M/S PERFECT TURNERS,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”A” JAIPUR Jh lanhi xkslkbZ] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 1115/JP/2019 fu/kZkj.k o"kZ@Assessment Year : 2016-17 cuke M/s. Perfect Turners The DCIT G1-135, Road No. 14, VKI Ind. Area, Vs. Circle – 4 VKI Extn Jaipur Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABFP 9896 L vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri S.L. Poddar, Advocate jktLo dh vksj ls@ Revenue by: Shri K.C. Gupta, JCIT DR lquokbZ dh rkjh[k@ Date of Hearing : 21/01/2020 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 23/01/2020 vkns'k@ ORDER PER SANDEEP GOSAIN, J.M. The present appeal has been filed by the assessee against the order of CIT(A) -2, Jaipur dated 21.08.2019 for the assessment year 2016-17 wherein the assessee has raised the following grounds of appeal. ‘’(1) In the facts and circumstances of the case the ld. CIT(A) has erred in confirming the addition of Rs. 3,94,946/- as per the provisions of section2(24)(x) read with section 36(1)(va) of the I.T. Act, 1961 on account of delay in payment of ESI and PF made by the AO.

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

(2) In the facts and circumstances of the case the ld. CIT(A) has erred in confirming the addition of Rs. 11,45,410/- on account of claim of loss by theft.

2.1 Brief facts of the case are that the assessee is a partnership firm and

derives income from manufacturing and job work of bearings. The return

was filed on 16-10-2016 declaring income at Rs. 48,90,340/-. The AO

completed the assessment 08-12-2018 u/s 143(3) of the I.T. Act, 1961

determining total income at Rs. 78,59,130/- inter alia making the

following additions.

(i) Addition of Rs. 15,96,562/- by disallowing the payment of interest on statutory liabilities.

(ii) Addition of Rs. 11,45,410/- by disallowing the claim of expenditure on account of theft of money debited in P&L A/c.

2.2 Aggrieved by the order of the AO, the assessee preferred appeal

before the ld.CIT(A) who has sustained the following additions.

(i) Addition of Rs. 3,94,946/- by disallowing the payment of interest on statutory liabilities.

(ii) Addition of Rs. 11,45,410/- on account of claim of loss by theft.

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

2.3 Aggrieved by the order of the ld. CIT(A), the assessee has

preferred the present appeal before us by raising the grounds mentioned

hereinabove.

3.1 The Ground No. 1 of the assessee relates to challenging the order

of the ld. CIT(A) in confirming the addition of Rs. 3,94,946/- as per the

provisions of Section 2(24)(x) r.w.s. 36(1)(va) o the I.T. Act, 1961 on

account of delay in payment of ESI and PF made by the AO.

3.2 The ld.AR of the assessee reiterated the same are arguments as

were raised before the ld. CIT(A). However, the ld. CIT(A) has filed the

written submission on the issue of this ground which are reproduced as

under:-

‘’Ground No. 1:- In the facts and circumstances of the case the Learned CIT(A) has erred in confirming the addition of Rs. 3,94,946/- as per the provisions of section 2(24)(x) read with section 36(1)(va) of the Income Tax Act, 1961 on account of delay in payment of ESI and PF made by the learned AO. The assesssee has debited following expenses on account of interest expenses in P&L A/c during the year under consideration: - S.No. Particulars Amount 1 Interest on delay payment to parties 1144231.00 2 Interest on late payment of excise & service tax, EPF 188449.00 3 Interest on LC (Bank Limit) for export 57385.19 4 Interest on late payment of sales tax payment 122729.00 5 Interest on late payment of TDS 83768.00 Total 1596562.19

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

During the assessment proceedings the learned AO has mentioned in the assessment order that the above payments were made in violation of law as the above payments were made due to late deposit of statutory liabilities and the payments are expenditure for violation of any law for the time being in force and hence under such circumstances such payment of interest cannot be held as expenses incurred wholly and exclusively for the purpose of business, hence disallowed.

