ACIT, Circle 11(2), Pune V. Maharashtra Co-operative Development Corporation Ltd., Pune

ITA 302/PUN/2013

• Counselvise Citation: 30224514 RSA 2013
• Duration Of Justice: 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-12-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 31-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Keywords: Business expenditure; Capital expenditure
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE: SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 302 / P N/ 20 1 3 ASSESSMENT YEAR : 200 9 - 10 THE ASST. COMMISSIONER OF INCOME TAX , CIRCLE - 11(2), PUNE VS. MAHARASHTRA CO - OPERATIVE DEVELOPMENT CORPORATION LTD., SAKHAR SANKUL, SHIVAJINAGAR, PUNE (APPELLANT) (RESPONDENT) PAN NO. AADCM0636L ITA NO. 1672 /PN/20 12 ASSESSMENT YEAR : 2008 - 09 THE ASST. COMMISSIONER OF INCOME TAX, CIR CLE - 11(2), PUNE VS. MAHARASHTRA CO - OPERATIVE DEVELOPMENT CORPORATION LTD., SAKHAR SANKUL, SHIVAJINAGAR, PUNE (APPELLANT) (RESPONDENT) PAN NO. AADCM0636L APPELLANT BY: SHRI S.P. WALIMBE RESPONDENT BY: SHRI S. N. PURANIK DATE OF HEARING : 0 2 - 12 - 20 13 DATE OF PRONOUNCEMENT : 24 - 12 - 2013 ORDER P ER R.S. PADVEKAR , JM : - IN TH ESE APPEAL S , THE REVENUE HAS CHALLENGED THE IMPUGNED ORDER OF THE LD. CIT(A) - I , PUNE DATED 20 - 11 - 2012 FOR THE A.Y S . 200 8 - 09 AND 2009 - 10. THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS: 1. (2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME - T AX (APPEALS) GROSSLY ERRED IN DELETING THE DISALLOWANCE ON ACCOUNT OF PENAL INTEREST PAYABLE TO THE GOVERNMENT OF MAHARASHTRA INSTEAD O F CONFIRMING THE SAME. 2. (3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE L EARNED COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN NOT CONSIDERING THE FACT THAT IT WAS CLEARLY MENTIONED IN THE GOVERN M ENT OF 2 ITA NO. 302/PN/2013 AND ITA NO. 1672/PN/2012, MAHARASHTRA CO - OPERATIVE DEVELOPMENT CORPORATION LTD., PUNE MAHARASHTRA ORDER DATED 15. 02.2006 BEARING NO. MSV - 2005/PR.KR.476/2 - S THAT THE DELAY IN REPAYMENT OF LOAN ALONG WITH INTEREST WILL RESULT IN LEVY OF PENAL INTER E ST AT THE RATE OF TWO PERCENT. 2. THE FACTS WHICH ARE REVEALED FROM THE RECORD AS UNDER. THE ASSESSEE IS A MAHARASHTRA STATE GOVERNMENT OWNED NON - BANKING FINANCE COMPANY (NBFC) REGISTERED UNDER THE INDIAN COMPANY ACT, 1956. THE ASSESSEE IS AUTHORIZED BY THE RBI, TO TRANSACT NBFC BUSINESS. IT IS STATED THAT THE ASSESSEE IS A NON - BANKING FINANCIAL ORGANIZATIONS FOR THE CO - OPERATIVE SECTOR IN MAHARASHTRA. THE ASSESSEE FILED THE RETURN OF INCOME FOR THE A.Y S. 2 008 - 09 AND 2009 - 10 WHICH WAS SELECTED FOR SCRUTINY AND ASSESSMENT HAS BEEN COMPLETED U/S. 143(3) OF THE INCOME - TAX ACT. THE ASSESSING OFFICER HAS OBSERVED THAT THE F INANCIAL ASSISTANTS BY WAY OF LOAN GIVEN ARE AS PER TRIPARTITE AGREEMENTS BETWEEN THE ASSESSEE COMPANY, BORROWER AND GOVERNMENT OF MAHARASHTRA WHICH GUARANTEES THE REPAYMENTS OF THE LOANS AND INTEREST. THE ASSESSEE HAS SHOWN THE INTEREST PAYABLE TO GOVT. OF MAHARASHTRA OF RS.26.01 CRORES AND PENAL INTEREST AT RS. 2,72,93,541/ - AND CLAIM ED THE SAID AS AN