DCIT, CC-1(3), KOLKATA, KOLKATA vs. M/S BONAI INDUSTRIAL COMPANY LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “D”, BENCH KOLKATA

BEFORE SHRIA. T. VARKEY, J.M &DR. A.L.SAINI, A.M आयकरअपीलसं./ITA No.1533/Kol/2017 (�नधा�रणवष� / Assessment Year: 2014-15) DCIT, CC-1(3)/Kolkata Vs. M/s. Bonai Industrial Company Ltd. Aayakar Bhawan Poorva, 3rd Floor, 8A, Express Tower, 42A, Shakespeare 110-Shantipally, Kolkata – 700 107. Sarani, Kolkata – 700 017. �थायीलेखासं./जीआइआरसं./PAN/GIR No. :AAACB 9156 F (Appellant) .. (Respondent) & आयकरअपीलसं./ITA No.1532/Kol/2017 (�नधा�रणवष� / Assessment Year: 2014-15) DCIT, CC-1(3)/Kolkata Vs. M/s. Feegrade & Company Pvt. Ltd. Aayakar Bhawan Poorva, 3rd Floor, 8A, Express Tower, 42A, Shakespeare 110-Shantipally, Kolkata – 700 107. Sarani, Kolkata – 700 017. �थायीलेखासं./जीआइआरसं./PAN/GIR No. :AAACF 6825 D (Appellant) .. (Respondent) Appellant by :Shri A. Bhattacharjee, Addl. CIT Respondent by :Shri Subash Agarwal, Advocate सुनवाईक�तार�ख/ Date of Hearing : 04/10/2018 घोषणाक�तार�ख/Date of Pronouncement : 10/10/2018 आदेश / O R D E R Per Dr. A. L. Saini: These two appeals filed by the Revenue, pertaining to Assessment Year 2014-15 are directed against separate orders passed by the ld. Commissioner of Income Tax(Appeals)-20, Kolkata,which in turn arise out of separate assessment

ITA No.1533/Kol/2017 M/s. Bonai Industrial Company Ltd ITA No.1532/Kol/2017 M/s. Feegrade& Company Pvt. Ltd. Assessment Year: 2014-15 orders passed by the Assessing Officer u/s 143(3) of the Income Tax Act 1961 (hereinafter referred to as the ‘Act’).

“1. In the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition made by the A.O on account of disallowance of Railways Punitive charges of Rs.69,77,664/- relying with the submissions of the assessee without appreciating the fact that the disallowances as the overloading charges is nothing but a penalty as per provision of section 73 of the Indian Railway Act, 1989. 2. In the facts and circumstances of the case, the Ld. CIT(A) erred in law as well as fact in deleting the addition made by the A.O on account of interest paid on belated deposit of T.D.S of interest on TDS of Rs.1,67,074/- without considering the fact that such interest is penal in matter. 3. In the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition made by the A.O on account of disallowance u/s 14A r.w. Rule 8D(2)(iii) of Rs.3,69,866/- relying with the submissions of the assessee without considering the direction of Circular 5/2014. 4. The appellant craves the leave to make any addition, alteration and modification etc. of ground or grounds on or before the date of hearing of the appeal.”

ITA No.1533/Kol/2017 M/s. Bonai Industrial Company Ltd ITA No.1532/Kol/2017 M/s. Feegrade& Company Pvt. Ltd. Assessment Year: 2014-15 deleted by the Tribunal. The ld. Counsel for the assessee submitted that these two appeals are covered by the aforesaid order of the Tribunal, a copy of which was also placed before the Bench.

