The Nakodar Co- op Sugar Mills Ltd, Nakodar V. The Depty Commissioner of Income Tax, Phagwara

ITA 701/ASR/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8789 (ITAT-AMRITSAR)
• Duration Of Justice: 1 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 21-03-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 25-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: Y K SUD
• Keywords: Business expenditure; Notional interest; Commercial expediency
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR BEFORE SH. A.D.JAIN, HONBLE JUDICIAL MEMBER AND SH. T.S. KAPOOR, HONBLE ACCOUNTANT MEMBER [ I.T.A NO.701(ASR)/2014 ASSESSMENT YEAR: 2008-09 THE NAKODAR CO-OPERATIVE SUGAR MILLS LTD. MEHATPUR, NAKODAR. PAN:AAATT2855J VS. DCIT, PHAGWARA CIRCLE PHAGWARA. (APPELLANT) (RESPONDENT) APPELLANT BY: SH. Y.K.SUD (CA.) RESPONDENT BY: SH. TARSEM LAL (DR.) DATE OF HEARING: 21.03. 2016 DATE OF PRONO UNCEMENT: 28.03.2016 ORDER PER T. S. KAPOOR (AM): THIS IS AN APPEAL FILED BY ASSESSEE AGAINST THE ORD ER OF LEARNED CIT(A), JALANDHAR, DATED 13.10.2014 FOR ASST. YEAR . 2008-09. 2. THE GROUNDS OF APPEAL TAKEN BY ASSESSEE ARE REPR ODUCED BELOW. (I) THAT THE CIT(A) WAS NOT JUSTIFIED IN GIVING A FINDING THAT DISALLOWANCE OF INTEREST OF RS.87,74,000/- MADE BY THE AO ON ACCOUNT OF INTEREST PAID TO THE BANK ON C/C ACCOUNT SHOULD BE RESTRICTED ON PROPORTIONATE BASIS TO THE INTEREST RECEIVABLE ON A DVANCE MADE TO ZIRA CO- OPERATIVE SUGAR MILLS AND INVESTMENT IN SHARES OF S UGARFED. (II) THAT BOTH AO AND CIT(A) FAILED TO APPRECIATE THAT THERE WAS NO NEXUS OF INTEREST PAID TO THE BANK ON C/C ACCOUNT W HICH WAS PURELY FOR FINANCING OF THE STOCKS OF THE NOTIONAL INTEREST CH ARGEABLE ON ADVANCE TO ZIRA CO-OPERATIVE SUGAR MILLS AND INVESTMENT MADE I N SHARE OF SUGARFED AND THEREFORE NO DISALLOWANCE OUT OF INTEREST COULD HAVE BEEN MADE U/S 36(1)(III). ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 2 (III) THAT THE CIT(A) FAILED TO APPRECIATE THE SU BMISSION OF THE ASSESSEE THAT ZIRA CO-OPERATIVE SUGAR MILLS WAS WOUND UP IN 2004-05 AND THE DEBT HAS GONE BAD THEREFORE NO INTEREST COULD HAVE BEEN CHARGED FROM THE SUGAR MILL DURING THE YEAR UNDER CONSIDERATION. (IV) THAT THE CIT(A) WAS NOT JUSTIFIED IN SUSTAIN ING THE DISALLOWANCE OF RS.2,58,086/- MADE BY THE AO ON ACCOUNT OF PENAL IN TEREST. BOTH OF AO AND CIT(A) FAILED TO UNDERSTAND THE NATURE OF THE P ENAL INTEREST WHICH WAS CLEARLY COMPENSATORY IN NATURE. 3. THE BRIEF FACTS OF THE CASE AS NOTED IN THE ASSE SSMENT ORDER ARE THAT THE ASSESSEE IS A CO-OPERATIVE SOCIETY ENGAGED IN THE BUSINESS OF MANUFACTURING OF SUGAR AND MOLASSES. THE RETURN OF INCOME IN THIS CASE WAS FILED ON 29 . 