Is punitive charges paid to the railways disallowable u/s 37(1) by holding as penalty. Ans is No. Order passed by ITAT KOLKATA on Nov 20, 2020 in the case of RUNGTA MINES PVT. LTD.vs. ACIT.
Is disallowance under section 14A can be sustainable without recording a satisfaction by AO on disallowance out of interest by invoking section 14A r.w.r 8D with regard to accounts of the assessee. And No. Order passed by ITAT KOLKATA on Nov 20, 2020 in the case of RUNGTA MINES PVT. LTD.vs. ACIT.
ASSISTANT COMMISSIONER OF INCOME TAX vs. RUNGTA MINES PVT. LTD.
IN THE ITAT KOLKATA BENCH ‘C’
J. SUDHAKAR REDDY, AM & MADHUMITA ROY, JM.
ITA No. 2199/Kol/2019 Nov 20, 2020
Section 14A, 37(1) section 14A r.w.r 8D
AY 2015-16
Decision in favour of: Assessee
Cases Referred to
Mahalaxmi Sugar Mills CO (1980) 123 ITR 429
Prakash Cotton Mills Pvt. Ltd (1993) 201 ITR 684
Western Coalfields Ltd (2009) 124 TTJ (Nag) 659
Counsel appeared:
Subash Agarwal, Advocate for the Appellant.: Supriyo Paul, Addl. CIT for the Respondent
MADHUMITA ROY, JM.
1. The instant appeal filed by the Revenue is directed against the order dated 18.07.2019 passed by the Commissioner of Income Tax (Appeals)-20, Kolkata arising out of the order dated 28.12.2017 passed by the DCIT, Central Circle-1(3), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the assessment years 2015-16 with the following grounds:
“1. Whether on the facts & circumstances of the case stated above, Ltd. CIT(A)-20, Kolkata is correct by deleting the addition under the head Railways Punitive charges of Rs. 5,26,28,266/-treating as compensatory in nature and allowable u/s 37 of the IT Act disregarding the observation of the A. O that punitive charges for overloading was penal in nature.
2. Whether on the facts & circumstances of the case stated above, Lt. CIT(A) is correct by deleting the addition under section 14A read with Rule 8D if Rs. 69,66,774/- out of total addition of Rs. 70,35,166/- by restricting provisions of rule 8D(2) (ii) limited to dividend yielding investment ignoring provisions of circular of CBDT No.5/2014 which clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.
3. That the Department craves the leave to addition, alter or modify or rescind the grounds hereinabove before or hearing of this appeal.”
2. Ground No.1 relates to deletion of addition under the head of ‘Railways Punitive’ to the tune of Rs.5,26,28,266/- treating the same as compensatory in nature and allowable u/s 37 of the Act. At The time of hearing of the matter the ld Counsel appearing for the assessee submitted before us that this issue is covered in assessee’s own case for assessment year 2013-14, a copy of the said order passed by the Coordinate Bench in ITA No.1531/Kol/2017 for assessment year 2014-15 dated 05.10.2018 has also been submitted before us.
On the other hand, the Ld. DR relied upon the order passed by the Ld. A.O.
3. Heard the submissions made by the respective parties, we have also perused the relevant materials available on record. We have further considered the order dated 05.102018 passed by the Coordinate Bench in ITA No.1531/Kol/2017 for assessment year 2014-15 in assessee’s own case ; the relevant portion whereof is as follows:
“4. After hearing both the parties and on perusal of record including the order dt. 10-01-2018 as relied on by the ld. AR of assesse, we find that the facts and circumstances of the case for A.Y 2013-14 are similar and identical with the facts and circumstances of the case in hand. We also find that the Co-ordinate Bench, ITAT, ‘D’ Bench, Kolkata in the case of supra discussed the issue thoroughly with various facts of various case laws. Relevant portion of said order dt. 10-01-2018 is reproduced herein below for the sake of clarity:-
“16. As far as the decision of the Hon’ble Delhi High Court in the case of Time Incorporated (supra) cited by the ld. DR before us is concerned that was the case of a suit for permanent injunction and damages, filed against the defendant for a passing off action and in the course of it’s judgement the Hon’ble court made a reference regarding purpose of awarding punitive damages. The said decision is not of any application whatsoever be the present case. The decision of the Hon’ble Karnataka High Court in the case of Mamta Enterprises(supra) is again a case where the criminal offence was compounded and the compounding fees was claimed as deduction. In the present case there is no offence whatsoever and there is no compounding fee paid and claimed as deduction. As far as the decision of the Hon’ble Supreme Court in the case of Haji Aziz Brothers (supra) is concerned it was again the case of breach of penal provisions of Customs Act for which fine was paid. Under these circumstances, the expenses were not allowed as deduction. We are of the view that in the facts and circumstances of the present case the claim of the assesse for deduction was rightly allowed by CIT(A). We therefore uphold the order of CIT(A) and dismiss ground no. 1 raised by the revenue.”
