DCIT, CC-193, KOLKATA, KOLKATA vs. M/S RUNGTA SONS PRIVATE LTD., KOLKATA

Ground no.1 raised by the revenue reads as follows :- “ (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 penalty as per provision of section 73 of the Indian Railway Act, 1989. “

The Assessee is a company. It is engaged in the business of mining. In the course of assessment proceedings u/s 143(3) of the Income Tax Act, 1961 (Act) the AO noticed that under the head ‘ Freight and Transporting expenses ‘ there were certain expenses incurred by the assesee. The aforesaid expenses also included expenditure of Rs.56,08,447/- which was paid by the assessee as ‘Railway Punitive Charges’. According to the AO these charges were in the nature of expenses incurred for any purpose which is an offence or which is prohibited by law and therefore ought not to be allowed as a deduction while computing the income from business as per the

The stand of the assessee was that these payments were not in the nature of penalty for infringement of law and were purely in the nature of compensatory charges and therefore cannot be disallowed under Explanation to section 37(1) of the Act. The assessee explained the nature of railway punitive charges that the charges though called Punitive Charges in the terminology of the railways did not actually relate to any offence or infringement of law. On the contrary, it was in the nature of additional freight on overload of goods beyond the permissible limit. The Assessee submitted that the goods are loaded for despatch to customers through Railway Wagons. When the Assessee loads the goods for despatch through Railway Wagons actual measurement of weight cannot be done due to absence of Weighing Bridge at the originating station. The loading nevertheless is done on some estimate basis which often varies from the railway measurement when it actually goes to the Weighing Bridge. In case it is found that the goods were loaded in excess than the permissible load, it cannot be unloaded. The Railways however recover punitive charges for such overloading as additional freight which is only compensatory in nature. The Assessee reiterated that overloading charges were not in the nature of punishment for violation or infraction of law but by way of compensation for permitting to overload the goods beyond the permissible limit; moreover, there is no

The Assessee also submitted that overloading of wagons was not a deliberate act on the part of the assessee but was basically due to the lack of infrastructural facility at the loading station. In case weighing Bridge existed at the loading station, then overloading of wagons could be easily avoided. The Assessee also relied on Notification dated the 23rd December 2005 (to be published in Gazette of India, Part- II, Section 3(i) of the Gazette of India) issued by the Ministry of Railways wherein punitive charges for overloading has been defined in para 3 as :

The AO did not agree with the submissions of the assessee and he held that the expenditure in question cannot be allowed as deduction in view of the provision of Explanation to Section 37(1) of the Income Tax Act, 1961 (Act).

Before CIT(A) the assessee placed reliance on the following judgements wherein it was held that railway punitive charges were compensatory payments and cannot be disallowed under Explanation to section 37(1) of the Act.

The CIT(A) found that on an identical issue he had in one of assessee’s group of cases for A.Y.2008-09 in an order dated 11.12.2014 taken a view that the punitive charges for overloading were actually in the nature of additional freight for transporting goods beyond the permissible carrying capacity which cannot be categorised as an expenditure incurred for any purpose which is an office or infringement of law. Following the aforesaid decision the CIT(A) took the view that payment in question was compensatory in nature and not penal and therefore the provision to Explanation to Section 37(1) of the Act will not be applicable. In the decision relied upon by CIT(A) there is also a discussion about the notification issued by the railway ministry of overloading charges and also the decision of the Hon’ble Supreme Court in the case of Prakash Cotton Mills Pvt. Ltd. 201 ITR 684 (SC) and the decision of the Hon’ble Punjab and Haryana High Court in the case of Hero Cycles Ltd. 178 Taxmann 484 (P&H). Reference was also made to the decision of ITAT Nagpur bench in the case of Western Coalfields Ltd (2009) 124 TTJ (Nag) 659. In the decision last cited on the same nature of expenses namely compensatory charges to the railways for over loading of the wagon, it was held to be not falling within the ambit of Explanation to section 37(1) of the Act.

Aggrieved by the order of CIT(A) the revenue has raised ground no.1 before the Tribunal.