EXPENDITURE. THE ASSESSING OFFICER HAS RESERVATION IN ALLOWING THE SAID PENAL INTEREST AS EXPENDITURE TO THE ASSESSEE. THE ASSESSING OFFICER HAS NOTED THA T THE ASSESSEE HAS TO PAY INTEREST AMOUNTING TO RS.13,94,76,921/ - ON GOVERNMENT LOAN, WHICH IS OUTSTANDING RESULTING IN LEVY OF PENAL INTEREST AMOUNTING TO RS.2,72,93,541/ - AT THE RATE OF 2% AS PER GOVT. OF MAHARASHTRA ORDER DATED 15 - 02 - 2006. IT IS STATED IN THE SAID ORDER THAT IF THERE IS A DELAY IN REPAYMENT OF LOAN WITH INTEREST, PENAL INTEREST AT THE RATE OF 2% WOULD BE LEVIED. 3. THE ASSESSEE HAD RAISED GOVERNMENT LOAN OF RS.113 CRORES FOR REPAYMENT TO BOND HOLDERS ON REDEMPTION OF 13% MCDC BONDS ( S ERIES - I). THE GOVERNMENT OF MAHARASHTRA FAILED TO REPAY DUES PAYABLE TO ASSESSEE AND TH AT RESULTED INTO INSUFFICIENT LIQUIDITY WITH THE ASSESSEE . 3 ITA NO. 302/PN/2013 AND ITA NO. 1672/PN/2012, MAHARASHTRA CO - OPERATIVE DEVELOPMENT CORPORATION LTD., PUNE IN CONSEQUENCE THE ASSESSEE BECOMES UNABLE TO REPAY THE LOAN AND INTEREST TO GOVT. OF MAHARASHTRA. THE ASS ESSEE STATED BEFORE THE ASSESSING OFFICER THAT THE PAYMENT OF PENAL INTEREST TO THE STATE GOVT. IS NEITHER DUE TO ANY DEFAULT OF STATUTORY DUES OR TAXES AND IT IS A PURELY A BUSINESS TRANSACTIONS. AS INTEREST PAYABLE IS A NORMAL BUSINESS TRANSACTION , THE SAME PRINCIP LE SHOULD BE MADE APPLICABLE TO PENAL INTEREST PAYABLE TO STATE GOVT. THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE EXPLANATION AND MADE THE DISALLOWANCE IN BOTH THE ASSESSMENT YEARS IN RESPECT OF THE PENAL INTEREST CLAIMED BY THE ASSESSEE A S EXPENDITURE. THE ASSESSEE CHALLENGED THE ACTION OF THE ASSESSING OFFICER BEFORE THE LD. CIT(A) AND LD. CIT(A) DELETED THE ADDITION BY HOLDING THAT THE EXPLANATION BELOW SEC. 37(1) CANNOT BE APPLIED TO THE PENAL INTEREST. THE REASONS GIVEN BY THE LD. CI T(A) AND THE FINDING IN A.Y. 2008 - 09 ARE AS UNDER: 3.4 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE LAW AS ARE APPARENT FROM RECORDS IN RESPECT OF THE GROUND UNDER CONSIDERATION. IT IS AN UNDISPUTED FACT THAT THE APPELLANT IS A NON - BANKING FINANCE COMPANY, DULY REGISTERED WITH THE RBI AND IS WHOLLY OWNED BY THE GOVT. OF MAHARASHTRA. (THE APPELLANT, INCORPORATED AS MAHARASHTRA COOPERATIVE DEVELOPMENT CORPORATION LTD. HAS RAISED A LOAN OF RS.113 CRORES TO REPAY THE INVESTORS OF 13% MCDC BONDS (SERIES - L) AND THE SANCTION LETTER PROVIDED FOR REPAYMENT OF LOAN TO THE GOVT. IN 10 EQUAL INSTALLMENTS WITH A MORATORIUM OF ONE YEAR ON THE INTEREST OF 9%. THIS SANCTION LETTER FURTHER PROVIDED FOR PAYMENT OF 2% OF PENAL INTEREST, IF THE ABOVE TERMS OF THE LOAN ARE NOT COMPLIED WITH. THE CONTROVERSY RELATES TO THE CLAIM OF RS.2,26,00,000 DEBITED IN THIS YEAR AS EXPENSE WHICH ARE UNDISPUTEDLY RELATING TO THE PENAL INTEREST COMPUTED BY THE APPELLANT COMPANY @ 2%. THE ASSESSING OFFICER HAS CONTEND ED IN THE ASSESSMENT ORDER THAT THIS PAYMENT IS NOT ALLOWABLE AS A BUSINESS EXPENDITURE AS THE SAME IS PENAL IN NATURE. HE HAS NOT EXPLAINED UND ER WHAT PROVISIONS OF ACT, HE IS HOLDING THIS EXPENDITURE AS N OT ALLOWABLE . HOWEVER, THE APPELLANT HAS ASSUME D THAT THE