Sri Pampamaheshwar Ravindranatha , Bangalore V. The Assistant Commissioner of Income Tax Circle-1 , Bellary

ITA 2412/BANG/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3212 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 09-03-2020
• Assessment Year: 2013-2014
• Appeal Filed On: 21-08-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R PREMI
• Keywords: Business expenditure; Set aside
• Section: 143(3); 37(1); 201; 48; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH C BEFORE SHRI N.V VASUDEVAN, VICE - PRESIDENT AND SHRI B.R.BASKARAN, ACCOUNTANT MEMBER ITA NO. 2 412 /BANG/201 8 (ASS ESSMENT YEAR : 201 3 - 14 ) SHRI PAMPAMAHESHWAR RAVI N DRANATH, FLAT NO.1 05A, BLOCK, TERRACE GARDEN APARTMENTS, 2 ND MAIN KEB ROAD, BSK 3RD STAGE, BANGALORE. PAN NO. ABTPR9384C APPELLANT VS THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 1, BELLARY RESPONDENT ASSESSEE BY : S HRI BALRAM R RAO, ADVOCATE REVENUE BY : S MT. R.PREMI, J CIT DATE OF H EARING : 0 9 - 0 3 - 20 20 DATE OF P RONOUNCEMENT : 11 - 0 3 - 20 20 O R D E R PER SHRI N.V VASUDEVAN, VICE - PRESIDENT : THIS IS AN APPEAL BY THE ASS ESSEE AGAINST THE ORDER DATED 29 - 0 6 - 2018 OF CIT (A) , GULBARGA RELATING TO ASSESSMENT YEAR 201 3 - 14. 2. GROUND NO.1 AND 5 RAIS E D BY THE ASSESSEE GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 3. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOLLOWS; 2. ( A) THE LD.CIT(A) AS WELL A THE AUTHORITIES BELOW FAILED TO APPRECIATE THE FACT THAT DISALLOWANCE OF CONTRACT BENEVOLENT IT A NO. 241 2 /B ANG / 20 1 8 2 FUND (CBF) EXPENSES AMOUNTING TO RS.2,51,397/ - WAS AN EXPENDITURE ALLOWABLE U/S 37(1) OF TH E ACT. B) THE CIT(A) AS WELL AS AUTHORITIES BELOW FA I LED TO APPRECIATE THE FACT THAT CBF IS MANDATORY DEDUCTION BY STATE GOVERNMENT AND NOT VOLUNTARY IN NATURE. 4. T HE ASSESSEE I S AN INDIVIDUAL. HE CARRIES ON BUSINESS AS C LASS - I C ONTRACTOR EXECUTING MAJOR PORTION OF CONTRACT WORKS FOR THE STATE GOVERNM E NT. IN THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) OF THE I NCOME T AX AC T, 1961 (ACT) FOR ASSESSMENT YEAR 2013 - 14 , THE A|O N OTICED THAT IN COMPUTING INCOME FROM BUSINESS THE ASSESSEE HA D DEDUCTED A SUM OF RS.2,51,937/ - BEING CONTRIB UTION OF ASSESSEE TO CONTRACTORS BENEVOLENT FUND (CBF) . ACCORDING TO AO, THE AFORESAID EXPENDITURE WAS NOT FOR THE PURPOSE OF BUSINESS OF THE ASSES SEE AND THEREFORE CANNOT BE ALLOWED AS DEDUCTION U/S 37(1) OF THE ACT. 5. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED THE ORDER OF A O HOLDING THAT THE CONTRIBUTION MADE BY THE ASSESSEE WAS PURELY OUT OF BENEVOLENCE AND NOT FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. FOLLOWING WERE THE RELEVANT OBSERVATION OF THE CIT(A). I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE SUBMISSIONS MADE BY THE APPELLANT DURING APPELLATE PROCEEDINGS. BENEVOLENCE IS THE DESIRE TO HELP SOMEONE OR A FEELING OF GOODWILL TOWARDS OTHERS. BENEVOLENCE CAN ALSO REFER TO AN ACT OF KINDNESS OR CHARITY. BENEVOLENCE FUND IS A MONETARY R E S E RVE KEPT IN ORDER TO HELP THOSE IN NEED. OFTEN, A BENEVOLENCE FUND IS USED TO AID FAMILIES WITH UNEXPECTED OR HIGH MEDICAL EXPENSES, VICTI MS OF NATURAL DISASTERS, THE UNEMPLOYED, THE UNDER - EMPLOYED AND OTHERS IN SIMILAR CIRCUMSTANCES. THE ADMINISTRATION OF A BENEVOLENCE FUND IS USUALLY APPOINTED TO A COMMITTEE WHO SEES THAT THE MONIES ARE DISTRIBUTED FAIRLY AND TO PERSONS TRULY IN NEED. I T CAN BE UNDERSTOOD THAT THE FUND IS DEDUCTED PURELY FOR THE PURPOSE OF CHARITY. IT IS NOTHING BUT A DONATION GIVEN FOR A CHARITY PURPOSE. THERE I S NO NEXUS WITH THE BUSINESS. THE FUND IS ALSO NOT RECOGNIZED FOR ALLOWING ANY DEDUCTION. THUS IT IS NOT AL LOWABLE EXPENDITURE. HENCE, THE APPEAL FILED BY THE ASSES S EE IS DISMISSED. THE GROUND NO.1 IS DISMISS E D. IT A NO. 241 2 /B ANG / 20 1 8 3 6. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSES S EE HAS RAISED GROUND NO.2 B EFORE THE TRIBUNAL. 7. THE LD. C OUNSEL F OR THE ASSESSEE BROUGHT TO OUR N OTICE A DECISION OF THE ITAT, BANGALORE BENCH IN THE CASE OF S HRI S.BASAVARAJA VS ACIT IN ITA NO.188 8(BANG)/2017 DATED 20 - 07 - 2018. THE TRIBUNAL IN THE AFORESAID C A SE WAS DEALING WITH A CASE OF INDIVIDUAL WHO WAS ALSO A CIVIL CONTRACTOR AND W H OS E CASE ALSO CONTRIBUTION TO CBF WAS DISALLOWED BY THE REVENUE AUTHORITIES. THE TRIBUNAL HELD THAT THE CONTRIBUTION TO CBF WAS FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND WAS OF REVENUE IN NATURE AND HAD TO BE ALLOWED AS DEDUCTION SUBJECT TO VERIFICATION WHETHER THE CONTRIBUTION WAS MADE IN ACCORDANCE WITH NOTIFICATION ISSUED BY THE GOVERNMENT OF KARNATAKA WHEREBY SEVERAL CONTRACTORS WER E OBLIGATED TO CONTRIBUTE CBF. THE FOLLOWING WERE THE RELEVANT OBSERVATION OF THE TRIBUNAL. 5.WE HAVE GONE THROUGH THE RECORD AND CONSIDERED THE ARGUMENTS MADE BY BOTH THE PARTIES. IN OUR VIEW THE CONTRACTOR IS UNDER AN OBLIGATION TO DEDUCT TAX BY NOTIFICATION ISSUED BY THE GOVERNMENT OF KARNATAKA, DT.18.1.2007 TO MAKE THE PAYMENT OF CBF WHICH IS EQUIVALENT TO 1% OF THE ESTIMATED COST OF THE CONTRACT AND THEREFORE THIS IS AN EXPENDITURE WHICH IS WHOLLY AND SOLELY RELATED TO THE BUSINESS OF THE ASSESSEE. HOWEVER IN OUR VIEW, WHETHER ACTUALLY THIS AMOUNT IS SPENT BY THE ASSESSEE FOR THE PURPOSES OF BUSINESS IS REQUIRED TO BE VERIFIE D BY THE A 0 WITH REFERENCE TO THE BILLS / RUNNING BILLS SUBMITTED BY THE ASSESSEE. IN VIEW OF THE ABOVE, WE REMAND THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY WHETHER THE ASSESSEE HAD MADE THE CONTRIBUTION TO CBF IN PURSUANCE TO THE N OTIFICATION DT.18.1.2007 OR THE CORRIGENDUM ISSUED. IF THE PAYMENT OF CBF IS MADE IN ACCORDANCE WITH THE SAID NOTIFICATION THEN THE SAME SHALL BE ALLOWED AFTER VERIFICATION. 