09.2008 DECLARING NIL INCOME AND WHICH WAS TAKEN UP FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCE EDINGS, THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAD INCURRED AN EXPE NDITURE OF RS.2,58,086/- AS PENAL INTEREST WHICH WAS CHARGED B Y THE BANK FOR OVERDRAWING THE CASH CREDIT LIMIT. THE ASSESSING OF FICER SHOW CAUSED THE ASSESSEE THAT SINCE IT WAS A PENALTY AND THEREFORE, IT WAS NOT AN ADMISSIBLE EXPENSES. IN RESPONSE THE ASSESSEE SUBMI TTED THAT DUE TO FLUCTUATION IN SUGAR PRICES THE VALUATION OF SUGAR STOCKS PLEDGED WITH BANK FLUCTUATES SIGNIFICANTLY AND WHICH RESULTS INT O OVERDRAWING OF CASH CREDIT LIMIT AND THEREFORE, INTEREST CHARGED BY BAN K IN THIS REGARD WAS A NORMAL BUSINESS EXPENDITURE. HOWEVER, THE ASSESSING OFFICER DID NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE AND MADE ADDITION OF RS.2,58,086/-. 4. THE ASSESSING OFFICER FURTHER OBSERVED THAT ASSE SSEE HAD PURCHASED SHARES OF SUGARFED (PUNJAB) AMOUNTING TO RS.53.82 LAC DURING ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 3 THE EARLIER YEARS BUT NO DIVIDEND WAS RECEIVED FROM THE YEAR 2003-04 TO 2007-08. HE FURTHER OBSERVED THAT ASSESSEE WAS NOT ABLE TO RECOVER AN AMOUNT OF RS.40 LACS ALONGWITH ACCRUED INTEREST OF RS.58.59 LACS FROM M/S ZIRA CO-OPERATIVE SUGAR MILLS LTD. THEREFORE, H E HELD THAT THE BORROWINGS MADE BY ASSESSEE WERE NOT MADE FOR BUSIN ESS PURPOSES AND ACCORDINGLY INTEREST PAYABLE ON THIS AMOUNT AT THE MARKET RATE WAS PROPOSED TO BE DISALLOWED U/S 36(1)(III). THE ASSES SEE IN ITS REPLY SUBMITTED THAT PUNJAB GOVERNMENT THROUGH REGISTRAR CO-OPERATIVE SOCIETIES, PUNJAB HAD INVESTED A CAPITAL OF RS.449. 40 LACS AND OUT OF THIS AMOUNT THE ASSESSEE HAD PURCHASED SHARES OF SUGARFE D PUNJAB AMOUNTING TO RS.53.90 LACS. 5. AS REGARDS LOAN TO M/S ZIRA CO-OPERATIVE SUGAR M ILLS, THE ASSESSEE SUBMITTED THAT THE LOAN WAS GIVE AS PER DIRECTIONS OF REGISTRAR CO- OPERATIVE SOCIETIES, PUNJAB. IT WAS ALSO SUBMITTED THAT THE LOAN AMOUNT CANNOT BE LINKED TO BANK BORROWINGS WHICH WERE STRI CTLY UTILIZED FOR MAKING SUGARCANE PAYMENTS AND OTHER INCIDENTAL EXPE NSES. THE ASSESSING OFFICER, HOWEVER, WAS NOT SATISFIED WITH THE SUBMISSIONS OF ASSESSEE AND THEREFORE, HE DISALLOWED THE INTEREST AMOUNT OF RS.87.74 LACS WHICH WAS PAID TO BANK U/S 36 (1)(III) OF THE ACT. 6. AGGRIEVED WITH THE ORDER THE ASSESSING OFFICER F ILED APPEAL BEFORE LEARNED CIT(A) AND THE LEARNED CIT(A) UPHELD THE AD DITIONS, HOWEVER, IN RESPECT OF DISALLOWANCE OF RS.87.74 LACS, THE LEARN ED CIT(A) DIRECTED THE ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 4 ASSESSING OFFICER THAT WHOLE OF THE LOAN CANNOT BE SAID TO HAVE BEEN UTILIZED FOR NON BUSINESS PURPOSES AND THEREFORE, H E DIRECTED THE ASSESSING OFFICER TO DISALLOW THE PROPORTIONATE INT EREST ON THE AMOUNT OF LOAN RECOVERABLE FROM ZIRA CO-OPERATIVE SUGAR MILL LTD. AND THE AMOUNT OF INVESTMENT IN SHARES OF SUGARFED. 