5. In view of above, we find that the CIT-A was correct in deleting the same. The CIT-A in the impugned order has relied on an order/decision of ITAT Mumbai in the case of Taurian Irion & Steel Co. Pvt. Ltd Vs. ACIT, ITA No. 847 & 1613/M/2010, which held punitive charges paid by the assesse to railways for overloading of wagon is compensatory in nature and the same cannot be disallowed by invoking the provisions of explanation to section 37(1) of the Act. Relevant portion of his order is reproduced herein below:-
“I have considered the finding of the AO on this issue in the assessment order and the submission made by the AR during the appellate proceedings. I find that my predecessor has given a detailed finding on this issue in assessee’s group case for assessment year 2008-09 vide his order in appeal no.249/CC-1(3)/CIT(A)- 20/13- 14.dated 1 1-12-2014 which is reproduced as under: I find from the impugned order that the assessee had explained at the assessment stage that the railways punitive charges were not paid for any purpose which was an offence or which was prohibited by law but it was only in the terminology, of the railways that it was called punitive charges. It appears from the material placed on record that due ‘ to the absence of Weightment Bridge at the loading point, the goods are loaded in railway wagon on the basis of some estimate and the exact weight is measured enroute by the railways when the loaded wagon actually goes to the Weightment Bridge. In case the load is found in excess of the permissible carrying capacity, then the railways recover additional freight which in its terminology is called punitive charges. It appears from the Notification issued by the Ministry of Railways that the punitive charges for overloading are actually in the nature of additional freight permissible carrying capacity which cannot be categorised as punishment for any offence or infringement of law. In case there was absence of Weightment Bridge at the loading station and the goods were loaded by estimate, then overloading of wagons cannot possibly by avoided and such overloading being apparently common is actually permitted by the railways on overloading charges termed in its terminology as ‘punitive charges. I therefore find merit in the contention of the Ld AR that the punitive charges are compensatory in nature for transporting goods beyond .permissible carrying capacity and such charges may in the terminology of the railways be called punitive charges but in commercial parlance it is not in the nature of penalty for infraction of ]aw. The overloading charges paid to the railways may in its terminology be termed as punitive charges but such payments appeal to be routine payments in the nature of additional freight charges for overloading of wagons and such payments are made in accordance with law as provided in the Notification dated the 23rd December 2005 issued by the Ministry of Railways. It also appears from the Notification of the Ministry of Railways that there is no provision for criminal action or prosecution or con6lscation of goods for overloading of wagons. I am of the considered view that the activities of the railways are commercial nature and freights are awed on commercial basis and merely because the railways is a government owned institution, the nature of over loading charges which are essentially of commercial nature cannot be characterized as penalty irrespective of the nomenclature given to such charges by the railways. It also appears that overloading of wagons is not a deliberate act on the part of the assessee but due to lack of infrastructure at the loading station. I also Htnd that the issue is squarely covered by the various judicial decisions placed on record by the Ld AR in course of the appellate proceedings. The Hon’ble Supreme Court has in the case of Mahalaxmi Sugar Mills CO (1980) 123 ITR 429 laid down the basic principle for deciding as to whether a claim of damages or penalty was allowable u/s. 37(1): whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure u/s. 37(1) of the Income Tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction u/s. 37(1) of the Income Tax Act whenever such examination reveals the concerned impost to be purely compensatory in nature. ” The Hon’ble Supreme Court reiterated the same legal position in the case of Prakash Cotton Mills Pvt. Ltd (1993) 201 ITR 684. In the case of Hero Cycles Ltd 178 Taxman 484, the Hon’ble Punjab & Haryana High Court allowed the deduction of the amount paid to the Electricity Board as penalty for violation of power regulations, ie. Extra charges paid for drawing extra load in peak hours. In the case of Western Coalfields Ltd (2009) 124 TTJ (Nag) 659, the Hon’ble ITAT, Nagpur Bench under identical facts and circumstances held that the overloading charges were essentially commercial in nature and cannot be characterized as penalty irrespective of the nomenclature given to such charges by the Railways. The Hon’ble ITAT has held that ” As regards overloading charges, we have to take into consideration the environment in which the companies are operating. Railway is the only mode of transportation