The ld. DR placed reliance on the order of AO. It was submitted by him that the act of the assessee in overloading the wagon was an act which was against public policy for which punitive charges are levied. He drew our attention to section 73 of the Railway Act, 1989 which reads as follows :-

He laid emphasis on the fact that the statutory provision makes it clear that the punitive charges are in addition to freight and other charges. He also highlighted that punitive charges are clearly referred to as penalty. It was therefore submitted by him that the CIT(A) was not justified in deleting the addition made by the AO. The ld. DR also brought to our notice the decision of the Hon’ble Delhi High Court in the case of Time incorporated vs Lokesh Srivastava (2006) 131 Company case 198 (Delhi). He drew our attention to the observations in the aforesaid decision that the punitive damages are awarded for the purpose of providing relief to the overloaded Justice delivery system by providing a civil alterative to criminal prosecution of minor crimes. His submission was that the punitive damages in the present case are to be regarded as penalty for infringement of law falling within the ambit of Explanation to section 37(1) of the Act. The ld. DR also placed reliance to the decision of the Hon’ble Karnataka High Court in the case of CIT vs Mamta Enterprises 266 ITR 356 (Ka. In the aforesaid case, compounding charges paid for unauthorised construction was claimed as deduction while computing income from business. The Hon’ble

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.

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.”

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 ITA No.1652/Kol/2016 M/s. Rungta Sons Private Ltd. A.Y.2013-14

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 ITA No.1652/Kol/2016 M/s. Rungta Sons Private Ltd. A.Y.2013-14

The Assessee as an employer withheld the provident fund contribution payable by its employees from their salaries payable, as their share of contribution to Provident Fund (PF) and Employees State Insurance (ESI). As per section 36(1)(va) of the Act, the sum so withheld as employees contribution to PF & ESI, if it is not paid on or before the due date as provided under the relevant law governing the provident fund, will not be allowed as deduction. It is the plea of the assessee that the employees’ contribution to PF & ESI had been paid by the assessee on or before the due date of filing the return of income for the relevant assessment year u/s 139(1) of the Act and therefore deduction claimed should be allowed as provided under the proviso to section 43B of the Act. The said plea of the assessee was rejected by the AO for the reason that the proviso to section 43B of the Act cannot be read into the provision of section 36(1)(va) of the Act.

On appeal by the assessee, the CIT(A) directed the AO to allow the claim of the assessee for deduction and in doing so, the CIT(A) followed the decision of the Hon’ble Delhi High Court in the case of CIT vs AIMIL Ltd. & Ors. 229 CTR 418 (Del) wherein it was held that employees’ contribution to PF should be allowed as deduction which is paid on or before the due date of filing the return of income u/s 139 of the Act. Aggrieved by the order of CIT(A) the revenue has raised ground no.2 before the Tribunal. ITA No.1652/Kol/2016 M/s. Rungta Sons Private Ltd. A.Y.2013-14

At the time of hearing it was brought to our notice that the Hon’ble Calcutta High Court has also taken the view that employees’ contribution to PF paid on or before the due date of filing the return of income u/s 139(1) of the Act should be allowed as deduction. In this regard the decision of the Hon’ble Calcutta High Court in the case of M/s. Akzo Nobel India Ltd. Vs CIT in ITA 110 of 2011 order dated 14.06.2016 and in the case of CIT vs Vijayshree Ltd., of the Hon’ble Calcutta High Court in GA No.2607 of 2011 order dated 06.09.2011 was filed before us. In the order in the case of Vijayshree Ltd., (supra), the Hon’ble Calcutta High Court held as follows :

Ground No.3 raised by the revenue reads as follows :-

As far as ground no.3 raised by the revenue is concerned the facts are that the assesee earned tax free dividend income. The AO invoking the provision of section 14A of the Act r.w. Rule 8D of the I.T.Rules, 1962 (Rules) disallowed the expense of Rs.3,52,568/- computed in the following manner :-

Before CIT(A) the assessee pointed out that the investments as appearing in the balance sheet as on 31.03.2013 was a sum of Rs.4 corres and that since A.Y.2009- 10 there was no new investments. The assessee pointed out that the position of own funds are as follows :- 31.03.2013 31.03.2012 “ Share Capital 24,57,54,000.00 24,57,54,000.00

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)(iii) of the Rules. In this regard the assessee placed reliance on the decision of ITAT, Kolkata Bench in the case of REL Agro Ltd vs DCIT 144 ITD 141 (Kol) wherein it was held that while working Average value of investments while applying Rule 8D(2)(iii) of the Rules only dividend yielding investments have to be taken into account. The CIT(A) agreed

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 the business. I find from the balance sheet for the relevant year that the assessee had share capital of Rs.245754000/- 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.152568/ -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 5 is thus, partly allowed.”

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).

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 ITA No.1652/Kol/2016 M/s. Rungta Sons Private Ltd. A.Y.2013-14