7. AGGRIEVED WITH THE ORDER, THE ASSESSEE IS IN APP EAL BEFORE US. 8. AT THE OUTSET, THE LEARNED AR SUBMITTED THAT ASS ESSEE HAD PAID INTEREST ON ITS CASH CREDIT LIMIT WHICH WAS UTILIZE D FOR MAKING PAYMENTS TO CANE GROWERS AND IN THIS RESPECT OUR ATTENTION W AS INVITED TO (PB-6) WHERE A COPY OF CERTIFICATE OF BANK WAS PLACED AND WHEREIN THE BANK HAD CERTIFIED THAT INTEREST AMOUNTING TO RS.86,57,029/- WAS CHARGED ON CASH CREDIT LIMIT GRANTED FOR CLEARING CANE PAYMENTS. TH E LEARNED AR IN VIEW OF THIS CERTIFICATE SUBMITTED THAT THE INTEREST EXPEND ITURE WAS INCURRED FOR THE PURPOSES OF BUSINESS AND THEREFORE, DISALLOWANC E MADE BY ASSESSING OFFICER AND PARTLY UPHELD BY LEARNED CIT(A) WAS NOT JUSTIFIED. 9. ARGUING FURTHER THE LEARNED AR SUBMITTED THAT IN VESTMENT IN SHARES OF SUGARFED WAS MADE BY ASSESSEE WAY BACK OU T OF CAPITAL OF RS.449.40 LACS MADE AVAILABLE BY PUNJAB GOVERNMENT AND THEREFORE THE INVESTMENT WAS MADE OUT OF INTEREST FREE AND SURPLU S FUNDS. IT WAS FURTHER SUBMITTED THAT THE INVESTMENTS IN SUGARFED PUNJAB WAS MADE PURELY BASED UPON COMMERCIAL EXPEDIENCY AS SUGARFED WAS CONTROLLING BODY FOR ALL SUGAR CO-OPERATIVE SOCIETIES. WITHOUT PREJUDICE TO THE ABOVE ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 5 IT WAS SUBMITTED THAT THE INVESTMENT WAS MADE IN EA RLIER YEARS AND LAST INVESTMENT WAS MADE ON 12.09.2003 AND IN ALL THESE YEARS THE ASSESSING OFFICER HAD NOT HELD THAT THESE INVESTMENTS WERE NO T FOR BUSINESS PURPOSES NOR ANY DISALLOWANCE WAS MADE U/S 36(1)(II I) OF THE ACT. IN VIEW OF THE ABOVE, IT WAS SUBMITTED THAT DISALLOWANCE MA DE BY ASSESSING OFFICER AND PARLTY UPHELD BY LEARNED CIT(A) WAS NOT JUSTIFIED. RELIANCE IN THIS RESPECT WAS PLACED ON THE CASE LAW OF HERO CYC LES (P) LTD. VS. CIT DECIDED BY HONBLE SUPREME COURT AND REPORTED AT 37 9 ITR 347. 10. AS REGARDS THE LOAN TO M/S ZIRA CO-OPERATIVE S UGAR MILLS LTD., THE LEARNED AR SUBMITTED THAT ASSESSEE HAD ADVANCED A L OAN OF RS.40 LACS TO M/S ZIRA SUGAR MILLS LTD. IN THE YEAR 1990-91 AND I NTEREST WAS BEING DEBITED TO M/S ZIRA SUGAR MILL, LTD. AND UP TO 31.0 3.1998 INTEREST WAS BEING RECOVERED BUT AFTER THAT NO INTEREST COULD B E RECOVERED AS ZIRA SUGAR MILL HAD GONE SICK AND WAS ULTIMATELY WOUND U P IN FINANCIAL YEAR 2004-05 AND IN THIS RESPECT OUR ATTENTION WAS INVIT ED TO (PB-8) WHERE A COPY OF ORDER OF REGISTRAR CO-OPERATIVE SOCIETIES W AS PLACED. THE LEARNED AR FURTHER SUBMITTED THAT DETAILED SUBMISSIONS WERE MADE TO LEARNED CIT(A) WHICH THE LEARNED CIT(A) HAD RECORDED IN HIS ORDER BUT WITHOUT CONSIDERING THE WRITTEN SUBMISSIONS AND WITHOUT CON SIDERING THE CASE LAWS RELIED BY