“14. We have considered the rival submissions. This tribunal in the case of Feegrade & Company Pvt. Ltd on an identical issue has taken the following view :- “ 8. At the time of hearing of the appeal it was fairly accepted by the parties that the issue raised by the revenue in this appeal is squarely covered in favour of the assessee by the decision of ITAT Mumbai bench in the case of Taurian Iron & Steel Co.(P)Ltd (supra). In the aforesaid decision the Hon’ble ITAT after considering the decision of the Hon’ble Supreme Court in the case of Prakash Cotton Mills P.Ltd. 201 ITR 684 (SC) and also the nature of railway punitive charges held that the payments made to the railways for overloading of the wagons is compensatory in nature and cannot be disallowed under Explanation to Section 37(1) of the Act. The other decisions relied upon by the assessee supports the plea of the assessee and where the decisions rendered in the context of overloading charges paid to railways. In view of the above we do not find any merits in ground no.1 raised by the revenue. Consequently the same is dismissed.” 15. In the case of M/s Taurian Iron & Steel Co (supra) ITAT Mumbai Bench dealt with an identical issue and came to the following conclusion :- “The overloading charges paid by the appellant to the Railways are paid in the regular course of business in accordance with the notification issued by Ministry of Railways doted 23.12.2005. The notification of Ministry of Railways dated 23.12.2005 provides a Schedule in which 'Situation A' and Situation B provides that if the aggregated payload in a rake exceed the combined permissible carrying capacity of the rake, the punitive charges should be levied as per 'Part - I, 'Part-II, Part-Ill of Situations A & B" It provides that in case of overloading upto1/2 tonnes, 'punitive charges’ eligible on the entire weight of loading beyond the permissible carrying capacity shall be nil (as per different tables of Situation A' and Situation B' and in case the weight of commodity exceeds the permissible carrying capacity of the wagon by more than 1/2 tonnes, the punitive charges eligible on the entire weight loading beyond the permissible carrying capacity would be 2 times the freight rates applicable to that commodity in case of Situation A' and 3 times the freight rates applicable to the highest class in case of Situation B'. Thus, it is obvious from the notification of Ministry of Railways dated 23.12.2005 that the railway authorities do allow overloading of its rake and it charges 2 or 3 times

ITA No.1533/Kol/2017 M/s. Bonai Industrial Company Ltd ITA No.1532/Kol/2017 M/s. Feegrade& Company Pvt. Ltd. Assessment Year: 2014-15 the freight rate applicable to that commodity as punitive charges. Though the words used in the notification are 'punitive charges', the charges levied by the Indian Railways for carrying the goods in its rake are permitted by Railway authorities itself and the punitive charges are computed as 2 times or 3 times of the freight rates. The punitive charges levied by Railways, in accordance with the notification of Ministry of Railways dated 23.12.2005, for carrying goods in its rakes are not 'for any purpose which is an offense or which is prohibited by law'. As a matter of fact, the Indian Railways itself permits carrying weight load beyond the permissible carrying capacity subject to payment of higher rate of freight by 2 times or 3 times. Though the words are 'punitive charges', they are payment which are neither an offense nor is prohibited by the law rather the payment is in accordance with the law as provided in the notification of Ministry of Railways dated 23.12.2005. It is, therefore, held that Explanation to Section 37 is not applicable and the payment of Rs.1,01,85,788/- is allowable. Hence, the addition is deleted and Ground No. 4 is allowed.” 16. As far as the decision of the Hon’ble Delhi High Court in the case of Time Incorporated (supra) cited by the ld. DR before us is concerned that was the case of a suit for permanent injunction and damages, filed against the defendant for a passing off action and in the course of it’s judgment the Hon’ble court made a reference regarding purpose of awarding punitive damages. The said decision is not of any application whatsoever be the present case. The decision of the Hon’ble Karnataka High Court in the case of Mamta Enterprises(supra) is again a case where the criminal offence was compounded and the compounding fees was claimed as deduction. In the present case there is no offence whatsoever and there is no compounding fee paid and claimed as deduction. As far as the decision of the Hon’ble Supreme Court in the case of Haji Aziz and Abdul Brothers (supra) is concerned it was again the case of breach of penal provisions of Customs Act for which fine was paid. Under these circumstances, the expenses were not allowed as deduction. We are of the view that in the facts and circumstances of the present case the claim of the assessee for deduction was rightly allowed by CIT(A). We therefore uphold the order of CIT(A) and dismiss ground no.1 raised by the revenue.”

ITA No.1533/Kol/2017 M/s. Bonai Industrial Company Ltd ITA No.1532/Kol/2017 M/s. Feegrade& Company Pvt. Ltd. Assessment Year: 2014-15 5. Ground No.2 raised by the Revenuein ITA No.1532/Kol/2017 and Ground No.2&3 raised by the Revenue in ITA No.1533/Kol/2017 relate to disallowance on account of interest paid on belated deposit of TDS.