8. W E ARE OF THE VIEW THAT IN THE LIGHT OF THE AFORESAID DECISION RENDERED UNDER IDENTICAL FACTS AND CIRCUMSTANCES OF THE CASE AS THAT OF THE ASSESSEE IN THIS APPEAL, WE ARE OF THE VIEW THAT THE DEDUCTION CLAIMED HAS TO BE ALLOWED IT A NO. 241 2 /B ANG / 20 1 8 4 SUBJECT TO VERIFICATION AS MENTIONED IN THE ORDER OF THE TRIBUNAL REFERRED TO ABOVE. THE RELEVANT GROUN D IS TREATED AS ALLOWED. 9. GROUND NO.3 RA I S ED B Y THE ASSE S SEE READS AS FOLLOWS; 3. ( A) THE LEARNED CIT(A) AS WELL AS AUTHORITIES BELOW FAILED TO APPRECIATE THE FACT THAT DISALLOWANCE OF R ESERVE FOR NOC AMOUNTING TO RS.6,09,351/ - WAS PURELY ON BUSINESS EXPENDITURE ALLOWABLE U/S 37(1) OF THE ACT. (B ) THE LEARNED CIT(A) AS WELL AS AUTHORITIES BELOW FAILED TO APPRECIATE THE FACT THAT RESERVE FOR NOC IS A THIRD PARTY INSPECTION CHARGE WHICH I S MANDATORY DEDUCTION AND PURELY BUSINESS EXPENDITURE. AS FAR AS GROUND NO.3 IS CONCERNED, THE FACTS ARE THAT THE ASSESSEE HAD DEBITED A SUM OF RS.6,09,531/ - UNDER THE HEAD RESERVE FOR NOC . THE AO HELD THAT TH E SAID EXPENDITURE WAS NOT ALLOW ABLE AS EXPENDITURE U/S 37(1) OF THE ACT AS IT WAS IN THE NATURE OF RESER VE AND NOT AN ACCRUED LIABILITY. ON APPEAL BY THE ASSESEEE, THE CIT(A) CONFIRMED THE ORDER OF THE AO. 10. BEFORE US THE LD.COUNSEL FOR THE ASSESSEE EXPLAINED THAT RESERVE FOR NOC ALSO IN THE NATURE OF DEDUCTION MADE BY THE STATE GOVERNMENT OUT OF T HE BILLS OF CONTRACTORS. IT WAS EXPLAINED BY THE LD. COUNSEL FOR THE A S SESSEE THAT THE AMOUNTS DEDUCTED ON ACCOUNT OF R ESERVE NOC ARE SUMS WHICH ARE RETAINED BY S TATE GOVERNMENT FROM AND OUT OF THE MONIES PAYABLE TO CONTRACTORS AND ARE MONIES WHICH WIL L BE APPROPRIATED, IF THIRD PARTIES WHO INSPECT THE PROJECT FIND D EFECTS IF ANY, IN THE MANNER OF EXECUTION OF WORK. IT WAS SUBMITTED BY HIM THAT INVARIABLY THESE SUMS ARE NEVER REFUNDED AND HAS TO BE TREATED AS AN OUTGOING EXPENDITURE IN THE BUSINESS OF THE ASSE S S E E . WITH REFERENCE TO A SPE CI FIC QUERY AS TO UNDER WHAT PROVISION IN THE CONTRACT OR ANY OTHER STATUTORY PROVISION , THE ASSESSEE IS OBLIG ED TO CONTRIBUTE TO W ARDS RESERVE FOR NOC , T HE LD. COUSEL FOR THE ASSE SS EE SUBMITTED THAT SUCH OBLIGATION S ARE PART OF THE CONTRACT ENTERED INTO WITH THE STATE GOVERNMENT. ANOTHER QUERY WAS RAISED BY THE BENCH AS TO WHETHER THE SUM CONTRIBUTED TOWARDS RESERVE FOR NOC WILL BE REFUNDED TO THE AS S ESSEE IN THE EVENT OF IT A NO. 241 2 /B ANG / 20 1 8 5 THIRD PARTY CERTIFICATION OF EXECUTION O F GOOD WORK BEING GIVEN. THE LEARNED COUNSEL FOR THE ASSESSEE EXPRESSED HIS INABILITY