if the person wishes to transport its product through railway. This fact is important because such activities of railways are of commercial in nature and freights are fixed on commercial basis. If we look the issue in its perspective, then, what emerges is that if there were private carriers also and if the assesse would have paid identical charges to them, the same would have been allowed as a normal business expenditure especially when there is no dispute that these expenses have been incurred in the course of business operations and, therefore, merely because the railways is a government owned Institution and works under an Act of Parliament, and nature of overloading charges which are essentially of commercial nature cannot be characterized as of penal nature irrespective of nomenclature given to such charges by the railways. Further, it is not in dispute that the quantity treated as overloading has been unloaded by the railways nor it has been a case of violation of safety rules/norms, hence, the overloading so incurred cannot be equated with travelling without ticket, hence, the said contentions of the Ld DR are rejected. It is also noted that such overloading is not correct due to a deliberate act on the part of the assesse but due to lack of infrastructure and nature of commodity, hence, the ratio of the decision of the Hon’ble Punjab & Haryana High Court in the case of Hero Cycles Ltd (supra) is squarely applicable. It is also a settled judicial principal that substance of the matter should be looked into and be given to the nomenclature given by the Railway to such charges. The object of Explanation 1 also supports the claim of the assesse as these expenses are not of the nature of any illegal/unlawful expenditure. In the case of M/s. Taurian Iron & Steel Co (P) Ltd (ITA No. 847 & 1613/M/2010), the Hon’ble ITAT D ‘ Bench, Mumbai has held that the punitive charges paid to the railways for overloading of wagons is compensatory in nature and therefore the provisions contained in Explanation to section 37(1) are not attracted. The Hon’ble ITAT has held that ” in the instant case as we have already held earlier that the punitive charges paid by the assesse to Railways for overloading of the wagons is compensatory in nature, therefore, the same cannot be disallowed by invoking the provisions of Explanation to section 37(1) of the Act”. In view of the above, I am of the considered opinion that overloading charges irrespective of the nomenclature given by the railways are essentially of commercial nature which cannot be characterized as penalty and that such charges are compensatory in the nature of additional freight for overloading of wagons which is explicitly permitted by the railways and the payments are made in accordance with law as provided by the Notification of the Ministry of Railways. The punitive charges paid to the railways cannot be characterized as expenditure incurred for any purpose which is an offence or which is prohibited by law and therefore the Explanation to section 37(1) is not attracted. In view of the above, it is to be held that the disallowance of Rs.6,55,30,392/- as made by the AO in the impugned order is not sustainable in law therefore on the facts of the case the addition of Rs.6,55,30,392/- is deleted.”
6. In view of above, we find no infirmity in the impugned order of the CIT-A and it is justified. Thus, ground no. 1 raised by the revenue is dismissed.”
4. Since the identical issue has been decided by the Coordinate bench in favour of the assessee by allowing the claim of damages as above, respectfully relying upon the same we find no infirmity in the order passed by the Ld CIT(A) so as to warrant interference. Hence in the absence of any merit found in the appeal preferred by the revenue, the same is hereby dismissed.
5. The Ground No.2 relates to addition u/s 14A r.w.r 8D to the tune of Rs.69,66,774/- out of total additions of Rs.70,35,166/-. The said issue is also covered in assessee’s own case in ITA No.1531/Kol/2017 as submitted by the Ld. AR. He further relied upon the judgment passed by Hon’ble Jurisdictional High Court in the case of CIT vs. M/s Ashika Global Securities Ltd. in GA 2122 of 2014 which is in favour of the assessee’s contention that the only those investments needs to be considered from which dividend has been received during the year.
In fact in the case in hand, the assessee earned dividend which does not form part of the total income; the assessee has not offered any loan as expenditure in relation to income not includible in the total income. However, the indirect expenses disallowance to the tune of Rs.70,35,166/- was added to the total income of the assessee by the Ld. A.O u/s 14A r.w.r 8D(iii). Relying upon the ratio laid down by the jurisdictional High Court and also the Mumbai High Court in the case of HDFC Bank Ltd. considering the fact that the assessee has very high share capital and reserve compared to security, income which is exempt, no disallowance has been allowed to be made in Rule 8D(ii) of the Rules as was the ultimate submissions of the Ld AR. The Ld. DR, however, relies upon the order passed by the Ld. A.O.