DISALLOWANCE HAS BEEN MADE AS PER EXPLANATION TO SEC. 37(1) WHICH SAYS THAT 'FOR REMOVAL OF DOUBT, IT IS HEREBY DECLARED 4 ITA NO. 302/PN/2013 AND ITA NO. 1672/PN/2012, MAHARASHTRA CO - OPERATIVE DEVELOPMENT CORPORATION LTD., PUNE 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 SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE.' IT IS FURTHER NOTED FROM THE FINDING OF THE ASSESSING OFFICER THAT THE EXPLANATIONS GIVEN TO HIM THAT THE IN TEREST PAYMENT IS NOT PENAL OR PROHIBITED IN LAW AND THAT THE SAME IS A COMMERCIAL LIABILITY WAS NOT ACCEPTED BY THE ASSESSING OFFICER BY SAYING THAT THE RECORDS SUBMITTED BEFORE HIM CLEARLY SHOWS THAT THE APPELLANT HAS COMMITTED BREACH OF CONTRACT AND THE REFORE, FACED WITH THE CONSEQUENCE IN THE FORM OF PENALTY AS PENAL INTEREST AND THEREFORE, IT IS NOT ALLOWABLE. THE ASSESSING OFFICER FURTHER REFERRED TO GOVERNMENT ORDER DATED 15.2.2006 TO INFER THAT THIS LETTER PROVIDES FOR LEVY OF PENAL INTEREST FOR DEL AY IN THE PAYMENT OF LOAN ALONG WITH INTEREST. AS PER THE ASSESSING OFFICER, MERELY BECAUSE THE WORD 'INTEREST' IS USED ALONG WITH THE WORD 'PENAL', IT CANNOT BE SAID THAT THE PAYMENT IS OF THE NATURE OF INTEREST. AS AGAINST THAT THE APPELLANT HAS CONTE NDED THAT NEITHER THE PAYMENT IS FOR INFRINGEMENT OF A LAW NOR IS FOR ANY PROHIBITED ACTIVITY. IT HAS BEEN CLAIMED THAT EVEN THOUGH THE WORD 'PENAL' HAS BEEN USED FOR THE PAYMENT OF ADDITIONAL INTEREST ON NON FULFILLMENT OF PAYMENT SCHEDULES, BUT THE SAME ARE MORE OF THE NATURE OF HIGHER COMPENSATION FOR THE DELAY. THEREFORE, THEY HAVE TRIED TO STATE THAT THE PAYMENT IS OF THE NATURE OF ADDITIONAL INTEREST. THE APPELLANT HAS ALSO PLACED RELIANCE ON THE DECISION OF CLT VS. CATHOLIC SYRIAN BANK LTD. (2003) 1 30 TAXMAN 447 (KER) AND CIT VS. NEW ALPINE FOREST (2000) 245 ITR 470 (J&K). IT HAS BEEN CONTENDED THAT THE TESTS LAID IN THESE JUDICIAL PRONOUNCEMENTS ARE WHETHER THE PAYMENT IS FOR NON - COMPLIANCE OF ANY PROVISION HAVING CRIMINAL LIABILITY OR PROSECUTION, FOR DETERMINING WHETHER THE EXPENDITURE OR ALLOWANCE WILL BE ALLOWABLE OR NOT. ON CAREFUL CONSIDERATION OF THE MATERIALS PLACED ON RECORD, I AM CONVINCED WITH THE FINDING OF THE ASSESSING OFFICER. ON THE CONTRARY, THE ARGUMENTS OF THE ASSESSEE LOOK REAS ONABLE AND ACCEPTABLE IN THE FACTS OF THIS CASE. THERE IS NO QUESTION OF ANY BREACH OF LAW OR OBLIGATION AND HAS ALSO NO CRIMINAL LIABILITY. THEY ARE ALSO NOT OF THE CATEGORY WHICH CAN BE SAID AS PROHIBITED BY LAW. IN SUBSTANCE, IT IS NOT DIFFICULT TO SEE THAT THE PENAL INTEREST IS ONE OF THE COMMERCIAL CONDITIONS PLACED IN THE ORDER TO ACHIEVE SOME COMMERCIAL GOALS AND THEREFORE, IT CANNOT BE STATED TO BE OF NATURE WHICH CAN BE SAID TO BE HIT BY EXPLANATION TO SEC. 5 ITA NO. 302/PN/2013 AND ITA NO. 1672/PN/2012, MAHARASHTRA CO - OPERATIVE DEVELOPMENT CORPORATION LTD., PUNE 37(1). BOMBAY HIGH COURT IN THE CASE OF C IT VS. R.D. SHARMA & CO. (1982) 137 ITR 333 (BOM) HAS HELD THAT COMPENSATION PAID FOR DELAY IN COMPLETION OF BUILDING CONTRACTS IS DEDUCTIBLE AS THE DELAY IS INCIDENTAL TO BUSINESS OF BUILDING CONTRACTS. IN THAT VIEW, IT WAS HELD