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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM]
ORDER Per Shri M. Balaganesh, AM:
This appeal by revenue is arising out of order of CIT(A)-VIII, Kolkata vide appeal No. 69/CIT(A)-VIII/Kol/12-13 dated 13.06.2013. Assessment was framed by DCIT, Circle- 7, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2010-11 vide his order dated 28.09.2012.
The only issue to be decided in this appeal is as to whether the ld CITA is justified in deleting the disallowance made on account of demurrage charges and penalty charges imposed by Steel Authority of India Ltd and Central Coal Fields Ltd in the facts and circumstances of the case.
The brief facts of this issue is that the assessee company incorporated with the main objects of carrying on the activities of handling and stevedoring contractor. During the previous year relevant to the assessment year under dispute, the respondent was acting in similar capacity for Steel Authority of India and Central Coalfields Limited. The ld AO observed that the assessee had made payment of Rs. 36,81,373/- and Rs. 1,43,27,044/- to Steel Authority of India Ltd (SAIL in short) and Central Coal Fields Ltd (CCFL in short) respectively on account of railway demurrage and punitive charges which were included in “Handling & Stevedoring Expenses’ and accordingly not admissible as deduction in terms of Explanation to Section 37(1) of the Act as the same in the opinion of the ld AO are penal
M/s. Ripley & Company Ltd., AY 1010-11 in nature. The ld AO observed that such expenses arose for breach of the contractual terms entered with SAIL and CCFL. The said addition was deleted by the ld CITA. Aggrieved, the revenue is in appeal before us on the following ground:- “That under the facts and circumstances of the case, the Ld. CIT(A) has erred in law as well as in facts in deleting the disallowance made by the A.O. of Rs.1,80,08,417/- towards demurrage charge and penalty charge (imposed by Steel Authority of India Ltd. & Central Coal Fields Ltd.) respectively since these are penal in nature and under the Income Tax Act, 1961, penalty of any sort is not an allowable expense.”
The ld DR vehemently relied on the order of the ld AO. In response to this, the ld AR argued that the issue is squarely covered in favour of the assessee in assessee’s own case by the order of the co-ordinate bench of this tribunal in dated 27.6.2014 for the Asst Year 2008-09 ; covered by the Hon’ble Jurisdictional High Court in the case of CIT vs Jiyajeerao Cotton Mills Ltd reported in (1992) 103 CTR (Cal) 426 ; Nanhoomal Jyoti Prasad vs CIT reported in (1980) 3 Taxman 60 (All) ; Mahalakshmi Sugar Mills Co. Ltd vs CIT reported in (1984) 19 Taxman 447 (Delhi) and accordingly argued that there interference need to be made in the order of the ld CITA.
We have heard the rival submissions and perused the materials available on record including the paper book containing summary and evidences of demurrage and punitive charges deducted by SAIL and CCFL (pages 5 to 41of PB) ; copy of agreement with SAIL (pages 42 to 73 of PB) ; copy of ledger account of penalty and demurrage imposed by CCFL (pages 74 to 78 of PB) ; copy of agreement with CCFL (pages 79 to 200 of PB) ; copy of return together with financial statements (pages 239 to 247 of PB) ; copy of certification of incorporation together with memorandum and articles of association of the assessee (vide pages 248 to 272 of PB). It is an admitted fact that the assessee is contractually bound by the Steel Authority of India, and Central Coalfields Limited to act in various capacities. The assessee could not execute their work within the time allowed in the contracts as required by the Steel Authority of India and Central Coalfields Limited which resulted in delay in completing the work beyond the scheduled time. On failure to carry out the work as per schedule, the Steel Authority of India and Central Coalfields Limited imposed demurrage as well as punitive charges in accordance with the terms of the contract entered into with them by the assessee. The demurrage was charged by the principal of the contractees upon the payments made to the Steel Authority of India and Central Coalfields
M/s. Ripley & Company Ltd., AY 1010-11 Limited who in turn charged the same on the payments made to the assessee. In other words, the demurrage arose out of the failure of the assessee to complete the work within the prescribed time allotted by the principal of the contractees and the same was deducted from the payments made to the contractees of the assessee who, in turn, deducted the same from the payments made to the assessee. In this line of business, such imposition of demurrage charges is usual. There is no infringement of any law, the failure of which has led to the instant imposition of demurrage but merely due to inability to comply with certain terms of the contract, the levy was imposed. The statutory prescription contained in the Explanation along with the provisions of sec. 37(1) Act prohibits deduction of expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law as being opposed to public policy. In the instant case, incurring