6. Heard the submissions made by the respective parties, we have also perused the relevant materials available on record. We find that this case is entirely covered by assessee’s own case for assessment year 2014-15 in ITA No.1531/Kol/2017; the relevant portion whereof is as follows:
“16. Ground no. 5 is relating to deletion of addition made on account of disallowance made u/s. 14A r.w. Rule 8D(2)(iii) of Rs. 63,31,460/-. Whether the CIT-A is justified in directing the AO to re-compute the expenses/disallowances U/R 8D(2)(iii) in terms of investment, which yielded exempt income in the facts and circumstances of the case.
17. After hearing both the parties and on perusal of record including the material as available before us, we find that the assessee has not offered any amount towards dividend income earned by the assessee and as such subsection(3) of section 14A r.w.r 8D(3) of the IT Rules, 1962 the AO made disallowance of Rs. 63,31,460/- and added the same to the total income of assessee. The assessee challenged the same before the CIT-A. The CIT-A by placing reliance on an order of Kolkata Bench (ITAT, Kolkata) in the case of REI Agro Ltd reported in (2013) 144 ITD 141 (Kolkata-Trib)/ITA No. 1331/Kol/2011 directed the AO to verify the details of investment and to compute the expenditure accordingly in terms of investment, which yielded exempt income.
18. Before us the ld.AR placed on record the order of Hon’ble High Court of Calcutta in the case of REI Agro Ltd and argued that the Hon’ble High Court of Calcutta dismissed the substantial question of law raised by the revenue and confirmed the finding of Tribunal in ITAT 220 of 2013 in GA No.3581 of 2013 and referred to para 8.1 of the said order. On the other hand, the ld. DR did not controvert the same.
19. We find that the issue in question is covered in favour of assesse by the judgment of the Hon’ble High Court of Calcutta in the case of REI Agro Ltd supra. Relevant portion of such order is reproduced herein below:-
“6. We have considered the rival submissions. A perusal of the provisions of section 14A, more specifically subsection (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the ITA No.1331 & 1423/Kol/2011 Assessment Year: 2008-09 amount of expenditure incurred in relation to such income, which does not form part of total income under the Act. For this the method is prescribed in rule 8D. The provision of section 14A, sub-section (3) specifies the provision of 14A(2) would also apply where the assessee makes a claim that there is no expenditure incurred. This is because if the assessee does not make a disallowance under section 14A in its computation of total income, when filing the return, then if sub- section (3) was not available, the AO might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke the section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the assessee. In the present case, there is no satisfaction by the AO and consequently, in view of the decision of the Coordinate bench of this Tribunal in the case of Balarampur Chini Mills Ltd. referred to supra, no disallowance under section 14A can be made.
7. Now coming to the merits of the issue. A perusal of the provision of section 14A(1) clearly shows the wordings, “in relation to the income which does not form part of the total income under this Act”. In the present case, this income, which does not form part of the total income under the Act, is the dividend income of Rs.1,32,638/-. Therefore, if any disallowance is to be made in respect of expenditure incurred, it should be in relation to this dividend income of Rs.1,32,638/-. If an assessee has invested in shares, which could get dividend or there is investment which generates dividend income or exempt income as also investment which does not generate exempt income, it is only such investments in respect of which the dividend income or exempted income has been earned which can be considered when computing the disallowance under section 14A read with ITA No.1331 & 1423/Kol/2011 Assessment Year: 2008-09 rule 8D. A perusal of the provisions of rule 8D also talks of satisfaction in sub-rule (1). Rule 8D(2) has three sub-parts. The first sub-part i.e. (i) deals with the amount of expenditure directly relating to the income which does not form part of the total income. That issue is not in dispute here and therefore, we do not go into it in this case. In second sub-part i.e.(ii), it is a computation provided in respect of expenditure incurred by the assessee by way of interest during the previous year which is not directly attributable to any particular income or receipt. This clearly means that if there is any interest expenditure, which is directly relatable to any particular income or receipt, such interest expenditure is not to be considered under rule 8D(2)(ii). In the assessee’s case here the interest has been paid by the assessee on the loans taken from the banks for its business purpose. There is no allegation from the banks nor the AO that the loan funds have been diverted for making the investment in shares or for non-business purposes. Further rule 8D(2)(ii) clearly is worded in the negative with the words “not directly attributable”. Thus for bringing any interest expenditure, claimed by the assessee, under the ambit of rule 8D(2)(ii) it will have to be shown by the AO that the said interest is not directly attributable to any particular income or receipt. Why we say here that it is to be shown by the AO is on account of the words in Rule 8D(1) being “where the Assessing Officer, is not satisfied with.