TO GIVE AN ANSWER TO THIS QUERY. IN THE CIRCUMSTANCE, WE ARE O F THE VIEW THAT THIS ISSUE SHOULD BE REMANDED TO THE AO FOR FRESH CONSIDERATION AND THE ASSE SSEE SHOULD DE MON S T RATE BEFORE THE AO THAT THE CONTRIBUTION TO W ARDS RESERVE FOR NOC IS BASED ON CONTRACT BETWEEN PARTIES OR IS A CONTRIBUTION WHICH IS PAYABLE UNDER STATUTE OR IS A MATTER OF PRACTICE WHILE EXECUTING THE CIVIL WORK FOR STA T E GOVERNMENT. THE ASSESSEE SHALL ALSO ESTABLISH THAT THE SUM SO CONTRIBUTED WILL NOT BE REFUNDED TO THE ASSESSEE AT ANY POINT OF TIME OR AS TO HOW THE SUM SO REFUNDED WOULD BE OFFERED TO TAX AS INCOME AS AND WHEN THE SAME IS RECEIVED. ACCORDINGLY, TH E ISSUE RAI S ED IN GROUND NO.3 IS SET ASIDE FOR DENOVO CONSIDERATION IN THE LIGHT OF THE DIRECTION GI V EN ABOVE. 1 1 . G ROUND NO.4 RAISED BY T H E ASSES S EE READS AS FOLLOWS; 4.THE LD. CIT(A) AS WELL AS AUTHORITIES BELOW FAILED TO APPRECIATE THE FACT THAT PENALTIES PAID FOR NON - PERFORMANCE OF CONTRACT IN TIME AMOUNTING TO RSD.7,25,299/ - WAS IN THE NATURE OF COMPENSATORY DAMAGES AND WAS PURELY BUSINESS EXPENDITURE U/S 37(1) OF THE ACT. 1 2 . THE ASSE S SEE CLAIMED AS DEDUCTION A SUM OF R S. 7,25,299/ - UNDER THE HEAD PENALTY AND CHARGES THE A O DISALLOWED THE CLAIM OF DEDUCTION O F THE AFORESAID AMOUNT ON THE G ROUND THAT IT W A S IN THE NATURE OF AN EXPENDITURE INCURRED BY AN ASSESSEE AS CONTEMPLATED U/S 37(1) EXPLANATION - 1 OF THE ACT WHICH READS AS FOLLOWS; EXPLANATION 1. FOR THE REMOVAL OF DOU BTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHAL L BE MADE IN RESPECT OF SUCH EXPENDITURE. 12. BEFORE THE CIT(A) THE ASSE SS EE SUBMITTED THAT THE PENALTY IN QUEST I ON WAS DAMAGE FOR NON - FULFI L LMENT OF REQUISITE OBLIGATION UNDER THE CONTRACT FOR EXECUTION OF CIVIL WORK AND THEREFORE, WAS NOT PENAL IN NA TURE BUT ONLY IT A NO. 241 2 /B ANG / 20 1 8 6 COMPENSATORY. THE CIT(A) HOWE V ER, CONFIRMED THE ORDER OF A O HOLDING THAT THE EXPENDITURE IN QUESTION WAS PENAL IN NATURE. 13. A GGRIEVED BY THE ORDER OF CIT(A) THE ASSES S EE PREFERRED APPEAL BEFORE THE TRIBUNAL. 14. THE LD. COUNSEL FOR T HE ASSESSEE FILE D BEFORE US A CHART GIVING DETAILS OF THE SUM PAID BY THE ASSESSEE AS ALSO THE CONTRACTS IN RESPECT OF WHICH SUCH PENALTY WAS IMPOSED. H E BROUGHT TO OUR NOTI C E THE INVOICES RAISED BY THE PWD DEPTT. WHEREIN THE NATURE OF THE SUM DEDUCTED A S REFLECTED AS PENALTY. THE SAID CHART IS GI V EN BELOW: CHART FOR RESERVE FOR NOC AND PENALTY FOR DELAY IN COMPLETION WORK SL. NO DATE INVOICE PARTICULARS RESERVE FOR NOCONR0 PENALT Y (IN RS) PAPER BOOK PANE NO 5 - 7 1. 03/01/2012 KSWC HOLEALUR 5,000 2. 12/04/2012 KSWC MUDDEBIHAL 50,000 20,000 8 10 3. 19/04/2012 KSWC JEWARGI 50,000 10,000 11 13 4. 19/04/2012 KSWC SHORAPURA 20,000 14 16 5. 