THAT THE LIABILITY TO COMPENSATION MUST BE CONSTRUED AS HAVING ARISEN ON ACCOUNT OF DELAY IN THE PERFORMANCE OF THE CONTRACT AND IS NOT IN THE NATURE OF A PENALTY. IN THIS CASE ALSO IT CAN BE SEEN THAT THE LIABILITY TO PAY PENAL INTEREST HAS ARISEN DUE TO DELAY IN REPAYING T HE LOAN TAKEN FOR THE BUSINESS ACTIVITY OF THE APPELLANT AND THEREFORE, CANNOT BE TREATED TO BE PENAL IN NATURE IN A SENSE WHICH CAN BE HELD TO BE HIT BY EXPLANATION TO S.S. 37(1). THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS HELD TO BE INC ORRECT AND THE APPEAL IS ALLOWED. THE LD. CIT(A) FOLLOWED HIS REASONS FOR THE A.YS. 2008 - 09 AND DELETED THE ADDITION IN A.Y. 2009 - 10 ALSO. NOW THE REVENUE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. THE DETAIL FACTS AR E GIVEN HERE - IN - ABOVE. THE SHORT ISSUE FOR OUR CONSIDERATION IS WHETHER THE PENAL INTEREST PAYABLE BY THE ASSESSEE TO THE GOVERNMENT FOR DEFAULTING IN REPAYMENT OF THE LOAN IS HIT BY EXPLANATION BELOW SEC. 31(1). IT IS NECESSARY TO EXAMINE THE SAID PROVI SION: 37(1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 26 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OF PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE B USINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. [EXPLANATION. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PU RPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSES OF BUSINESS OF PROFESSION AND NOT DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE.] 5. NOW LET US EXAMINE THE FACTS OF THIS CASE IN THE BACK DROP OF THE ABOVE EXPLANATION. THE ASSESSEE HAS RAISED A LOAN OF RS.113 CRORES TO MAKE REPAYMENT TO THE INVESTORS OF 13% MCDC BONDS (SERIES - I) AND THE 6 ITA NO. 302/PN/2013 AND ITA NO. 1672/PN/2012, MAHARASHTRA CO - OPERATIVE DEVELOPMENT CORPORATION LTD., PUNE SANCTION LETTER PROVIDED FOR REPAYMENT OF LOAN TO THE GOVT. IN 10 EQUAL INSTALLME NTS WITH A MORATORIUM OF ONE YEAR ON THE INTEREST OF 9%. THE SAID SANCTION LETTER FURTHER PROVIDED FOR PAYMENT OF 2% OF PENAL INTEREST, IF THE ABOVE TERMS OF THE LOAN ARE NOT COMPLIED WITH. IT IS CLEAR FROM THE ABOVE FACTS THAT THE PENAL INTEREST IS NOT FOR ANY OFFENCE BUT IT IS FOR FAILURE TO KEEP CONTRACTUAL COMMITMENT BY TH E ASSESSEE . FAILURE TO COMPLY WITH THE CONTRA CTUAL OBLIGATION CANNOT BE EQUATED WITH THE OFFENCE WHICH IS CONTEMPLATED IN EXPLANATION BELOW SEC. 3 7. IN OUR OPINION, THE LD. CIT(A) HAS RIGHTLY DELETED THE HIGH PITCH ADDITIONS WHICH ARE MADE BY THE ASSESSING OFFICER. WE FIND NO REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A). ACCORDINGLY, THE GROUNDS TAKEN BY THE REVENUE ARE DISMISSED IN BOTH ASSESSMENT YEARS. 6 . IN THE RESU LT, BOTH APPEAL S OF THE REVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 24 - 12 - 20 1 3 SD/ - SD/ - ( R.K. PANDA ) ( R.S. PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER RK /PS PUNE , DATED : 24 TH DECEMBER, 20 1 3 COPY TO 1 DEPARTMENT 2 ASSESSEE 3 THE CIT(A ) - I, PUNE 4 THE CIT - I, PUNE 5 THE DR, ITAT, B BENCH, PUNE . 6 GUARD FILE. //TRUE COPY// BY ORDER PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL , PUNE