SRI SAURABH TIWARY,JAMSHEDPUR vs. ACIT CIR-3 , JAMSHEDPUR

आदेश /O R D E R Per S. S. Godara(Oral): This assessee’s appeal for assessment year 2013-14 arises against the Commissioner of Income-tax (Appeals), Jamshedpur’s order dated 16.08.2018 passed in case No.279/JSR/2017-18 involving proceedings u/s 143(3) of the Income Tax Act, 1961; (in short ‘the Act’). Heard both the parties. Case file persued. 2. The assessee’s former two substantive grounds seek to reverse both the lower authorities’ action disallowing consumables with cloths and apparels expenses claims of Rs.7,50,000/- and 2,25,080/- to the extent of Rs.2,00,000/- and Rs.56,270/-; respectively, after alleging that the same involved some unverified heads and personal usages. We do not find any such element in either of the two these claims in the case file. The fact also remains that the assessee failed to discharge its onus of having incurred the impugned twin expenses wholly and exclusively for the purpose of

ITA No.350/Ran/2018 Sauravh Tiwary Page 2 business. We deem it appropriate, in these circumstances, that lumpsum additions of Rs.50,000/- and Rs.10,000/- only would be just and proper with a rider that the same shall not be treated as precedent. The assessee gets part relief(s) of Rs.1,50,000/- and Rs.46,270/-; respectively.

“2. The only issue that arises for consideration in this appeal by the Assessee is as to whether the revenue authorities were justified in disallowing the claim of the Assessee for deduction of a sum of Rs.7,90,359/- which was interest u/s.234C of the Income Tax Act, 1961 (Act) paid by the Assessee for not paying advance tax in time and another sum of Rs.11,275/- which was interest for delay in deposit of Tax Deducted at Source (TDS) in all a sum of Rs.8,01,634/-. 3. The Assessee is a company. It is engaged in the business of manufacture of steel, sponge iron and ferro alloy. For AY 2012-13, the Assessee filed return of income declaring loss of Rs.4,92,31,576/-. While completing the assessment u/s.143(3) of the Act, the AO reduced from the loss declared by the Assessee the sum of Rs.7,90,359/- which was interest u/s.234C of the Income Tax Act, 1961 (Act) paid by the Assessee for not paying advance tax in time and another sum of Rs.11,275/- which was interest for delay in deposit of Tax Deducted at Source (TDS) in all a sum of Rs.8,01,634/-, on the ground that the sum in question is not allowable as deduction in view of the provisions of Explanation to Sec.37(1) of the Act. Sec.37(1) of the Act and Explanation thereto reads as follows: “(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business 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 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.”

ITA No.350/Ran/2018 Sauravh Tiwary Page 3 4. Before CIT(A), the Assessee submitted that interest paid u/s.234C of the Act and interest on late deposit of Tax deducted at source were compensatory in nature and what can be disallowed under Explanation to Sec.37(1) of the Act is only expenditure incurred for any purpose which is an offence or which is prohibited by law. The Assessee placed reliance on the decisions of the Hon’ble Supreme Court in the case of Prakash Cotton Mill Pvt.Ltd. 201 ITR 684(SC) and CIT Vs. Ahmedabad Cotton Manufacturing Company Pvt. Ltd. 205 ITR 163 (SC). It was contended that what needs to be done by an Assessing Officer, in similar circumstances, is to examine the claim of an assessee though called a penalty is to ensure whether the law or scheme under which the amount was paid requires such payment to be made as penalty or as something akin to penalty which is imposed by way of punishment for breach in infraction of law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of an option conferred upon him under the very law or scheme, then one has to refer such a payment as business expenditure and consequently allowable u/s 37 of the IT Act as an incidence of business laid out and expended fully and exclusively for the purposes of business. 5. The CIT(A) agreed with the submission of the Assessee and was of the view that the claim for deduction under Explanation to 37(1) of the Act has not been properly examined by the AO. He however went on to uphold the disallowance by applying the provisions of Sec.40(a)(ii) of the Act. The provisions of Sec.40(a)(ii) of the Act reads thus: “Amounts not deductible. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,— (a) in the case of any assessee— (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.” According to the CIT(A) interest paid for delay in payment of tax to the Government in time will be akin to tax paid on profits and gains of any business and therefore cannot be allowed as deduction u/s.40(a)(ii) of the Act. 6. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal. We have heard the submission of the learned counsel for the Assessee who relied on the decision of the Hon’ble supreme Court in the case of Harshad Shantilal Mehta Vs. Custodian and Others 231 ITR 871 (SC), wherein the Hon’ble Supreme Court held that the definition of "tax" under s. 2(43) does not include penalty or interest. The Hon’ble Court held that under s. 156, it is provided that when any tax, interest, penalty, fine or any of other sum is payable in consequence of any order passed under this Act, the AO shall serve upon the assessee a notice of demand as prescribed. The provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax. The Hon’ble court held that neither penalty nor interest can be considered as tax. It was submitted that though the aforesaid judgment was rendered in the context of Sec.11(2)(a) of the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992, the same reasoning will also apply to disallowance u/s.40(a)(ii) of the Act. On the disallowance under Explanation to Sec.37(1) of the Act, the learned counsel reiterated submissions made before CIT(A). The learned DR relied on the order of the CIT(A). 7. We have considered the rival submissions. On a plain reading of Sec.40(a)(ii) of the Act, it can be seen that what can be disallowed under the said provision is “any sum paid on account of any rate or tax levied on the profits or gains of any business or profession”. Interest paid