ASSESSEE HAS WRONGLY UPHELD THE ADDI TIONS. RELIANCE IN THIS RESPECT WAS PLACED ON THE CASE LAW OF CIT VS. SURAJ DEV DADA 367 ITR 78 FOR THE PROPOSITION THAT WHERE RECOVERY OF P RINCIPAL WAS IN DOUBT NOTIONAL INTEREST COULD NOT BE DISALLOWED U/S 36(1) (III) OF THE ACT. COMING ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 6 TO THE ISSUE OF DISALLOWANCE OF PENAL INTEREST CHAR GED BY BANK THE LEARNED AR SUBMITTED THAT NATURE OF INTEREST WAS NO T PENAL IN NATURE BUT IT WAS A CONTRACTUAL PAYMENT. HE SUBMITTED THAT ASS ESSEE HAD NOT VIOLATED ANY LAW FOR WHICH PENAL INTEREST WAS CHARG ED BUT IT WAS CHARGED AS PER TERMS AND CONDITIONS BETWEEN ASSESSEE AND BA NK. RELIANCE IN THIS RESPECT WAS PLACED ON THE CASE LAW OF JAMNA AUTO IN DUSTIRES VS. CIT DECIDED BY PUNJAB & HARYAN HIGH COURT AND REPORTED AT 299 ITR 92 FOR THE PROPOSITION THAT DAMAGES FOR BREACH OF CONTRACT WAS A DEDUCTIBLE EXPENDITURE. 11. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT THOUGH ASSESSEE HAD BEEN CLAIMING THAT INTEREST FREE FUNDS WERE UTILIZED FOR MAKING INVESTMENTS IN THE SHARES OF SUGARFED BUT NO THING HAS BEEN BROUGHT ON RECORD IN SUPPORT OF ITS CLAIM AND THERE FORE, LEARNED CIT(A) HAS RIGHTLY UPHELD THE PART DISALLOWANCE. 12. AS REGARDS THE LOAN TO SOCIETY THE LEARNED DR S UBMITTED THAT AS PER ARGUMENT OF LEARNED AR, THE SAID SOCIETY M/S ZI RA SUGAR MILLS WAS WOUND UP IN 2004 THEN HOW THE AMOUNT IS OUTSTANDING IN THE BOOKS OF ASSESSEE FOR THE ASST. YEAR 2008-09. HE ARGUED THAT IF THE SOCIETY WAS WOUND UP IN 2004, THEN ASSESSEE SHOULD HAVE WRITTEN OFF THE AMOUNT IN THAT YEAR ITSELF. HE SUBMITTED THAT CONTINUATION OF REFLECTION OF LOAN IN THE BALANCE SHEET OF ASSESSEE COMPANY SHOWS THAT AMOUNT MIGHT BE RECOVERABLE AND THEREFORE, THIS REQUIRES FURTHER IN VESTIGATION. ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 7 13. AS REGARDS THE OTHER ADDITION ON ACCOUNT OF PEN AL INTEREST THE LEARNED DR RELIED UPON THE ORDER OF AUTHORITIES BEL OW. 14. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE T HROUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT IT IS AN UN DISPUTED FACT THAT ASSESSEE HAD MADE INVESTMENT IN THE SHARES OF SUGAR FED, PUNJAB IN EARLIER YEARS AND THE LAST INVESTMENT WAS MADE ON12 .09.2003. IT IS ALSO AN UNDISPUTED FACT THAT PUNJAB GOVERNMENT THROUGH R EGISTRAR OF CO- OPERATIVE SOCIETIES HAD INVESTED A CAPITAL EQUIVALE NT TO AN AMOUNT OF RS.449.40 IN THE ASSESSEES BUSINESS AND IT WAS OUT OF THIS AMOUNT OF CAPITAL THAT ASSESSEE MADE INVESTMENT IN THE SHARES OF SUGARFED, PUNJAB AMOUNTING TO RS.53.90 LACS IN EARLIER YEARS. THIS S UBMISSION WAS MADE BY ASSESSEE BEFORE ASSESSING OFFICER AND BEFORE LEA RNED CIT(A) ALSO. BOTH THE AUTHORITIES SIMPLY BRUSHED ASIDE THE SUBMISSION