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Facts
The Assistant Commissioner of Income Tax (ACIT) disallowed an expenditure of Rs. 5,47,36,000/- claimed by Maximal Infrastructure Private Limited as interest paid on delayed External Development Charges (EDC) to HUDA, treating it as penal and capital in nature. The Ld. CIT(A) subsequently allowed this expenditure, classifying it as revenue. The Revenue appealed this decision.
Held
The Income Tax Appellate Tribunal (ITAT) upheld the decision of the Ld. CIT(A), ruling that the interest paid on delayed EDC is a revenue expenditure and not penal or capital in nature. The Tribunal relied on its own previous decisions for the assessee and precedents like CIT vs. Enchante Jewellery Ltd., affirming that such interest is an allowable business expense, especially when related to projects already completed and sold.
Key Issues
Whether interest paid on delayed External Development Charges (EDC) is an allowable revenue expenditure or a penal/capital expense; and its treatment regarding work-in-progress.
Sections Cited
143(3), 37(1), 43B
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Income Tax Appellate Tribunal, “E” BENCH, DELHI
Before: MS. MADHUMITA ROY & SHRI MANISH AGARWAL
The instant appeal filed by the Revenue is directed against the order passed by the Ld. CIT(A)-37, New Delhi, dated 27.01.2020 arising out of the Assessment Order dated 22.12.2017 passed by the ITO, Ward - 16(3) under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) Assessment Year 2015-16. The matter relates to
Heard the parties and perused the material available on record. It was submitted by the Ld. Counsel appearing for the assessee that the issue is squarely covered by the assessee’s own case i.e. for Assessment Year 2014-15 the relevant portion is reproduced as under:
“2. Briefly stated facts of the case are that in the scrutiny assessment order dated 01/07/2016 in terms of section 143 (3) of Income-tax Act, 1961 (in short ‘the Act’) with reference to the return of income filed by the assessee, the Assessing Officer disallowed interest paid to Haryana Urban Development Authority(HUDA) for delayed payment of External Development Charges (EDC), which was claimed as revenue expenditure, observing as under:
“3.3 The contention of the AR has been considered but is found to be not maintainable due to the following reasons:- i) Firstly, the interest paid by the assessee company is on account of delayed payment of EDC charges to HUDA. Therefore, it is an expense of penal nature on which interest has been levied @ 18% by the concerned authority for delay in depositing the installments. Therefore, the same is not allowable as a business expense. ii) Secondly, the external development charges (EDC) is payable by the developer to the concerned government authority, which in this case is HUDA, for works related to water supply, sewerage, drains, roads, street lights etc which are integral part of a residential housing project and would therefore definitely constitute part of the cost of such projects. Therefore, the contention of the AR that EDC payable is not recoverable from buyers and further that it does not add anything to the physical development of the project is not acceptable. iii) Further, the interest on EDC, in the case of the assessee company has been paid in respect of housing project which is part of cost of Maximal Infrastructure Private Limited materials consumed/work in progress which would constitute stock of the assessee company and not a fixed asset as per the analogy of car as given by the assessee.
In view of the above discussion, the amount of Rs. 8,17,42,528/-, paid by the assessee company as interest to HUDA for delayed payment of the external development charges (EDC) and claimed as revenue expenditure, is disallowed as being penal and capital in nature,
(Addition : 8,17,42,528/-)”
3. The above disallowance has been deleted by the learned CIT(A) observing as under:
“6.1 I have considered the facts and circumstances of the case, submission of the appellant and perused the assessment order. I find that on the identical facts the then CIT(A)-29 in the case of Triveni Ferrous Infrastructure P. Ltd. for the AY 2012-13 has held
"6.3 In the facts of the present case, the interest payment made to the HUDA on account of delayed payment of EDC charges is on account of agreement between two parties (appellant and HUDA) and since it does not fall within the definition of 43B payment, hence in my humble view, such interest payment for the year under consideration is definitely a revenue expenditure and there is no reason why the same should not be allowed for the year under consideration when on all previous years such expenditure has been claimed and allowed by the revenue as a "revenue expenditure.
In view of the above discussion, the payment of Rs.2,46,24,237/- made by the appellant on the delayed payment of EDC charges is held to be a revenue and an allowable business expenditure as has been claimed and allowed in their years too.
I agree with the above decision, therefore, on identical facts the same is followed.”
