INCOME TAX OFFICER, WARD-3(1), HYDERABAD vs. R K MINING PRIVATE LIMITED, HYDERABAD

Succinctly stated, the assessee company which is engaged in the business of mining had e-filed its return of income for AY 2014-15, declaring a loss of Rs.3,81,33,177/-. Subsequently, the case of the assessee company was selected for scrutiny assessment under section 143(2) of the Act.

Thereafter, the AO vide his order passed under section 143(3) of the Act, dated 14/12/2016 determined the income of the assessee company at a loss of Rs.1,28,37,269/- after making two disallowances, viz., (i) disallowance of the amount charged by M/s. Bharat Coking Coal Limited (BCCL) towards penalty: Rs.2,51,48,471/-; and (ii) disallowance of cash payments made by the assessee company under section 40A(3) of the Act: Rs.1,47,437/-.

Aggrieved, the assessee company carried the matter in appeal before the CIT(A) who found favour with the contentions advanced by the assessee company regarding both the abovementioned disallowances and vacated the same by observing as under: “6.2 Decision:- I have perused the assessment order, grounds of appeal and submission filed by the appellant carefully. I find from the assessment order that the return of income for AY 2014-15 was filed on 29.11.2014 declaring total loss of Rs.3,81,33,177/-. The case was selected for scrutiny under CASS. During the course of assessment proceedings, penalty charged by Bharat Coking Coal limited of Rs.2,51,48,471/- was disallowed being inadmissible expenditure. Further addition of Rs.1,47,437/- was made on account of cash payments made in violation of provisions of section 40A(3) of the Act. Aggrieved by the assessment order passed by the AO, the appellant had filed appeal before the CIT(A) but the CIT(A) had dismissed the appeal. Therefore, the appellant had filed appeal before Hon'ble ITAT Hyderabad. The Hon'ble ITAT Hyderabad set aside the matter to the file of CIT(A) for denovo consideration. During appellate proceedings, the appellant submitted thatthe amount of Rs.2,51,48,471/- was deducted by Bharat Coking Coal limited from the bills payable to the appellant on account of failure of the appellant to transport the expected quantity of material from excavation point to the mining yard. Thus, the demurrage was levied for the failure of the appellant of not transporting minimum quantity and the same was not in the nature of penalty for infringement of any law. Therefore, the appellant requested to delete the addition made by the AO. I have considered the facts of the case and submission of the appellant carefully. I find that the penalty/demurrage was recovered for failure of the appellant to comply the terms of the business and the penalty was not imposed for infringement of any law. As such the AO is not justified in making the addition since there is no infringement of any law. Therefore, the addition of Rs.2,51,48,471/- is hereby deleted and grounds raised by the appellant are allowed. 7. Ground No.9 to 12: In these grounds, the appellant has contested the addition of Rs. 1,47,437/- made by the AO on account of disallowance of expenses on the ground that the said payments were made in cash in violation of the provisions of section 40A(3) of the Act. 7.1 The appellant has not submitted any ground wise written submission. 7.2 Decision:- I have perused the assessment order, grounds of appeal and submission filed by the appellant carefully. I find from the assessment order that the addition of Rs.1,47,437/- was made on account of cash payments made in violation of provisions of section 40A(3) of the Act. Aggrieved by the assessment order passed by the AO, the appellant had filed appeal before the CIT(A) but the CIT(A) had dismissed the appeal. Therefore, the appellant had filed appeal before Hon'ble ITAT Hyderabad. The Hon'ble ITAT Hyderabad set aside the matter to the file of CIT(A) for denovo consideration. During appellate proceedings, the appellant has pointed out that none of the cash payment was exceeding Rs.20,000/- on single day as can be seen from the assessment order. Therefore, the appellant requested to delete the addition made by the AO. I have considered the facts of the case and submission of the appellant carefully. I find that none of the cash payment was exceeding Rs.20,000/- on single day and as such there was no violation of the provisions of section 40A(3) of the Act. Therefore, the addition made by the AO is hereby deleted and grounds of appeal raised by the appellant are allowed.” 5. The Revenue aggrieved with the order passed by the CIT(A) has carried the matter in appeal before us.

We have heard the Learned Authorized Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.

Shri K Prasad, Learned Senior Departmental Representative (for short, “Ld. Sr-DR”) at the threshold of hearing of the appeal submitted that as the assessee had raised a claim for deduction of penalty of Rs.2,5148,471/- in its profit and loss account, the AO had rightly disallowed the same as per the “Explanation-1” to section 37(1) of the Act. The Ld. Sr-DR to buttress his contention has drawn our attention to the financial statements of the assessee company, wherein as per “Note22: Other Expenses” an amount of Rs.2,51,48,471/- was reflected as “deduction by BCCL”. The Ld. Sr-DR submitted that as the aforementioned amounts were in the nature of penalty imposed by the assessee company, the same had rightly been disallowed by the AO. It was submitted that as the CIT(A) had wrongly vacated the aforesaid disallowance, his order be set aside and the disallowance made by the AO be restored.

Coming to the disallowance of the part cash payments made by the assessee company towards purchase of spares aggregating to an amount of Rs.1,47,437/-, the Ld. Sr-DR submitted that as the said payments towards expenditure incurred by the assessee company were made in violation of the mandate of section 40A(3) of the Act, the AO had rightly disallowed the same.

