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Income Tax Appellate Tribunal, BENCH ‘D’ KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM ]
PER N.V.VASUDEVAN, JM:
This is an appeal by the Revenue against the order dated 23.05.2016 of C.I.T- (A)-20, Kolkata relating to A.Y.2013-14. 2. 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.27,60,951/- 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 provision of Explanation to Section 37(1) of the Act. Section 37(1) of the Act provides that any expenditure (not being expenditure of the nature described ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14
in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed as a deduction in computing income chargeable under the head "Profits and gains of business or profession". Explanation to Sec.37(1) lays down as follows: “For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”
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 provision for criminal action or prosecution or confiscation of goods for overloading.
ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14
It was argued that in fact overloading was very common which was permitted by the railways on additional freight termed as punitive charges.
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 :
"Where the commodities are overloaded in a 8-wheeled wagon, the railway administration shall recover punitive charges as provided in parts I, II and III of the situation 'A' & 'B' of the Schedule, from the consignor, the consignee or the endorsee as the case may be, for the entire weight of the commodities loaded beyond the permissible carrying capacity for the entire distance to be travelled by the train hauling the wagon from the originating station to the destination point, irrespective of the point of detection of overloading : provided that no punitive charges will be levied if the customer carries out load adjustment at the originating station itself in case of detection of overloading at originating point.” 6. The Assessee thus argued that the very heading of para 3 of the said Notification 'issued by the Ministry of Railways namely "punitive charges for overloading" makes it amply clear that such charges were actually in the nature of additional freight for overloading beyond the permissible carrying capacity and were not in the nature of penalty for any offence or infringement of law. The charges were in fact compensatory in nature for transportation of goods loaded beyond the permissible carrying capacity and it was only in the terminology of the railways that such charges are called punitive charges but in commercial parlance it is not in the nature of penalty for infraction of law. Therefore Explanation to section 37(1) of the Act will not apply to such charges.
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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.
M/s Taurian Iron & Steel Co vs ACIT, ITA No. 847 & 1613/M/2010 2. Western Coalfields Ltd vs DCIT, ITA Nos. 289 & 290/Nag/2006 & 261/Nag/2008 3. Agarwal Roadlines (P) Ltd vs DCIT, ITA No. 668/Ahd/2009 4. DCIT vs Bharat C Gandhi, ITA No. 4270/Mum/2009
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.
ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14
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 :-
“ 73. Punitive charge for overloading a wagon.-Where a person loads goods in a wagon beyond its permissible carrying capacity as exhibited under sub-section (2) or sub section (3), or notified under sub-section (4), of section 72, a railway administration may, in addition to the freight and other charges, recover from the consignor, the consignee or the endorsee, as the case may be, charges by way of penalty at such rates, as may be prescribed, before the delivery of the goods: Provided that it shall be lawful for the railway administration to unload the goods loaded beyond the capacity of the wagon, if detected at the forwarding station or at any place before the destination station and to recover the cost of such unloading and any charge for the detention of any wagon on this account.”
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
ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14
Karnataka High Court held that the compounding fee was paid for the purpose of compounding a criminal offence and was therefore hit by the provision of Explanation to section 37(1) of the Act. Reference was also made to the decision of the Hon’ble Supreme Court in the case of Haji Aziz & Abdul Brothers vs CIT 41 ITR 350 (SC) . In the aforesaid case fine paid to customs authorities for release of confiscated goods imported contrary to law was held to be not allowable as deduction u/s 37(1) of the Act. 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.
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 that f the aggregated payload in a rake exceed the combined permissible carrying capacity of the rake, the punitive charges should be levied as per 'Part - ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14
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 ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14
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.
Ground No.2 raised by the revenue reads as follows :- “(2) In the facts and circumstances and law point of the case, Ld. CIT(A) is erred in deleting the additions u/s 14A ·without going into the provision of IT Act and IT Rule. “
As far as ground no.2 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 r.w. Rule 8D disallowed the expense of Rs.4,30,385/- computed in the following manner :-
As such, Rs.4,30,385/- was added back to the total income of the assessee as disallowance u/s 14A of the Act.
ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14
Before CIT(A), the assessee submitted that the investments as appearing in the balance sheet as on 31.03.2013 was a sum of Rs.4,44,40,000 and that these investments were made in A.Y.2008-09 and since A.Y.2008-09 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 44982000.00 44982000.00 Reserve & Surplus 10062888619.64 8340605847.72
As far as disallowance under clause (ii) of Rule 8D is concerned, the assessee pointed out that no disallowance on account of interest expenditure is warranted as the assessee was having huge own funds in the form of share capital & reserves to the extent of Rs 1011 crores as on 31.03.2013 whereas total investments were only Rs. 4.49 crores. Even if it is presumed that investments were made out of mixed funds, it is a settled law that if mixed funds are available, it should be presumed that investment in shares is made out of own funds. The assessee relied on the decision of the Hon’ble Bombay HC in the case of CIT vs. Reliance Utilities and Power Ltd. 313 ITR 340 in regard to allowance of interest u/s 36(i)(iii) and in the case of CIT vs. HDFC Bank Ltd. (ITA 330 of 2012). As per the decision in the case of HDFC Bank Ltd (supra) , if share capital and reserves are available along with borrowed capital, a presumption can be made that investment in shares have been made from own funds. Relevant extract of the decision was as under: 'In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the ass see would be out of the interest free funds available with the assessee. '
The assessee thus pleaded that disallowance of interest expenses in terms of Rule 8D (2)(ii) should be deleted. 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 ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14
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 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.”
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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. Order pronounced in the open Court on 10.01.2018.
Sd/- Sd/- [Waseem Ahmed] [ N.V.Vasudevan ] Accountant Member Judicial Member Dated : 10.01.2018. [RG Sr.PS] Copy of the order forwarded to: 1.M/s Feegrade & Company Ltd., 8A, Express Tower, 42A, Shakespeare Sarani, Kolkata-700012. 2. D.C.I.T., Central Circle-1(3), Kolkata. 3. C.I.T.(A)0, Kolkata 4. C.I.T.-Central-1, Kolkata.. 5. CIT(DR), Kolkata Benches, Kolkata. True Copy By order,
Senior Private Secretary Head of Office/D.D.O., ITAT, Kolkata Benches ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14
ITA No.1654/Kol/2016 M/s Feegrade & Company Ltd. A.Y.2013-14