S OF ASSESSEE AND HELD THAT THE INVESTMENT WAS MADE FOR NON BUSINESS PURPOSES, THEREFORE, ARRIVED AT THE CONCLUSION THAT DISALLOWANCE OUT OF INTEREST PAYMENT BE MADE. HOWEVER, WHILE ARRIVING AT THIS DECISION THE LEARNED CIT(A) HAS IGNORED THAT DURING THE YEAR NO INVESTMENT IN THE S HARES OF SUGARFED WAS MADE AND RATHER INVESTMENT RELATED BACK TO EARLIER YEARS AND IN EARLIER YEARS, THERE WAS NO DISALLOWANCE MADE BY THE AUTHO RITIES U/S 36(1)(III) OF THE ACT. FURTHER THERE IS NO NEXUS BETWEEN THE BORR OWED FUNDS AND INVESTMENT MADE AS THE INVESTMENT WAS NOT MADE OUT OF BORROWED FUNDS BUT OUT OF CAPITAL CONTRIBUTION. FURTHER FROM THE C ERTIFICATE OF BANK PLACED AT (PB-6), WE FIND THAT THE BANK HAS CERTIFI ED THAT INTEREST CHARGED ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 8 TO THE ASSESSEE WAS ON CASH CREDIT LIMITS GRANTED T O ASSESSEE FOR CLEARING CANE PAYMENTS, THEREFORE, IT CANNOT BE SAID THAT IN TEREST WAS INCURRED FOR NON BUSINESS PURPOSES. ABOVE ALL WE FIND THAT SUGAR FED IS A CONTROLLING BODY OF ALL CO-OPERATIVE SUGAR MILLS IN PUNJAB AND INVESTMENT IN THIS COMPANY BY SUGAR MILLS INCLUDING ASSESSEE IS OUT OF COMMERCIAL EXPEDIENCY AND CANNOT BE HELD TO BE FOR NON BUSINES S PURPOSES. THE HONBLE SUPREME COURT IN THE CASE OF HERO CYCLES (P) LTD. VS. CIT 379 ITR 347 (SC), HAS HELD THAT ADVANCES TO SUBSIDIARY COMPANIES TO PROVIDE ADDITIONAL MARGIN TO THEM TO MEET WORKING CAPITAL R EQUIREMENTS IS BUSINESS EXPEDIENCY AND THEREFORE, INTEREST PAID ON BORROWING WAS NOT TO BE DISALLOWED, THEREFORE, IN VIEW OF THE ABOVE, WE FIND FORCE IN THE ARGUMENT OF LEARNED AR THAT FIRSTLY THERE WAS NO NE XUS BETWEEN THE INTEREST PAID AND INVESTMENT MADE AND SECONDLY THE INVESTMENT WAS MADE KEEPING IN VIEW BUSINESS EXPEDIENCY AND THEREF ORE DISALLOWANCE U/S 36(1)(III) WAS NOT WARRANTED. 15. AS REGARDS THE OTHER FACTOR OF MAKING LOAN OF R S.40 LAC TO M/S ZIRA CO-OPERATIVE SUGAR MILLS, WE FIND THAT THE SAID LOA N WAS GIVEN BY ASSESSEE AS PER THE SOCIETY RESOLUTION DATED 25.08. 1990 PLACED AT (PB-7). THE LOAN CARRIED INTEREST @ 16.5 PER ANNUM. THE ASS ESSEE HAS BEEN DEBITING INTEREST ACCRUED UP TO 31.3.1998 BUT WHEN IT FAILED TO RECOVER THAT INTEREST, THEN, IT STOPPED PROVIDING INTEREST AS THERE WAS NO POINT IN CONTINUING TO DEBIT INTEREST WHILE NOT RECEIVING IT . IT IS ALSO A FACT THAT THE SAID SOCIETY WAS PUT UNDER THE LIQUIDATION VIDE ORD ER OF REGISTRAR CO- ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 9 OPERATIVE SOCIETY IN F.Y. YEAR 2004-05 AS IS APPARE NT FROM (PB-8), THEREFORE, IN THE PRESENT YEAR, IT WAS NOT APPROPRI ATE FOR THE ASSESSEE TO CHARGE INTEREST ON THE SAID LOAN AS THE RECOVERY OF PRINCIPAL ITSELF WAS IN DOUBT. THE ARGUMENT OF LEARNED DR THAT WHEN THE SOC