ITA No.350/Ran/2018 Sauravh Tiwary Page 4 u/s.234C of the Act and for delay in payment of tax deducted at source cannot be equated with tax levied on profits or gains of business. The decision of the Hon’ble Supreme Court in the case of Harshad Shantilal Mehta (supra) clearly supports the stand of the Assessee in this regard. 8. As for as disallowance under Explanation to Sec.37(1) of the Act is concerned, explanation to Sec.37(1) of the Act was inserted by the Finance (No.2) Act, 1998 and it only provides 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. In the Memo explaining this provision it has been stated as follows. “It is proposed to insert an explanation after sub-section 1 of Section 37 to clarify that any allowance shall be made in r/o expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by Law. This proposed amendment will result in disallowance of the claim made by certain tax payers of payment on account of protection money, extortion, hafta, bribes etc. as business expenditure. This amendment will take effect from 1st April,1962 and will accordingly apply in relation to the Assessment Year 1962-63 and subsequent years”. 9. It can be seen from the above Memorandum explaining the provisions that the term ‘offence’ is generally equivalent to a crime. An offence is transgression of law, a breach of law established for the protection of the public. Payment of interest u/s.234C and for late payment of TDS cannot be said to be any amount paid which is an offence or prohibited by law. It is a compensatory payment for not paying tax in time. The Honourable Supreme Court in the case of Prakash Cotton Mills Pvt.Ltd. VS. CIT 201 ITR 684 (SC) has laid down the following principles with regard to allowability of a claim for deduction u/s.37(1) of the Act, with regard to fines, penalties etc., “whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 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 under section 37 (1) of the Income-tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature.” 10. In the case of CIT Vs. Ahmedabad Cotton Mfg.Co.Ltd. 205 ITR 163 (SC) the Honourable supreme Court further held as follows: “what needs to be done by an assessing authority under the Income-tax Act, 1961, in examining the claim of the assessee that the payment made by such assessee was a deductible expenditure under section 37 of the Income-tax Act although called a penalty is to see whether the law or scheme under which the amount was paid required such payment to be made, as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, then one has to regard such payment as business expenditure of the assessee, allowable under section 37 of the Income-tax Act, as an incident of business laid out and

ITA No.350/Ran/2018 Sauravh Tiwary Page 5 expended wholly and exclusively for the purposes of the business. However, such payment of the assessee is one which is made in exercise of the option given to such assessee by law or the statutory scheme and there arises no need for the assessing authority to go into the question whether the payment could be regarded as one made as a measure of business expediency, for it cannot ignore the fact that the law or the statutory scheme enables incurring of such expenditure in the course of the assessee's business.” 11. Having regard to the principles laid down in the aforesaid decisions it is clear that interest paid for delay in remitting tax to the Government cannot be regarded as falling within Explanation to sec.37(1) of the Act. We are therefore of the view that the claim of the Assessee for deduction of the aforesaid sum should be allowed. We hold and direct accordingly.”

Order pronounced in open court on 16/07/2020.

Sd/- Sd/- (A. L. Saini) (S.S. Godara) Accountant Member Judicial Member Kolkata; Date: 16/07/2020 RS आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant- Sauravh Tiwary 2. ��यथ�/Respondent- ACIT, Circle-3, Jamshedpur 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाइल / Guard file.

//True copy// By order/आदेश से, Sr. Private Secretary