The learned AO did not appreciate the heads of interest payment correctly. First of all that all the payments of interest in above chart are not for delayed payment of statutory liabilities. The above interest payment can be bifurcated in two categories as under: -

(a) Payment of interest under the normal business transaction (i) Interest on delay payment to parties 1144231.00 (ii) Interest on LC (Bank Limit) for export 57385.19 Total 1201616.19

The above payments were made to the various parties from whom purchases were made and services were taken. All these parties are private parties and due to shortage of funds payments were made delayed as per terms of purchase for which interest was paid. This interest payment was made under the normal business circumstances and there are no violation of law of land. Therefore the above interest payment was made exclusively for the purpose of business and allowable. There is no reason for disallowance of above interest expenditure which is made to private parties and banks for delayed payment and loans. Therefore the above addition deserves to be deleted.

(b) Payment of interest for delayed payment of statutory liabilities - (i) Interest on late payment of excise & service tax, EPF 188449.00 (ii) Interest on late payment of sales tax payment 122729.00 (iii) Interest on late payment of TDS 83768.00 Total 394946.00 The assessee has made delay in payment of excise, service tax, sales tax and TDS to the government account for which interest payment was made. The above interest payment was not in penal in nature. It is only compensatory in nature to the government for delayed payment of liabilities. It is paid in the name of interest and not in the name of penalty. Therefore it cannot be disallowed. During the assessment proceedings the assessee has submitted as under: -

It is submitted that according to the provisions of section 37(1) of the Act, any expenditure incurred wholly and exclusively for the purposes of business is allowable as deduction, provided the same was not incurred for the purpose of any offence or which is prohibited by law. The payment made by taxpayer on account of interest on late deposit of any statutory liability was compensatory in nature. The same was not in the nature of penalty for said default. Reliance in this regard is placed on the

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

decision of Karnataka High Court in the case of CIT v Oriental Insurance Co. Ltd: 315 ITR 102, wherein, it has been held that interest paid under section 201(1A) of the Act for late deposit of TDS is compensatory to government treasury and not penal in nature.

It is further submitted that the interest partakes the character of principal in respect of which the same is paid. The amount of TDS/Service Tax/Sales Tax payment/ Excise etc, being part of a particular payment is allowable as deduction in the return of income as expenses incurred for the purposes of business. Therefore, the amount of interest paid in respect of late deposit of statutory/ government liabilities also partakes the character of an expense, which is allowable as expenditure under section 37(1)of the Act.

The AO accepted the argument of the taxpayer that the interest under section 75 of the Finance Act 1994 for late payment of service tax is compensatory in nature, has the same character as service tax and it is not in nature of any penalty or fine allowable under section 37 of the income tax Act 1961. Accordingly, he allowed the said interest paid on late deposit of service tax.

But the learned AO did not mention anything in the order and disallowed the whole payment without considering the nature of payment. The learned CIT(A) deleted the addition on account of interest payment for delayed payment of purchases as well as for LC payments but confirmed the interest on late payment of excise, service tax, sales tax and TDS and confirmed the addition of Rs. 3,94,946/- on this account.

In this regard our submission is that the Hon’ble Jaipur Tribunal has also decided that the interest payment of delayed payment of statutory liabilities is allowable as business expenditure.

CIT v. Western Indian State Motors [1988] 174 ITR 116 (Raj.). Wholly and exclusively for purposes of business—Interest paid on sales-tax arrears— is allowable business expenditure under s. 37.

Therefore it is clear that when any statutory dues are paid delayed and interest is paid for delayed payment then it is compensatory in nature and allowable expenditure for business u/s 37 of the Income Tax Act, 1961. In the case Lachmandas Mathura v. CIT 254 ITR 799 the Apex Court has held that “The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Bench’s decision in Saraya Sugar Mills (P) Ltd. v. CIT (1979) 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT (1983) 144

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

ITR 732 (All.) (FB), wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue.” The same view was further approved by the ITAT Kolkata in the case of DCIT Vs Narayani Ispat (P) Ltd. Appeal Number : ITA No. 2127/Kol/2014 Date of Judgement/Order : 30/08/2014 wherein it has been held that “Interest was paid for delayed payment of service tax & TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature. As such the interest on delayed payment is not in the nature of penalty in the instant case on hand”. In view of the above judgments, there remains no doubt that the interest expense on the delayed payment disallowed by the learned AO for Rs. 3,94,946/- deserves to be allowed. Copy of interest paid on delayed payment account is placed on paper book page no. 1. Copy of reply submitted before the learned AO is available on paper book page no. 2 to 4. Copy of reply filed before the learned CIT(A) is available on paper book page no. 15 to 18.’’

