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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI A.T. VARKEY, JM & DR. A.L.SAINI, AM
आदेश / O R D E R
Per Dr.Arjun Lal Saini, AM:
The captioned appeal filed by the Revenue, pertaining to assessment year 2009-10, is directed against the order passed by the ld. Commissioner of Income Tax(Appeals)-XII, Kolkata in Appeal No. 384/XII/R-11/11-12 dated 05.03.2014, which in turn arises out of an order passed by the AO u/s 143(3) of the Income Tax Act 1961, (hereinafter referred to as the ‘Act’), dated 22.12.2011.
return of income for assessment year 2009-10 on 29.09.2009declaring total income of Rs. 91,80,24,850/-. The assessee’s return of income was processed u/s 143(1) of the Income Tax Act. Later on, the assessee’s case was selected for scrutiny u/s 143(2) of the Act and the Assessing Officer has completed the assessment by making addition on account of interest on late payment of service tax. The Ld. Assessing Officer observed that from the details of the interest paid by the assessee during financial year 2008-09, it is seen that the assessee company paid interest of Rs. 68,81,675/- with the Narration “Interest on late payment of service tax”. Therefore, the ld. Assessing Officer held that from the Narration of the entry in the books of accounts, it was evident that the said interest is penal in nature. Hence, the claim of the interest paid, on late payment of service tax of Rs. 68,81,675/- was disallowed and added back to the total income of the assessee.
Aggrieved from the order of the Assessing Officer the assessee filed an appeal before the Commissioner of Income Tax( Appeals), who has deleted the addition made by the Assessing Officer. The Ld. CIT(A) observed that the basic conditions for allowance of deduction u/s 37(1) of the Act are- i) the expenditure should not be personal expenditure of the assessee, ii) the expenditure should have been laid out wholly and exclusively for the purpose of business or profession. The Finance Act, 1998 has inserted an Explanation in Section 37(1) to provide that any expenditure incurred by the assessee which is an offence or which is prohibited by any 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 Ld. CIT(A) also held that where penalty is incurred for the contravention of any specific statutory provisions, it cannot be said to be commercial loss falling on the assessee as a trader and it is not deductible. The Ld. CIT(A) further observed that however, where the payment of penalty or fine is of the nature of compensatory liability, the same is allowable as a deduction, as business expenditure u/s 37(1) of the Act. The Ld. CIT(A) relied on the judgment of Hon’ble Punjab &Hariyana High Court in the case of CIT vs. Hoshiari Lal Kewal Krishan (2007) 160 Taxmann 96 wherein it was held that a penalty or fine paid under any law would not always be in the nature of punishment for breach of law. It may be compensatory liability irrespective of the nomenclature used. In that case, the Court allowed deduction of payment of fine paid to Excise Department for belated payment of Excise duty installment. In view of the principle of law laid down in payment of service tax is an expenditure laid down for commercial expediency and it is deductible u/s 37(1) of the IT Act, therefore, the Ld. CIT(A) deleted the disallowance of Rs. 68,81,675/- made by the Assessing Officer.
Not being satisfied with the order of the Commissioner of Income Tax (Appeals), the Revenue is in appeal before us and has taken following grounds of appeal:
1. That in the facts and in law of the case the Ld. CIT(A) erred in deleting the addition of Rs. 68,81,675/- on account of interest paid on late deposit of service tax.
2. That in the facts and in law of the case the Ld. CIT(A) erred in deleting the expenditure which is penal in nature.
The Ld. DR for the Revenue has vehemently submitted before us that the assessee has paid interest on late payment of service tax and it is a kind of a penal nature and therefore, should not be allowed u/s 37(1) of the Act. Therefore, the Ld. DR for the Revenue has defended the order passed by the Assessing Officer.
On the other hand, the Ld. Counsel for the assessee has submitted before us that the assessee has paid interest on late deposit of service tax and it is a kind of compensatory nature and not in a penal nature i.e. interest on late deposit of service tax is compensatory in nature and would be allowable as deduction in computing the profits of a business. The Ld. Counsel for the the case of Ginners & Pressers Ltd. vs ITO in assessment year 2003-04 wherein it has been held as follows:
6. The first issue that arises in Revenue’s appeal is whether interest paid on delayed payment of service tax is penal in nature or not. The Assessing Officer disallowed the amount of interest paid on delayed payment of service tax, on the grounds that it is penal in nature. The first appellate authority held that the said interest was only compensatory in nature and as it is not levied for violation of a Statute, no disallowance can be made. We fully agree with these findings of the first appellate authority. The Ld. Senior Counsel Mr. Percy Pardiwalla, pointed out that interest on delayed payment of service tax is levied u/s 75 of the Service Tax Act and penalty for failure to pay service tax is governed u/s 76 of that Act. A plain reading of both the sections 75 and 76 clearly demonstrate that as far as interest is concerned, it is purely compensatory in nature and hence, should be allowed as such. The interest in this case is not levied for violating any Statute. Thus, we uphold the findings of the first appellate authority and dismiss this ground of the Revenue
Having heard the rival submissions, perused the material available on record, we are of the view that the interest paid by the assessee on late payment of service tax is compensatory in nature.
Therefore, we are of the view that whenever any statutory liability paid by the assessee between damages or penalty or interest is claimed as allowable expenditure u/s 37(1) of the IT Act. The Assessing Officer is required to examine the scheme of the provision of the relevant Statute providing for payment of such expenditure notwithstanding the nomenclature of the expenditure as given by the Statute to find out whether it is compensatory nature or penal in the IT Act wherever such examination reveals the concerned expenditure/penalty to be purely compensatory in nature. In the instant case, it has been clearly found that though termed of interest paid on late payment of service tax, the said payment is in the nature of compensatory and therefore, allowable u/s 37(1) of the Act. Based on the above cited reasoning, we dismiss the appeal filed by the Revenue.
In the result, the appeal filed by the Revenue,is dismissed.
Order pronounced in the open court on this 07 / 07/2017.
Sd/- Sd/- (A.T. VARKEY) (DR. A.L.SAINI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER कोलकाता/Kolkata; �दनांक Dated 07/ 07/2017 SB, Sr.PS. आदेशक���त�ल�पअ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ�/ The Assessee- DCIT Cir-II, Kolkata 2. ��यथ�/ The Respondent.-M/s Safexpresspvt. Ltd. 3. आयकरआयु�त(अपील) / The CIT(A), :Kolkata. 4. आयकरआयु�त/ CIT �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, कोलकाता/ DR, ITAT, Kolkata 5. 6. गाड�फाईल / Guard file. स�या�पत��त //True Copy// By Order
Senior Private Secretary Head of Office/D.D.O,’ I.T.A.T., Kolkata Benches, Kolkata