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.... 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 go beyond what is provided in Section 14 A of the Act. 11. Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, Redington (India) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257 (Mad.)which was, subject matter of T.C.A.No.520 of 2016. 11.1 A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf. 11.2 As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income. 11.3 Pe....
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....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 Mills Limited [1971] 82 ITR 452 and Rajasthan State Ware Housing Corporation v. Commissioner of Income-tax [2002] 242 ITR 450 in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non-taxable income, was allowable in entirety without apportionment. It was thus that s.14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income exempt from taxation. As observed by the Supreme Court in the judgment in the case of Commissioner of Income-tax v. Walfort Share and Stock Brokers (P) Ltd. [2010] 326 ITR 1 '.... The mandate of s.14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by ....
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.... 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 of Hon'ble Jurisdictional High Court and also taking note of dismissal of Revenue' SLP by Hon'ble Supreme Court in the case of CIT v. Chettinad Logistics Private Limited(supra), we uphold the well reasoned order of Ld. CIT(A) on the proposition 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 and we dismiss the appeal of Revenue on this short ground only. Thus, Revenue fails on this ground. We order accordingly. 13. Thus , appeal of the revenue in ITA no. 1893/Mum/2017 for AY 2012-13 is partly allowed as indicated above. ITA No. 1892/Mum/2017 for AY 2009-10 14. The only issue which arise for our determination in Revenue's appeal in ITA no. 1892/Mum/2....