10/06/2012 KSWC BELGUM 20,000 17 19 6. 26/06/2012 22 SD - KSWC HARIHARA 467 7. 28/06/2012 KSWC KUKANOOR 20,6 05 20 22 8. 28/06/2012 KSWC BAGALKOT 81,311 41,831 23 25 9. 03/08/2012 KHB ARAKERE 21,400 26 28 10. 07/08/2012 KSWC BAGALKOT 38,361 11. 09/08/2012 KHSDRP BAGALKOTE 1,44,808 12. 10/09/2012 KSWC JEWARGI 25,000 10,000 29 30 13. 22/10/2012 KSWC CHI TTAPUR 50,000 20,000 31 - 32.1 14. 22/10 / 2012 KSWC ATHANI 5,000 33 35 15. 22/10/2012 KSWC HUNUGUNDA 50,000 30,000 IT A NO. 241 2 /B ANG / 20 1 8 7 16. 15/11/2012 KSWC HOLEALUR 25,000 36 38 17. 09/11/2012 KSWC DHARWAD 10,000 39 41 18. 07/11/2012 KSWC BAGALKOT 10,000 42 - 44 19. 06/ 12/2012 KHDDRP KOPPAL 92,000 20. 08/01/2013 KSCMF HUBLI - 1 42,795 21. 21/01/2013 KSWC BAGALKOT 10,000 45 - 47 22. 21/01/2013 KSWC HARIHARA 3,03,220 25,000 48 - 50 23. 20/02/2013 KRIES LACHANN 50,000 51 - 52 24. 25/03/2013 KRIES BIJAPUR 37,000 25. 31/03/2013 KREIS MUDHOOL 16,032 15. FROM THE DOCUMENTS REFERRED TO IN THE CHART GIVEN ABOVE, IT IS NOT POSSIBLE TO LINK THE PENALTIES LEVIED UN DER VARIOUS BILLS BY THE PWD AS A PAYMENT MADE BY WAY OF DAMAGES FOR DEALY IN EXECUTION OF CONTRACT . IN OTHER WORDS, THE ASSES S EE WAS NOT ABLE TO LINK THE PENALTY REFLECTED IN THE BILLS AS PE N ALTY FOR DELAYED IMPLEMENTATION OR DELAYED EXECUTION OF THE CONTR A CT. THIS ASPECT NEEDS DETAILED VERIFICATION AND THE ASSESSEE IS DIRECTED TO ESTABLISH THIS FACT BEFOR E THE AO AND FOR THIS PURPOSE THE I SSUE IS REMANDED TO THE AO FOR CONSIDERATION FRESH AFTER DUE OPPORTUNITY TO THE ASSE S S EE. IF THE PAYMENT IS E S TA B LISHED AS FOR PAYMENT FOR BREA C H OF CONTRACT AND THEN THE SAME CANNOT BE SAID TO BE A PAYMENT FALLING WITHIN THE AMBIT OF EXPLANATION TO SEC.37(1) OF THE ACT. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF PRAKASH COTTON MILLS (P)LTD. VS CIT 201 ITR 684(SC) AND THE AFORESAID DEC ISION CLEARLY LAYS DOWN THE PROPOSITION THAT WHEN A PAYMENT BY WAY OF IMPOST OR BY WAY OF PENALTY OR INTEREST IS PURELY COMPENSATORY AND NOT PENAL IN NATURE , THE SAME SHOULD BE ALLOWED AS EXPENDITURE U/S 37(1) OF THE ACT. A PAYMENT OF COMPENSATION FOR BR EACH OF CONTRACT CAN BY NO STRETCH OF IMAGINATION BE TERMED AS PENALTY FOR INFRACTION OF LAW. WE THEREFORE, SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND IT A NO. 241 2 /B ANG / 20 1 8 8 REMAND THE ISSUE TO THE FILE OF AO FOR FRESH CONSIDERATION IN THE LIGHT OF DIRECTIONS GIVEN ABO VE. 16. IN THE RESULT, THE APPEAL OF THE AS SESSEE IS ALLOWED FOR STATISTIC AL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11 - 03 - 2020. S D/ - S D/ - (B.R.BASKARAN) (N.V VASUDEVAN) ACCOUNTANT MEMBER VICE - PRESIDENT PLACE : BANGALORE DATED : 11 - 03 - 2020 * AM COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF BY ORDER ASST. REGIST RAR