3.3 On the other hand, the ld. DR relied on the order passed by the ld.

CIT(A).

3.4 We have heard the both the ld. counsels of the parties and perused

the materials available on record and the also the judgement cited by the

parties. From the facts, we noticed that the addition made by disallowing

the interest on late payment of TDS is concerned, the said issue has

already been decided by the ITAT Coordinate Bench, Jaipur in ITA No.

294/JP/2019 for the Assessment Year 2015-16 in assessee's own case

vide order dated 8-01-2020. The said addition was upheld by the

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

Coordinate Bench and the operative portion of the order of the Coordinate

Bench is reproduced below.

‘’4. On appeal, the ld CIT(A) has recorded a finding that during the course of assessment proceedings, it was admitted by the assessee that the same was missed to be added back to the total income of the assessee, however, during the course of appellate proceedings, the same was claimed as allowable u/s 37(1) of the Act. As per ld. CIT(A), TDS is a payment under direct tax and by not depositing TDS in time is a violation of law and therefore, levy of interest on such late payment is penal in nature and cannot be allowed as deduction. Against the said finding, the assessee is in appeal before us and in support of his contention, the ld AR has relied on the decision of Hon’ble Karnataka High Court in case of CIT vs. Oriental Insurance Company Ltd. reported in 315 ITR 102 for the proposition that levy of interest u/s 201(1)(A) of the Act cannot be construed as penal in nature.

“11. As far as interest on late payment of TDS u/s 201 (1A) is concerned, useful reference can be drawn to the decision of Hon’ble Bombay High Court in case of Ferro Alloys Corporation Ltd vs. CIT (1992) 196 ITR

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

406 (Bom) where interest payment u/s 201(1A) for failure to deduct or pay tax deducted at source was held not deductible. A Similar view has been taken by the Madras High Court in case of CIT vs. Chennai Properties & Investment Ltd., (1999) 239 ITR 435 (Mad) wherein it was held as under (Head notes): “The liability for deduction of tax arises by reason of the provisions of the Act. Under section 201, the consequence of failure to comply with the same renders that person liable to be deemed as an assessee in default with all the consequences attached thereto. The liability to pay interest on the amount not deducted or deducted, but not paid is directly related to the failure to deduct or remit the amount. The amount required to be deducted is the amount payable as income-tax. The interest paid for the period of delay takes colour from the nature of the principal amount required to be paid but not paid within time. The principal amount here would be the income-tax and the interest payable for delayed payment is the consequence of failure to pay the tax and in the circumstances, is in the nature of a penalty though not described as such in section 201(1A). The fact that the income-tax required to be remitted is not income-tax payable by the assessee but is ultimately for the benefit of and to the credit of the recipient of the income on which that tax is payable, does not in any manner alter the character of the payment, namely, its character as income-tax. The interest paid under section 201(1A), therefore, would not assume the character of business expenditure and could not be regarded as a compensatory payment. Income-tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce & Industries Ltd. v. CIT [1998] 230 ITR 733/ 98 Taxman 151 rejected the argument that retention of money payable to the State as tax or income- tax would augment the capital of the assessee and the

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

expenditure incurred, namely, interest paid for the period of such retention, would assume the character of business expenditure. It held that an assessee could not possibly claim that it was borrowing from the State the amounts payable by it as income-tax, and utilising the same as capitalization in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure. Therefore, the interest paid under section 201(1A) could not be allowed as business deduction.”