IETY WAS WOUND UP IN 2004-05 HOW THE AMOUNT WAS APPEARING IN THE BALA NCE SHEET OF ASSESSEE AS ON 31.3.2008, WE FIND THAT THIS IS NOT A RELEVANT ISSUE IN THIS CASE AS THE ISSUE IS OF DISALLOWANCE U/S 36(1)(III) ON LOANS WHICH HAS BECOME BAD AND HENCE NOT RECOVERABLE. IT IS AN UNDI SPUTED FACT THAT LOAN WAS GIVEN WAY BACK IN 1990 AND THAT TOO OUT OF SURP LUS FUNDS AND THEREFORE, THERE WAS NO NEXUS BETWEEN LOAN ADVANCED AND INTEREST PAID. THEREFORE, NO DISALLOWANCE COULD HAVE BEEN MADE U/S 36(1)(III) OF THE ACT. AS REGARDS ARGUMENT OF LEARNED DR THAT WHY THIS AMO UNT WAS NOT WRITTEN OFF IN THE YEAR 2004-05 ITSELF WE FIND THAT THE ORDER OF REGISTRAR OF CO-OPERATIVE SOCIETY PLACED AT (PB-8) IS FOR APPOIN TMENT OF A LIQUIDATOR WHEREBY THE LIQUIDATOR TAKES CHARGE OF ANY SICK SOC IETY. THE ASSESSEE MAY BE IN THE HOPE OF RECOVERING PART OF ITS DUES F ROM THE LIQUIDATOR HAD NOT WRITTEN OFF IN ITS BOOKS. HOWEVER, THE FACT REM AINS THAT THE SAID LOAN WAS GIVEN WAY BACK IN 1990-91 AND AT THAT POINT OF TIME THERE WAS TEMPORARY AVAILABILITY OF FUNDS AS IS MENTIONED IN THE RESOLUTION ITSELF AND THEREFORE LOAN WAS GIVEN OUT OF SURPLUS FUNDS. THE INCURRING OF EXPENDITURE ON ACCOUNT OF INTEREST ON FUNDS USED FO R MAKING PAYMENTS TO CANE GROWERS CANNOT BE SAID TO BE FOR NON BUSINE SS PURPOSES ONLY ON THE BASIS THAT THE ASSESSEE WAS NOT ABLE TO RECOVER ITS DUES FROM A LOANEE ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 10 TO WHOM LOAN WAS GIVEN OUT OF ITS SURPLUS FUNDS IN EARLIER YEARS. THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. SURAJ DEV DADA 367 ITR 92(P&H) HAS HELD THAT WHERE THE RECOVE RY OF PRINCIPAL AMOUNT WAS DIFFICULT THE ADDITION ON ACCOUNT OF NOT IONAL INTEREST ON ACCOUNT OF LOAN TO SAID COMPANY CANNOT BE MADE U/S 36(1)(III) OF THE ACT. IN VIEW OF THE ABOVE, ENTIRE FACTS AND CIRCUMSTANCE S WE HOLD THAT THERE WAS NO NEXUS BETWEEN INTEREST PAID AND LOANS MADE B Y ASSESSEE AND THEREFORE, THE DISALLOWANCE MADE BY ASSESSING OFFIC ER AND PARTLY CONFIRMED BY LEARNED CIT(A) IS NOT JUSTIFIED. IN VI EW OF THE ABOVE, GROUND NOS.1,2 & 3 ARE ALLOWED. 16. NOW COMING TO GROUND NO.4 REGARDING CHARGING OF PENAL INTEREST WE FIND THAT THE ASSESSEE WAS CHARGED PENAL INTERES T WHICH WAS BASED UPON THE CONTRACT BETWEEN ASSESSEE AND BANK AND THE AMOUNT WAS NOT CHARGED TO ASSESSEE BECAUSE OF VIOLATION OF SOME LA W, THEREFORE, THE NATURE OF PAYMENT IS NOT PENALTY BUT CONTRACTUAL OB LIGATION WHICH THE ASSESSEE IS BOUND TO PAY AS PER TERMS AND CONDITION S OF THE AGREEMENT. THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF JAMNA AUTO INDUS. VS. CIT 299 ITR 92(P&H) HAS DIFFERENTIATED T HE DAMAGES FOR BREACH OF CONTRACT AND PENALTY. THE HONBLE COURT H AS HELD THAT DAMAGES FOR BREACH