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Income Tax Appellate Tribunal, KOLKATA BENCH “D” KOLKATA
Before: Shri Aby.T Varkey & Shri Waseem Ahmed
आदेश /O R D E R PER Waseem Ahmed, Accountant Member:- This appeal by the Revenue is directed against out of order of Commissioner of Income Tax (Appeals)-20, Kolkata dated 23.05.2016. Assessment was framed by DCIT, Central Circle-1(3), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28.01.2016 for assessment year 2013-14. The Revenue has raised following ground:- “(1) In the facts and circumstances of the case, Ld. CIT(A) is erred in deleting the disallowances as the overloading charges is nothing but a pee as per provision of section 73 of the Indian Railway Act, 1989.
DCIT, C-1(3), Kol. Vs. M/s Bonai Industrial Co. Ltd. Page 2 (2) The appellant crave the leave to make any addition, alteration, and modification etc. of ground or grounds on or before the date of hearing of the appeal.” Shri Arindal Bhattacherjee, Ld. Departmental Representative appeared on behalf of Revenue and Shri Subash Agarwal, Ld. advocate appeared on behalf of assessee.
Sole issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the disallowances made by the Assessing Officer for ₹32,63,552/- paid to India Railways (IR) for overloading charges.
Briefly, the facts are that assessee in the present case is a limited company and engaged in mining activities. The assessee in the year under consideration has claimed expense under the head “freight and transport charges” which was inclusive of punitive charges paid to IR. The assessee explained that the punitive charges were paid to the IR on account of excess quantity loaded in the wagons of IR. However, the Assessing Officer observed that punitive charges are paid to IR on account of contravention of law / rules. Therefore, he was of the view that such expense cannot be allowed as deduction as per Explanation-1 to Sec. 37(1) of the Act. Thus, the AO disallowed the same and added to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) who deleted the addition made by AO by observing as under:- “I have considered the finding of the AO on this issue in the assessment order and the submission made by the AR during the appellate proceedings. I find that my predecessor has given a detailed finding on this issue in assessee's own case for assessment year 2008-09 vide his order in appeal no.249/CC- 1(3)/CIT(A)-20/13-14 dated 11-12-2014 which is reproduced as under: "I find from the impugned order that the assessee had explained at the assessment stage that the railways punitive charges were not paid for any purpose which was an offence or which was prohibited by law but it was only in the terminology of the railways that it was called punitive charges. It appears from the material placed on record that due to the absence of Weightment Bridge at the loading point, the goods are loaded in railway wagon on the basis of some estimate and the exact weight is measured enroute by the railways when the loaded wagon actually goes to the Weightment Bridge. In case the load is found in excess of the permissible carrying capacity, then the railways DCIT, C-1(3), Kol. Vs. M/s Bonai Industrial Co. Ltd. Page 3 recover additional freight which in its terminology is called punitive charges. It appears from the Notification issued by the Ministry of Railways that the punitive charges for overloading are actually in the nature of additional freight for transporting goods beyond the permissible carrying capacity which cannot be categorised as punishment for any offence or infringement of law. In case there was absence of Weightment Bridge at the loading station and the goods were loaded by estimate, then overloading of wagons cannot possibly be avoided and such overloading being apparently common is actually permitted by the railways on overloading charges termed in its terminology as punitive charges. I therefore find merit in the contention of the Ld AR that the punitive charges are compensatory in nature for transporting goods beyond the permissible carrying capacity and such charges may in the terminology of the railways be called punitive charges but in commercial parlance it is not in the nature of penalty for infraction of law. The overloading charges paid to the railways may in its terminology be termed as punitive charges but such payments appeal to be routine payments in the nature of additional freight charges for overloading of wagons and such payments are made in accordance with law as provided in the Notification dated the 23rd December 2005 issued by the Ministry of Railways. It also appears from the Notification of the Ministry of Railways that there is no provision for criminal action or prosecution or confiscation of goods for overloading of wagons. I am of the considered view that the activities of the railways are commercial in nature and freights are fixed on commercial basis and merely because the railways is a government owned institution, the nature of overloading charges which are essentially of commercial nature cannot be characterized as penalty irrespective of the nomenclature given to such charges by the railways. It also appears that overloading of wagons is not a deliberate act on the part of the assessee but due to lack of infrastructure at the loading station. I also find that the issue is squarely covered by the various judicial decisions placed on record by the Ld AR in course of the appellate proceedings. The Hon'ble Supreme Court has in the case of Mahalaxmi Sugar Mills Co (1980) 123 ITR 429 laid down the basic principle for deciding as to whether a claim of damages or penalty was allowable u/s 37(1) : "whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure u/s 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 u/s 37(1) of the Income Tax Act whenever such examination reveals the concerned impost to be purely compensatory in nature". The Hon'ble Supreme Court reiterated