Respectfully following the decision of this Coordinate Bench in

assessee's own case (supra), we sustain the addition of Rs. 83,768/- on

account of late payment of TDS. However, on account of interest paid by

the assessee on account of late payments of Sales Tax, Excise & Service

Tax and EPF are concerned, in this respect, we rely upon the decision of

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

ITAT Coordinate Bench in the case of CIT vs Western India State

Motors (1988) 174 ITR 116 (Raj) wherein it has been said that interest

payment of delayed payment of statutory liabilities is allowable as

business expenditure. Therefore, the amount of interest paid in respect of

late deposit of statutory/Govt. liabilities also partake the character of an

expenses which is allowable as expenditure u/s 37(1) of the I.T. Act,

1961. We are also fortified by the decision of Hon'ble Supreme Court in

the case of Lachmandas Mathura vs CIT , 254 ITR 799 wherein it was

held that when any statutory dues are paid delayed and interest is paid for

delayed payment then it is compensatory in nature and allowable

expenditure for business u/s 37 of the I.T. Act, 1961. In view of the above

decision, there remains no doubt that delay in making payment of

statutory liabilities or interest expenses on delayed payment are

compensatory in nature and this is allowable expenditure in business u/s

37 of the I.T. Act, 1961. Therefore, we direct the AO to allow the claim

of payment of interest made by the assessee on account of late payment of

Sales Tax, on account of late payment of Excise and Service Tax and on

account of late payment of EPF. Therefore, the ground no. 1 of the

assessee is partly allowed.

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

4.1 In Ground No. 2, the assessee is aggrieved that the ld. CIT(A) has

erred in confirming the addition of Rs. 11,45,410/- on account of claim of

loss by theft.

4.2 Apropos Ground No. 2 of the assessee, the facts as emerges from

the order of ld. CIT(A) are as under:-

‘’3.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. Assessee claimed deduction of Rs. 11,45,410/- on account of loss by theft. From records, it is seen that theft at business premises in F.Y. 2013-14 and FIR was lodged on 14-12- 2013. The loss pertained to A.Y. 2014-15. But this amount is claimed in this year. Assessing Officer disallowed the same as it did not pertain to year under appeal. Assessee's authorized representative relied on certain case laws which are distinguishable as in those cases, the expenses were claimed in the year when loss occurred. In present case, the loss was of A.Y. 2014-15 and assessee kept its books on mercantile basis where loss is to be accounted for in year of occurrence. Thus, claim is not acceptable and addition is confirmed. This ground of appeal is dismissed.’’

4.3 After hearing both the parties and perusing the materials available

on records, we found that there is no dispute with regard to the fact that

the assessee had suffered loss on account of theft and only reason for

disallowing the said loss is that theft in the business premises of the

assessee had taken place in F.Y. 2013-14 and therefore, the loss claimed

by the assessee pertains to A.Y. 2014-15. However, the assessee has

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

claimed the said loss in the year under consideration i.e. A.Y. 2016-17. In

this respect, we noticed during the course of arguments that investigation

on the FIR lodged by the assessee was in progress and the assessee was

hopeful of getting his amount back. The ld.AR of the assessee relied on

the decision of Hon'ble Madras High Court in the case of CIT vs Durga

Jewellers, 172 ITR 0134 wherein it was held as under:-

‘’Business loss or trading loss – year of allowability of loss caused by embezzlement – loss du9e to embezzlement is allowable as deduction only when recovery is impossible or chance or recovery become remote or in the year in which FIR was lodged.’’

Therefore, as per facts of the present case, since the assessee was hopeful

of getting the recovery of amount but it was only when the assessee

during the year under consideration had come to conclusion that recovery

is impossible or chance of recovery became remote, therefore, the

assessee had rightly made his claim during the year under consideration.

Therefore, in view of the decision of Hon'ble Madras High Court in the

case of CIT vs Durga Jewellers (supra), we allow the claim of the

assessee and direct the AO to delete the addition made on account of

claim of loss of theft. Thus Ground No. 2 of the assessee is allowed.

ITA No. 115/JP/2019 M/s. Perfect Turners vs DCIT, Circle – 4, Jaipur

5.0 In the result, the appeal filed by the assessee is partly allowed with

no order as to cost.

Order pronounced in the open court on 23/01/2020.

Sd/- Sd/- ¼lanhi xkslkbZ½ ¼foØe flag ;kno½ (Sandeep Gosain) (Vikram Singh Yadav) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member

Tk;iqj@Jaipur fnukad@Dated:- 23 /01/2020. *Mishra आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1.vihykFkhZ@The Appellant- M/s. Perfect Turners, Jaipur 2.izR;FkhZ@ The Respondent- DCIT, Circle – 4, Jaipur 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 4. 5. xkMZ QkbZy@ Guard File {ITA No. 1115/JP/2019} vkns'kkuqlkj@ By order, सहायक पंजीकार@Aेेजज. त्महपेजतंत