“7. We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, AO has disallowed the interest expenses incurred by the assessee on account of late deposit of service tax and TDS after having reliance on the judgment of Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) (Supra). The relevant extract of the judgment reads as under : FACTS During the year under consideration, the assessee failed to pay advance tax equivalent to 75 per cent of estimated tax. The Assessing Officer levied interest under section 215 as well as under section 139. The assessee claimed that since taxes which were payable were delayed, the assessee's financial resources increased which were available for business purposes. Hence, the interest which was paid to the Government was interest on capital that would be borrowed by the assessee otherwise. Hence, the amounts should be allowed as deduction. The revenue did not allow such deduction. The High Court affirmed the view. On appeal to the Supreme Court : HELD When interest is paid for committing a default in respect of a statutory liability to pay advance tax, the amount paid and the expenditure incurred in that connection is in no way connected with preserving or promoting the business of the assessee. This is not expenditure which is incurred and which has to be taken into account before the profits of the business are calculated. The liability in the case of payment of incometax and interest for delayed payment of income-tax or advance tax arises on the computation of the profits and gains of business. The tax which is payable is on the assessee's income after the income is determined. This cannot, therefore, be considered as an expenditure for the purpose of earning any income or profits. Interest which is paid for delayed payment of advance tax on such income cannot be considered as expenditure wholly and exclusively for the purpose of business. Under the Act, the payment of such interest is inextricably connected with the assessee's tax liability. If income-tax itself is not permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory objection under the Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction.

ITA No.1533/Kol/2017 M/s. Bonai Industrial Company Ltd ITA No.1532/Kol/2017 M/s. Feegrade& Company Pvt. Ltd. Assessment Year: 2014-15 Therefore, it was to be held that deduction of interest levied under sections 139 and 215 would not be allowable under section 37. In the above judgment, the claim of the assessee for interest expenses was denied as it defaulted to make the payment of advance tax as per the provisions of the Act. The advance tax is nothing but income tax only which the assessee has to pay on his income. In the instant case the default relates to the delay in the payment of advance tax and consequently interest was charged on the delayed payment of advance tax. In the above judgment the Hon’ble Apex Court held that as Income Tax paid by the assessee is not allowable deduction and therefore interest emanating from the delayed payment of income tax (advance tax) is also not allowable deduction. However the facts of the instant case before us are distinguishable as in the case before us the interest was paid for delayed payment of service tax & TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature. As such the interest on delayed payment is not in the nature of penalty in the instant case on hand. The issue of delay in the payment of service tax is directly covered by the judgment of Hon’ble Apex Court in the case of Lachmandas Mathura Vs. CIT reported in 254 ITR 799 in favour of assessee. The relevant extract of the judgment is reproduced below : “The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Bench's decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 (All.) (FB), wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue.” In view of the above judgment, there remains no doubt that the interest expense on the delayed payment of service tax is allowable deduction. The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates to the expenses claimed by the assessee which are subject to the TDS provisions. The assessee claims the specified expenses of certain amount in its profit & loss account and thereafter the assessee from the payment to the party deducts certain percentage as specified under the Act as TDS and pays to the Government Exchequer. The amount of TDS represents the amount of income tax of the party on whose behalf the payment was deducted & paid to the Government Exchequer. Thus the TDS amount does not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. Thus any delay in the payment of TDS by the assessee cannot be linked to the income tax of the assessee and consequently the principles laid down by the Hon’ble Apex Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) reported in 230 ITR 733 cannot be applied to the case on hand. Thus, in our considered view, the principle laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) is not applicable in the instant facts of the case. Thus, we hold that the Assessing Officer in the instant case has wrongly applied the principle laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd.(supra). We also find that the Hon'ble Supreme Court in the case of Lachmandas Mathura (Supra) has allowed the deduction on account of interest on late

ITA No.1533/Kol/2017 M/s. Bonai Industrial Company Ltd ITA No.1532/Kol/2017 M/s. Feegrade& Company Pvt. Ltd. Assessment Year: 2014-15 deposit of sales tax u/s 37(1) of the Act. In view of the above, we conclude that the interest expenses claimed by the assessee on account of delayed deposit of service tax as well as TDS liability are allowable expenses u/s 37(1) of the Act. In this view of the matter, we find no reason to interfere in the order of Ld. CIT(A) and we uphold the same. Hence, this ground of Revenue is dismissed.