Per contra, Shri Pawan Kumar Chakrapani, CA, Learned Authorized Representative (for short, “Ld. AR”) for the assessee company, relied upon the CIT(A) order. It was submitted that as the deduction by M/s. Bharat Coking Coal Limited (BCCL) as per the bills payable to the assessee company of Rs.2.51 crores (approx.) was on account of failure of the assessee company to transport the expected quantity of the material from excavation point to the mining yard, thus the demurrage charges were imposed upon the assessee company and the same was not in the nature of penalty for infringement of any law. The Ld. AR relied upon the CIT(A) order and submitted that he had after duly appreciating the facts pertaining to the nature of deduction made by BCCL had, observed that as the subject deduction was for failure of a contractual obligation and not a penalty for infringement of any law, thus, had rightly vacated the same.

Coming to the disallowance made by the AO under section 40A(3) of the Act of Rs.1,47437/-, the Ld. AR submitted that as neither of the cash payments made by the assessee company exceeded the threshold amount of Rs.20,000/- on a single day, the CIT(A) taking cognizance of the fact that there was no violation of the provisions of section 40A(3) of the Act, rightly vacated the impugned disallowance made by the AO.

We have given thoughtful consideration to the contentions advanced by the Learned Authorized Representatives of both parties in the backdrop of the orders of the authorities below.

Apropos the disallowance under section 40A(3) of the Act of Rs.1,47,437/- made on account of cash payments made by the assessee company to two parties, viz., (i) Sri Ravi Shanker Singh (towards part payments made for purchase of spares); and (ii) Sarwar Tyres, we find that it is a fact borne from record that neither of the payments exceeded an amount of Rs.20,000/- on a single day. Accordingly, we find no infirmity in the view taken by the CIT(A) who had rightly observed that as neither of the payments made by the assessee exceeded Rs.20,000/- in a single day, thus, there was no violation of the provisions of section 40A(3) of the Act. We thus, in terms of our aforesaid observations uphold the view taken by the CIT(A). The Ground of appeal No.4 is dismissed.

Apropos to the disallowance of Rs.2,51,48,471/- made by the AO with respect to deductions by BCCL, the Ld. AR submitted that as the same was in the nature of demurrage levied by BCCL for the failure of the assessee company, for not transporting minimum quantity of material from the excavation point to the mining yard and not in the nature of penalty for infringement of any law as contemplated in “Explantion-1” to section 37(1) of the Act, therefore, the CIT(A) had rightly vacated the impugned disallowance made by the AO. The Ld. AR to fortify his aforesaid contention has placed on record a copy of the “Work order”, i.e., Award of work for “transportation of coal from different sources to different destinations” given by BCCL to the assessee company, which, inter alia, contemplated, viz., (i) transportation of specific quantity of coal for a particular period on a base price per liter; (ii) minimum quantity of coal to be transported; and (iii) penal clauses/recovery of damages, as per general and special terms and conditions of the contract. The Ld. AR had further taken us through the Tender Document for transportation of coal from different sources to different destinations of BCCL, which, at Clause 6.2, contemplated that in the event of contractor’s failure to comply with the required progress in the terms of the agreed time and progress chart or to complete the work and clear the site on or before the date of completion of contract or extended date of completion, he shall without prejudice to any other right or remedy available to the company on account of such breach, shall become liable to pay for penalty, viz., (a) if the average daily progress of work during the calendar months is less than the stipulated rate indicated in the detailed tender notice, subjected to penalty as therein mentioned, i.e., i) if the average daily progress of work executed during the calendar month is more than 80% and less than 100% of stipulated rate of progress, penalty equal to 10% of the contract value of the short fall in work shall be levied; (ii) if the average daily progress of work executed during the calendar month is less than 80% of stipulated rate, penalty equal to 20% of contract value of the short fall in work shall be levied; and (iii) the aggregate of the penalties so levied shall not exceed 10% of the total contract value. The Ld. AR had further taken us through the copy of the ledger accounts appearing in the books of accounts of the assessee company, viz., (i) deduction for shortfall quantity; and (ii) deduction for SOR both of which aggregated to an amount of Rs.2,51,48,471/-. Elaborating on his contention, the Ld. AR submitted that as the deduction by BCCL as provided in the terms and the conditions of the contract mentioned in tender was on account of short fall in the quantity of the work executed, therefore, the same as observed by the CIT(A) not being in the nature of penalty for any infringement of law could not be brought within the meaning of any penalty for any infringement of law as contemplated in “Explanation-1” to section 37(1) of the Act, as a result whereof the same could not be disallowed.

At this stage, we may herein observe that the Ld. AR to buttress his contention that the amounts deducted by BCCL from the bills issued by the assessee company were for the short fall in the transportation of coal as was agreed in terms of the work order has taken us through certain contract bills, which, inter alia referred to the deductions made on account of penalty. The Ld. AR to dispel all doubts that the subject penalty was in the nature of a contractual penalty, i.e., 8 for failure to fully comply with the terms of the work orders and not for any infringement of law has further taken us through the calculation of penalty at Page-152 read a/w the quantification of the penalty as provided in the tender documents (Page-36 of APB) to fortify his claim that the subject penalty was in the nature of a contractual penalty/demurrage and not on account of any infringement of law as provided in “Explantion-1” to section 37(1) of the Act.

We have given thoughtful consideration and find substance in the Ld. AR’s contention that as the amounts deducted by the BCCL of Rs.2,51,48,471/- from the bills payable to the assessee company were on account of the failure on its part to transport the accepted quantity of material from excavation point to the mining yard as per the terms of the contract, thus, the same not being in the nature of any penalty for infringement of any law could not have been disallowed by bringing it within the meaning of “Explanation-1” to section 37(1) of the Act. We thus, finding no infirmity in the view taken by the CIT(A) who had rightly vacated the impugned disallowance made by the AO, uphold his order. Grounds of appeal No.2 and 3 are dismissed.

Grounds of appeal No.1 and 5 being general are dismissed as not pressed.

In the result, appeal filed by the Revenue being devoid and bereft of any substance is dismissed.