ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2, DIBRUGARH vs. M/S. BRAHMAPUTRA VALLEY FERTILIZER CORPORATION LIMITED, DIBRUGARH
What did the Tribunal hold?
The Tribunal upheld the CIT(A)'s deletion of the addition for penal interest, stating it was not a penalty under Section 37(1) and not covered by Section 43B. The Tribunal also upheld the deletion of prior period expenses, following a precedent where prior period income was accepted.
What were the facts?
The Assessing Officer (AO) disallowed penal interest on a loan from the Government of India and prior period expenses. The assessee argued that penal interest was not a penalty for violating laws, and prior period expenses were offset by prior period income.
What were the issues?
Whether penal interest on a government loan is a disallowable penalty, and whether prior period expenses can be disallowed when prior period income is accepted.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
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- Gujarat State Financial Corporation Ltd. v. ClT3 citing35 Taxmann.com 64 · 2013 · HC
Income Tax Appellate Tribunal, “GAUHATI” BENCH, GAUHATI
Before: Shri Rajpal Yadav(KZ) & Shri Rajesh Kumar]
Heard together (2 matters)
Read from the judgment's own cause title. This page is filed under one of them.
ORDER Per Shri Rajesh Kumar, AM Appeal filed by the revenue and the Cross Objection filed by the assessee are against the order of Ld. CIT(A), Dibrugarh dated 16.01.2019 for AY 2008-09.
The revenue has raised the following grounds:
“1. That whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the addition made for penal interest which is not allowable as per the provision of sub section 1 of section 37 of the Income Tax Act, 1961.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the addition made for penal interest, which was not actually paid and such not allowable as per provision of Section 43B of the Act.
3. Whether on the facts and circumstances of the case, the Ld. CIT(A)was justified in deleting the disallowance of prior period adjustment when such prior period expenses is not allowable to an assessee following the mercantile system of accounting.”
& C.O. No. 01/Gau/2022 Brahmaputra Valley Fertilizer Corpn. Ltd., AY 2008-09
The issue raised in ground nos. 1 and 2 is against the deletion of addition of Rs.23,52,79,034/- on account of interest payment on loan taken from Govt. of India.
Facts in brief are that the AO during the course of assessment proceeding observed that assessee debited in P&L Account a sum of Rs.71,85,32,707/- as interest and the said interest includes penal interest of Rs.23,42,79,034/- and accordingly, a show cause notice was issued to the assessee as to why the same should not be disallowed and added to the income of the assessee. The assessee replied vide letter dated 13.12.2010 submitting that the penal interest is not in the nature of penalty imposed for any violation of law but for failure to timely pay the interest to the Govt. of India as envisaged in the loan agreement. It is submitted that it is not in the nature of expenditure as referred to in explanation to section 37(1) of the Act. However, the contention by the assessee did not find favour with the AO and he added the amount to the income of the assessee.
In appeal before the Ld. CIT(A), he deleted the addition observing as under:
I have carefully considered the matter. The higher rate of interest payable is not penalty for infringement of law. The penal interest did not arise due to commission of offence prohibited by law. Higher rate of interest was chargeable on loan given by the Government. Assessee had not committed any offence against any law of the land. It was only liable to pay higher rate of interest in accordance to term set out by the lender. Hon'ble Gujarat High Court in the case of Gujarat State Financial Corporation Ltd. Vs. ClT (2013) 35 taxman.com 64 (Guj) held that penal interest charged for late re-payment of loan did not constitute penalty contemplated in explanation to section 37(1). Therefore, disallowance made by the AO in employing the said explanation is not sustainable. The next argument for disallowance is also not sustainable. Section 43B of the Act does not cover loan taken from the Government. It only covers loan from Public Financial Institution and Banks. Therefore, the action of the AO cannot be sustained.
After hearing the rival contentions and perusing the material available on record, we find that the higher rate of interest paid by the assessee is not for any infringement of law or due to commission of any offence . The Ld. CIT(A) has recorded a very clear cut finding to this effect besides, the Ld. CIT(A) has rightly relied on the decision of Hon’ble Gujarat High Court in the case of Gujarat State Financial Corporation Ltd. Vs. CIT (2013) 35 taxmann.com 64 (Guj.) wherein it has been held that penal interest charged for late repayment of loan did not constitute penalty as contemplated in explanation to section 37(1) of the Act. Accordingly, we do not find any infirmity in the order of Ld. CIT(A) and we are inclined to uphold the same by dismissing ground nos. 1 and 2 of the revenue.
& C.O. No. 01/Gau/2022 Brahmaputra Valley Fertilizer Corpn. Ltd., AY 2008-09
The issue raised in ground no. 3 is against the deletion of addition of Rs.1,34,59,370/- on account of prior period expenses.
The facts in brief are that the AO, during the assessment proceeding, observed that assessee has debited net amount of Rs.1,34,59,370.65 as adjustment relating to prior period under various heads. AO also noted that in Schedule 25 of Tax Audit Report, the same was stated to be prior period and accordingly, the same was disallowed and added to the income of the assessee. In the appellate proceeding, ld. CIT(A) deleted the same by holding that prior period debits were Rs.1,55,94,000/- and credits were Rs.21,35,000/- and hence, the net of Rs.1,34,59,370/- was claimed in the account. The Ld. CIT(A) deleted the addition after relying on the decision of Coordinate Bench in the case of ACIT Vs. Meghalaya State Electricity Corporation (ITA No.359/Gau/2013 dated 13.05.2017) wherein it has been held that when prior period income is accepted the prior period expenses should not be disallowed.
After hearing the rival contentions and perusing the material available on record, we observe that assessee had debited prior period expenditure under various sub-heads upon crystallization of these expenses as the bills were received in the current year and therefore, these were claimed to be expenses pertaining to the current year only. We note that during the year, the assessee has earned income of Rs.21,35,000/- as prior period income and the expenses of prior period of Rs.1,55,94,000/- were netted against this income and a net expenses of Rs.1,34,59,370/- was claimed. We note that Ld. CIT(A) has rightly followed the decision of Coordinate Bench in the case of Meghalaya State Electricity Corporation (supra) wherein ratio has been laid down that if prior period income is accepted by the AO then prior period expenses has to be allowed. Accordingly, we do not find any infirmity in the order of Ld. CIT(A) and we are inclined to uphold the same and dismiss this ground of appeal of the revenue.
11. The Cross Objection has been filed by the assessee is in support of the order of Ld. CIT(A). Accordingly, the same is infructuous as we have dismissed the appeal filed by the revenue. & C.O. No. 01/Gau/2022 Brahmaputra Valley Fertilizer Corpn. Ltd., AY 2008-09
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