“20.As far as disallowance of other expenses under Rule 8D(2)(iii) viz. other expenses are concerned the plea of the assessee was to exclude investments which did not yield dividend exempt income during the previous year while working out the average value of investments for application of Rule 8D(2)(ii) of the Rules. In this regard the assessee placed reliance on the decision of ITAT, Kolkata Bench in the case of REI Agro Ltd vs DCIT 144 ITD 141 (Kol) wherein it was held that while making disallowance under Rule 8D(2)(iii) of the Rules and while computing Average value of investments only investments which yielded during the relevant previous year should be considered. 21. The CIT(A) agreed with the submissions of the assessee and deleted the addition of interest expenses of Rs.2,05,685/-/- made by the AO under Rule 8D(2)(ii) of the Rules. As far as the disallowance of other expenses under Rule 8D(2)(iii) of the Rules is concerned the CIT(A) gave the direction to the AO to compute the disallowance after excluding the investments which do not yield any dividend income while working out the average value of investments. The following were the relevant observations of the CIT(A) : “ I have perused the impugned order and also considered the submissions of the assessee and relevant judicial decisions. It was argued before me that the investments were made by the assessee out of its own fund and that the borrowed fund was utilized for the purposes of

ITA No.1533/Kol/2017 M/s. Bonai Industrial Company Ltd ITA No.1532/Kol/2017 M/s. Feegrade& Company Pvt. Ltd. Assessment Year: 2014-15 the business. I find from the balance sheet for the relevant year that the assessee had reserves and surplus of Rs.10062888619/- and share capital of Rs.44982000/- as on 31-03- 2013. In this factual background, I find merit in the argument that the investments were made by the own fund of the assessee and therefore no disallowance out of interest expenditure was justified. The contention of the assessee is also supported by the decision of the jurisdictional High Court in the case of Britannia Industries Ltd 280 ITR 525 (Cal). In view of the above, the addition of Rs.205685/ -made under rule 8D(2)(ii) is deleted. The assessee has contended before me that all investments have not yielded dividend income during the year and therefore no disallowance could lawfully be made under rule 8D(2)(iii) for all investments in view of the decision of the jurisdictional ITAT in the case of REI Agro Ltd (ITA No.1331/Kol/2011). The AO may verify the contentions of the assessee in this regard. The AO shall then re-compute the disallowance under rule 8D(2)(iii) in view of the decision of the jurisdictional ITAT in the case of REI Agro Ltd (supra) by considering only those investments which yielded tax free dividend income during the year. Ground no 4 is thus, partly allowed.” 22. Aggrieved by the order of CIT(A) the revenue has raised ground no.3 before the Tribunal. The ld. DR placed reliance on the order of the AO. The ld. Counsel for the assessee placed reliance on the order of CIT(A). 23. After considering the rival submissions we are of the view that in the light of the uncontroverted factual details with regard to availability of own funds the disallowance of interest expenses in terms of Rule 8D(2)(ii) of the Rules was rightly deleted by CIT(A). As far as disallowance under Rule 8D(2)(III) of the Rules is concerned the CIT(A) has followed the decision of the Tribunal in the case of REI Agro Ltd.(supra) and has directed the AO to exclude investments which did not yield tax free income while working out the average value of investment. We find no grounds to interfere with the order of CIT(A). Ground no.2 raised by the revenue is accordingly dismissed. 24. In the result the appeal by the revenue is dismissed.”

ITA No.1533/Kol/2017 M/s. Bonai Industrial Company Ltd ITA No.1532/Kol/2017 M/s. Feegrade& Company Pvt. Ltd. Assessment Year: 2014-15 and the Revenue is unable to produce any material to controvert the aforesaid finding of the ld. CIT(A) and the ld. CIT(A) has allowed the appeal of the assessee by following the decision of the Tribunal in REI Agro Ltd. (supra). We find no reason to interfere in the order of the ld. CIT(A) and the same is hereby upheld. Therefore, ground No.3 raised by the Revenue is dismissed.

Order is pronounced in the open court on 10.10.2018.

Sd/- Sd/- (A. T. VARKEY) (A. L. SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक/ Date: 10/10/2018 (RS, Sr. PS) आदेशक���त�ल�पअ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ�/The Appellant- DCIT, CC-1(3)/Kolkata 2. ��यथ�/ The Respondent- (i) M/s. Feegrade& Company Pvt. Ltd. (ii) M/s. Bonai Industrial Company Ltd. 3. आयकरआयु�त(अपील) / The CIT(A)-20 4. आयकरआयु�त/ CIT 5. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, कोलकाता/ DR, ITAT, Kolkata 6. गाड�फाईल / Guard file. स�या�पत��त