the same legal position in the case of Prakash Cotton Mills Pvt Ltd (1993) 201 ITR 684. In the case of Hero Cycles Ltd 178 Taxman 484, the Hon'ble Punjab & Haryana High Court allowed the deduction of the amount paid to the Electricity Board as penalty for violation of power regulations, i.e. extra charges paid for drawing extra load in peak hours. In the case of Western Coalfields Ltd (2009) 124 TTJ (Nag) 659, the DCIT, C-1(3), Kol. Vs. M/s Bonai Industrial Co. Ltd. Page 4 Hon'ble ITAT, Nagpur Bench under identical facts and circumstances held that the overloading charges were essentially commercial in nature and cannot be characterized as penalty irrespective of the nomenclature given to such charges by the Railways. The Hon'ble ITAT has held that "As regards overloading charges, we have to take into consideration the environment in which the companies are operating. Railway is the only mode of transportation if the person wishes to transport its product through railway. This fact is important because such activities of railways are of commercial in nature and freights are fixed on commercial basis. if we look the issue in its perspective, then, what emerges is that if there were private carriers also and if the assessee would have paid identical charges to them, the same would have been allowed as a normal business expenditure especially when there is no dispute that these expenses have been incurred in the course of business operations and, therefore, merely because the railways is a government owned Institution and works under an Act of Parliament, and nature of overloading charges which are essentially of commercial nature cannot be characterized as of penal nature irrespective of nomenclature given to such charges by the railways. Further, it is not in dispute that the quantity treated as overloading has been unloaded by the railways nor it has been a case of violation of safety rules/norms, hence, the overloading so incurred cannot be equated with travelling without ticket, hence, the said contentions of the Ld DR are rejected. It is also noted that such overloading is not correct due to a deliberate act on the part of the assessee but due to lack of infrastructure and nature of commodity, hence, the ratio of the decision of the Hon 'ble Punjab & Haryana High Court in the case of Hero Cycles Ltd (supra) is squarely applicable. It is also a settled judicial principal that substance of the matter should be looked into and be given to the nomenclature given by the Railway to such charges. The object of Explanation 1 also supports the claim of the assessee as these expenses are not of the nature of any illegal/unlawful expenditure. In the case of M/s Taurian Iron & Steel Co (P) Ltd (ITA No.847 & 1613/M/2010), the Hon'ble ITAT 'D' Bench, Mumbai has held that the punitive charges paid to the railways for overloading of wagons is compensatory in nature and therefore the provisions contained in Explanation to section 37(1) are not attracted. The Hon'ble ITAT has held that" in the instant case as we have already held earlier that the punitive charges paid by the assessee to Railways for overloading of the wagons is compensatory in nature, therefore, the same cannot be disallowed by invoking the provisions of Explanation to section 37(1) of the Act". In view of the above, I am of the considered opinion that overloading charges irrespective of the nomenclature given by the railways are essentially of commercial nature which cannot be characterized as penalty and that such charges are compensatory in the nature of additional freight for overloading of wagons which is explicitly permitted by the railways and the payments are made in accordance with law as provided by the Notification of the Ministry of Railways. The punitive charges paid to the railways cannot be characterized as expenditure incurred for any purpose which is an offence or which is prohibited by law and therefore the Explanation to section 37(1) is not attracted. In view of the above, it is to be held that the disallowance of Rs.24,09,972/- as made by the AO in the impugned order is not sustainable in law therefore on the facts of the case the addition of Rs.24,09,972/- is deleted. Ground no 3 is allowed".
DCIT, C-1(3), Kol. Vs. M/s Bonai Industrial Co. Ltd. Page 5 Aggrieved by this, the Revenue has come up in appeal before us. 5. Before us both parties relied on the order of Authorities Below as favourable to them.
We have heard the rival contention of both the parties and perused the material available on record. In the instant case, issue relates to the disallowance made by the Assessing Officer for punitive charges paid by assessee to the IR. At the outset, we find that in the identical facts and circumstances Hon'ble co-ordinate bench of this Tribunal has decided the issue in favour of assessee and against the Revenue in the case of DCIT vs. Rughta Mines Ltd. in dated 10.01.2018 and relevant extract of the order is reproduced below:- 13. The ld. Counsel for the assessee placed reliance on the decision of the ITAT, Kolkata Bench in the case of DCIT vs M/s. Feegrade & Company Pvt. Ltd. In IT(SS) A. Nos. 36 to 38/Kol/2015 dated 05.04.2017 wherein this Tribunal took the view that railway punitive charges were not hit by Explanation to section 37(1) of the Act. 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 f the aggregated payload in a rake exceed the combined DCIT, C-1(3), Kol. Vs. M/s Bonai Industrial Co. Ltd. Page 6 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 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.”
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 judgement 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.”
DCIT, C-1(3), Kol. Vs. M/s Bonai Industrial Co. Ltd. Page 7 We respectfully following the consistent view of the Tribunal decline to interfere with the order passed by the Ld. CIT(A) on this account and accordingly the ground taken by Revenue is regretted.