(a) ………
(b) ………
in relation to income………, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). In the assessee’s case, admittedly, the assessee has substantial capital. The increase in the capital itself is to an extent of Rs.4 crores and in respect of reserves and surplus, the increase is Rs.112 crores. The loans taken during the year admittedly are for the letters of credit and the assessee is bound to provide the bank stock ITA No.1331 & 1423/Kol/2011 Assessment Year: 2008-09 statement and other details to show the utilization of the loans. No bank would permit the loan given for one purpose to be used for making any investment in shares. The ld. CIT(A), it is noticed that after considering these facts that the assessee had not used any of its borrowings for purchasing the shares, has deleted the disallowance. On this ground itself, the deletion as made by the ld. CIT(A) is liable to be confirmed and we do so.
7.1 In any case, the working of the disallowance under sub-part (ii) of sub- clause (2) of rule 8D as made by the AO also suffers from a substantial error in so far as in the said rule in regard to the numerator B, the words used are the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year. Here the AO has taken into consideration the investment of Rs.103 crores made this year, which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. This is why the question of satisfaction is provided in section 14A and rule 8D(1), that relates to the accounts of the assessee. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. A question may arise as to why the term “average of the value of investment” is then used. The term average of the value of investment would be to take care of cases where there is the issue of dividend striping. In any case, as we have already held that the assessee has not incurred any expenditure by way of interest during the previous year, which is not directly attributable to any particular income, the findings of the ld. CIT(A) on the issue stand confirmed and consequently the appeal filed by the Revenue stands dismissed.
8. In respect of provisions of rule 8D(2)(iii), which is the subject-matter of the appeal in the assessee’s hand, a perusal of the said provision shows that what is disallowable under rule 8D(2)(iii) is the amount equal to V2 percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus, under sub-clause (iii), what is disallowed is V2 percentage of the numerator B in rule 8D(2)(ii). Again this is to be calculated in the same line as mentioned earlier in respect of Numerator B in rule 8D(2)(ii) of the Act.
8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee’s appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14Aread with rule 8D(2)(i) and (ii) can be made in this case. ”
20. Respectfully following the above, we find no infirmity in the order of CIT-A and it is justified. Ground no. 5 raised by the revenue is dismissed.
21. Ground no. 6 raised by the revenue is general in nature and requires no adjudication and as such it is dismissed
7. We have further considered by the judgment passed by the Hon’ble Jurisdictional High Court in the case of CIT vs. M/s Ashika Global Securities Ltd. in GA 2122 of 2014. While deciding the identical issue the Hon’ble Court has been pleased to observe as follows:
“The Court : This is another useless appeal without any substance. In course of assessment, a sum of about Rs. 99 lakh debited as interest paid on unsecured loans another sum of about Rs. 9 lakh engaged the attention of the officer. The Assessing Officer required the assessee to explain why the interest expense and the administrative expenses should not be disallowed in view of Section 14A of the Income Tax Act, 1961. The assessee replied that such income was not exempted income earned during the year and there was no question of disallowance under Rule 8D of the Income Tax Rules, 1962 read with Section 14A of the Act.
Both the Commissioner and the Appellate Tribunal found as a matter of fact that there was no exempt income for the operation of the relevant Rule. In the light of such concurrent findings and, in particular, the Department failing to demonstrate any error therein, no question of law arises in this matter.
ITAT100 of 2014 and GA 2122 of 2014 are dismissed.
There will be no order as to costs.”
8. Considering the ratio laid down by the Hon’ble Jurisdictional High Court in CIT vs. M/s Ashika Global Securities Ltd. in GA 2122 of 2014 and also the judgement passed by the Coordinate Bench and respectfully relying upon the same we find no infirmity in the order passed by the Ld CIT(A) in deleting the addition made under section 14 A r.w.r.8D so as to warrant interference. Hence in the absence of any merit found in the appeal preferred by the revenue, the same is hereby dismissed.
9. In the result, the appeal of the Revenue is dismissed.
Order is pronounced in the open court on 20.11.2020.