OF CONTRACT ARE DEDUCTIBLE EXPENDITURE. THE RELEVANT FINDINGS OF THE HONBLE COURT ARE REPRODUCED BELOW. WHENEVER DAMAGES ARE TO BE PAID BY AN ASSESSEE FOR THE BREACH OF A CONTRACT, SUCH DAMAGES ARE TREATED TO BE NORMAL INC IDENTS OF BUSINESS. FOR ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 11 ALLOWABILITY AS A DEDUCTION, A CLAIM FOR DAMAGES IS TO BE TESTED ON THE TOUCHSTONE OF THE PROVISIONS OF SECTION 37(1) OF TH E ACT. WHERE AN ASSESSEE HAS TO PAY DAMAGES TO THE OTHER PARTY FOR FAILURE T O FULFIL THE CONTRACT ENTERED INTO BY HIM IN THE ORDINARY COURSE OF HIS B USINESS, THE AMOUNT OF DAMAGES SO PAID IS AN ALLOWABLE DEDUCTION IF IT IS IN THE ORDINARY COURSE OF THE BUSINESS, AND IS NOT OPPOSED TO PUBLIC POLICY. A PENALTY IMPOSED FOR BREACH OF ANY LAW DURING THE COURSE OF TRADE, ETC., CANNOT BE DESCRIBED AS A COMMERCIAL LOSS. INFRACTION OF THE LAW IS NOT A N ORMAL INCIDENT OF BUSINESS AND, THEREFORE, NO EXPENSE WHICH IS PAID B Y WAY OF PENALTY FOR A BREACH OF LAW IS AN ADMISSIBLE DEDUCTION. WHENEVER AN ASSESSEE HAS INDICATED' ANY AMOUNT, WHICH HAD BEEN PAID EITHER B Y WAY OF DAMAGES OR PENALTY, TO BE AN ALLOWABLE EXPENDITURE UNDER SECTI ON 37(1) OF THE ACT, THE ASSESSING AUTHORITY IS OBLIGED TO DISCOVER THE NATU RE OF SUCH AMOUNT VIS-A- VIS TWO PROMINENT ASPECTS, WHETHER IT IS COMPENSATO RY OR PENAL. A SITUATION MAY ARISE WHERE AN ASSESSEE MIGHT HAVE TO MAKE A COMPOSITE PAYMENT BEING BOTH ' COMPENSATORY' AND 'PENAL CHARACTER'. IN THAT SITUATION, THE ASSESSING AUTHORITY WOULD BE REQUIRE D TO SEGREGATE THE AMOUNT CONTAINING TWO CHARACTERS. AFTER UNDERTAKING THIS EXERCISE, THE AMOUNT THAT IS HELD TO BE OF COMPENSATORY NATURE SHALL BE COUNTENANCED AS ALLOWABLE EXPENDITURE WHEREAS THE OTHER PORTION OF THE AMOUNT, WHICH IS PENAL IN NATURE, SHALL NOT BE AN ALLOWABLE EXPEN DITURE. FROM THE NATURE OF PENAL INTEREST CHARGED BY THE BA NK FROM ASSESSEE IT IS FOUND THAT THE CHARGES ARE COMPENSATORY IN NAT URE AS ASSESSEE HAS NOT VIOLATED ANY LAW BUT THE EXTRA PAYMENT HAS BEEN MADE FOR LOWER VALUATION OF STOCKS PLEDGE WITH BANK. THEREFORE, WE HOLD THAT THE PENAL INTEREST WAS IN THE NATURE OF COMPENSATORY PAYMENT AND ALLOWABLE U/S 37(1) OF THE ACT. IN VIEW OF THE ABOVE, GROUND NO.4 IS ALSO ALLOWED. 17. IN NUTSHELL, THE APPEAL FILED BY THE ASSESSEE I S ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH MARCH, 2016. SD/- SD/- (A.D. JAIN) (T. S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT ME MBER DATED: 28.03.2016. /PK/ PS. COPY OF THE ORDER FORWARDED TO: (1) THE ASSESSEE: ITA NO.701 (ASR)/2014 ASST. YEAR:2008-09 12 (2) THE (3) THE CIT(A), (4) THE CIT, (5) THE SR DR, I.T.A.T., TRUE COPY BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, AMRITSAR BENCH: AMRITSAR.