COMMISSIONER OF INCOME TAX-II, LUDHIANA. vs. M/S HERO CYCLES LTD.

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ITA/655/2008HC Punjab & HaryanaPHHC01080667200809 December 2008Author: MR. JUSTICE ADARSH KUMAR GOEL,MR. JUSTICE L.N. MITTAL4 pages

AI SummaryDismissed

What did the High Court hold?

The High Court held that the appeal by the revenue did not raise any substantial question of law. The Tribunal had followed a previous order of the High Court in CIT, Patiala v. Industrial Cables (India) Limited, which was not shown to be different. The Tribunal had found no distinction between the nature of the payment made by the assessee and the payment in the Industrial Cables case, where the payment was held not to be in the nature of a penalty. Therefore, the Tribunal's decision to allow the deduction for the extra charges paid to PSEB was upheld. The High Court was unable to hold that the ITAT was wrong in law. The addition of Rs.11,83,050/- made by the Assessing Officer was accordingly deleted by the Tribunal.

What were the facts?

The Revenue, Commissioner of Income Tax II, Ludhiana, appealed against an order of the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench 'B', dated October 31, 2007. The appeal concerned assessment year 1999-2000. The assessee, M/s Hero Cycles Limited, Ludhiana, a manufacturer of cycle parts, claimed a deduction for an amount paid to the Punjab State Electricity Board (PSEB) as extra charges for violating power regulations. The Assessing Officer disallowed this claim, but the CIT(Appeals) allowed it, a decision subsequently upheld by the ITAT. The ITAT's decision was based on its finding that the payment was identical in nature to one previously considered by the Punjab and Haryana High Court in CIT, Patiala v. Industrial Cables (India) Limited.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in deleting the payment made to PSEB on account of extra charges, holding it to be a capital expenditure under the IT Act? Assessee's Contention: The assessee argued that the payment made to PSEB was not a penalty for a deliberate violation of law but was an incidental business expense incurred out of commercial expediency. They relied on the principle that payments not involving illegality or moral turpitude, or innocent violations, may be allowed as deductions. Revenue's Contention: The revenue contended that payments made in the nature of penalty or fine for any wrongful act cannot be allowed as permissible deductions. They argued that the label of the payment is not conclusive, but the nature of the payment as a penalty for violating power regulations should lead to its disallowance.

Which sections of the Income-tax Act were involved?

Section 260A

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of decision: 9.12.2008 The Commissioner of Income Tax II, Ludhiana -----Appellant Vs. M/s Hero Cycles Limited, Ludhiana --Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON'BLE MR JUSTICE L.N.MITTAL Present: Mr. Rajesh Sethi, Sr.Standing Counsel for the revenue. Adarsh Kumar Goel,J.

This appeal has been preferred by the revenue under section 260A of the Income tax Act, 1961 (in short, ‘the Act’) against the order of the Income Tax Appellate Tribunal Chandigarh Bench ‘B’, Chandigarh passed in ITA No.751/Chandi/2004 dated 31.10.2007 in respect of assessment year 1999-2000, proposing to raise following substantial question of law:- “Whether on the facts and in the circumstances of the case the ITAT was right in law in deleting the payment made to PSEB on account of extra charges being penalty paid as capital expenditure under the IT Act?”

The assessee is manufacturer of cycle parts and during assessment, made claim for amount paid to Electricity Board as penalty for violating power regulations. The said claim was disallowed by the Assessing Officer but was allowed by the CIT(Appeals). This view has been upheld by the Tribunal. After considering the nature of amount paid, the Tribunal held that the payment was identical to the one considered by this Court in CIT, Patiala v. Industrial Cables (India) Limited, (2007) 162 Taxman 423. The finding of the Tribunal is as under:- “12. We have given our careful consideration to the rival contentions. In our considered view, there is no distinction between the nature of the payment made by the assessee to the PSEB in the case of Industrial Cables (India) Limited (supra) and in the case of the assessee. Since the claim of the assessee in the case of Industrial Cables (India) Limited (supra) has been held not to be in the nature of penalty, we

respectfully following the order of the Hon’ble Punjab and Haryana High Court in the case of Industrial Cables (India) Limited (supra) hold that the assessee is entitled to deduction on account of extra charges paid to the PSEB for drawing extra load in peak hours. The addition of Rs.11,83,050/- is accordingly deleted.”

There is no doubt that payments made in the nature of penalty or fine for any wrongful act cannot be allowed as permissible deductions but mere label of the payment is not conclusive. Certain payments may be incidental to the business and have to be allowed on the test of ‘commercial expediency’, if no violation of law or public policy is involved. Where penalty is not for deliberate violation of law, the amount may be allowed as deduction. There may be cases involving illegality or moral turpitude on the one hand and innocent violation on the other. Law is well settled. Reference may be made to judgments of the Hon’ble Supreme Court in Haji Aziz & Abdul Shakoor Bros v. CIT, (1961) 41 ITR 350, Malwa Vanaspatti v. CIT, (1997) 225 ITR 383, Parkash Cotton Mills Pvt. Limited v. CIT, (1993) 201 ITR 684. The test has to be applied from case to case.

Since the Tribunal has followed an order of this Court, which is not shown to be different, we are unable to hold that any substantial question of law arises.

Accordingly, the appeal is dismissed. (Adarsh Kumar Goel) Judge December 9, 2008 (L.N.Mittal) ‘gs’ Judge 4

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