4. Aggrieved, the Revenue is in appeal raising the grounds as reproduced above.
Before us, the parties appeared through Video Conferencing facility and filed documents and synopsis through email.
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The learned counsel of the assessee brought to our attention that identical issue in assessment year 2012-13, the Tribunal in has upheld the order of the Ld. CIT(A) deleting the disallowance. The relevant part of the decision of the Tribunal (supra) is reproduced as under:
“6. We have considered the rival submission and perused the order passed by the authorities below. On going through the orders and material referred to before us, we note that assessee during the year has incurred an expenditure of Rs.2,46,24,237/- on account of interest in respect of the EDC charges outstanding and payable to HUDA. The AO has disallowed the same considering it penal in nature and also on the reasoning that such expenditure should form part of the work-in-progress as assessee is a developer and deduction of same will be available against the sale of the project. The CIT (A) has held that such expenditure is not penal in nature and the interest expenditure pertains to the current year and is revenue in nature. As regards the first issue whether such expenditure is penal in nature, the same is covered in favour of the assessee by the judgment of the coordinate bench of the ITAT in the case of M/s Ferrous Township Pvt. Ltd. vs. DCIT dated 06.09.2017, whereby it was held that interest payable on EDC charges is not penal in nature. The relevant finding of the order reads as under:-
“7. We have heard both the parties and perused the records especially the impugned order as well as the case law cited by the Ld. Counsel of the assessee. For the sake of convenience, the observation of the Hon'ble High Court in the case of CIT vs. Enchante Jewellery Ltd. passed in IT Appeal No. 1006 of 2001 dated 20.11.2012 reported in [2013] 40 taxmann.com 216 (Delhi) [HEADS NOTES ONLY] are reproduced as under:-
"Section 37(1) of the Income Tax Act, 1961 –
Business expenditure - Allowability of [Penalty/Illegal payments] –
Assessee was engaged in manufacture and trade of gold jewellery - Assessee claimed that it used to import jewellery manufacturing machinery under Export Promotion Council Goods Scheme (EPCG Scheme) at a concessional rate with an export obligation which it could not fulfill and, thus, was required to pay interest to DGFT - Assessee's claim
Commissioner (Appeals) as well as Tribunal held that amount paid was not penal in nature as much as it was as per declared policy of Government and occasioned by failure of assessee 's conduct was an offence or that it did anything that was prohibited by law, payment in question did not fall within mischief of Explanation below section 38(12) –
Held, yes - whether, therefore, assessee's claim was to be allowed - Held, yes [para 5] [in favour of assessee]”
Keeping in view of the facts and circumstances of the case and respectfully following the precedent, as aforesaid, we are of the considered view that the facts and circumstances of the case of the assessee's case is exactly the similar and identical to the decision of the Hon'ble High Court in the case of CIT vs. Enchante Jewellery Ltd. (Supra). Therefore, respectfully following the aforesaid decision of the Hon'ble Delhi High Court in the case of CIT vs. Enchante Jewellery Ltd. (Supra), the addition of Rs. 4,26,000/- confirmed by the Ld. CIT(A) out of interest payable in EDC charges terming the same as penal in nature is hereby deleted and the ground of appeal raised by the assessee is allowed.”
7. As regards the second contention that such expenditure should form part of the work-in-progress, it is seen that, this interest is in respect of outstanding EDC charges payable for a project the realization of which has already taken place in earlier years. Thus, interest is on an amount outstanding and payable for the services availed in respect of the project which stands already completed and sold in earlier years. Hence, such an interest cannot form part of the work-in-progress. The interest payment on the outstanding balance in respect of the trade creditors is revenue in nature and allowable expenditure while computing business income. Accordingly, we uphold the order of the CIT (A) deleting the above addition.”
6.1 As the Tribunal (supra) has held that the interest payment as revenue expenditure and not penal in nature, therefore respectfully following the same, the interest expenditure on delayed payment for EDC charges paid to HUDA in the year under consideration is allowable to the assessee. We do not find any error in the order of the Ld. CIT(A) and Maximal Infrastructure Private Limited accordingly, we uphold the same. The grounds of the appeal of the Revenue are accordingly dismissed.
In the result, the appeal of the Revenue is dismissed.”
Having regard to the above order passed by the Co-ordinate Bench on the identical facts we do not find any reason to deviate from the stand taken therein, accordingly we dismiss the appeal of the Revenue.
The appeal of the Revenue is dismissed.
Order pronounced in the open court on 30.05.2025.