of the expenditure on demurrage and claiming the same as an expense was not for an offence nor prohibited by law as being opposed to public policy. Where demurrage charged by port authorities is in the nature of compensation for delay in clearing the goods from the godowns of the port authorities which includes amount chargeable for storage and safe custody of the goods by the port authorities beyond the free period allowed under port rules, therefore, the demurrage paid by the assessee was not a fine paid for any criminal act but compensation for use the part facilities beyond the permissible free period and the impugned expenditure is a permissible revenue deduction. It is further settled that payment of demurrage is not in the nature of penalty and that it is merely charge made by the railway administration to compensate itself for keeping the goods of the assessee in its custody beyond a particular time and therefore, the payment of demurrage is incidental to business and was an allowable deduction. Further, the contracts entered into by the assessee had specific clause for imposition of penalty in case it failed to make progress as per their requirement mentioned in the work rate chart. The contractees, Steel Authority of India and Central Coalfields Limited imposed the instant punitive charges on account of breach of contract which does not fall in the category of payment of penalty for breach of any law of the land but is simply a compensation for breach of contractual obligations. In other words, the punitive charges arose out of the failure of the assessee to complete the work within the time frame agreed with the contractees, Steel Authority of India and Central Coalfields Limited. Such types of penalties are usual in this, line of business and the contractees deduct such charges from the payment disbursed by them. The works undertaken as agreed in the contracts entered into
M/s. Ripley & Company Ltd., AY 1010-11 were not completed in time and therefore punitive charges under the default clause as laid down therein had to be paid. It is not a penalty for breach of law. Such payment was perforce made to honour the contractual obligation under the agreements executed. This was done in course of carrying on of the business by the assessee. In the instant case, there was a specific requirement to complete the work in time and a clause for imposing punitive charges was included for any default. These rights and obligations arose in course of carrying on of the business of the respondent. Therefore, this payment made under a contractual obligation is to be allowed u/s. 37(1) of the Act.
We find that the reliance placed by the ld AR on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs Jiyajeerao Cotton Mills Ltd reported in (1992) 103 CTR (Cal) 426 is well founded. In the said case, it was held that :
“12. From the facts noted by the IT authorities and the Tribunal, it appears that the goods were not delivered in time and as because the goods were not delivered in time a penalty under the default clause the aforesaid sum of Rs. 47,393 had to be paid by way of penalty. It is not a penalty for breach of any law. The payment was made on account of the contractual obligation under cl. 12 of the agreement. When the goods were not delivered within the stipulated period, an extra amount, designated 'penalty' had to be paid. This was done in course of carrying on the business by the assessee. Usually time is not of the essence of the contract but the parties are entitled to make it so by inserting a specific clause in the contract. The parties are entitled to fix the time within which the goods must be delivered and to stipulate that if there is any failure to deliver the goods within the contracted period, extra money will have to be paid to compensate the buyer for non-delivery of the goods in time.
In the instant case, there was specific requirement to deliver the goods in time and a penalty clause for default. These rights and obligations arose in course of carrying on of the business of buying and selling goods. I fail to see how this payment made under a contractual obligations cannot be allowed as business expenditure.”
We find that the payments in the form of punitive charges made by the assessee could under no circumstances be regarded as illegal payments or payments which were opposed to public policy. We find that as long as the payment made is not by way of default on account of infraction of any law and / or opposed to public policy, the same would be allowable as deduction. We hold that in the instant case, the punitive charges paid are only compensatory in nature pursuant to the contractual obligation which is directly
M/s. Ripley & Company Ltd., AY 1010-11 connected or intrinsically related with the carrying on of its business which unequivocally qualifies as an allowable deduction u/s 37(1) of the Act. It is well settled that the nomenclature used in any provision of law to describe any payment, to be made by any person, as interest, compensation, penalty , etc is not conclusive. It is incumbent on the part of the authorities to construe the provisions as a whole to find out the true nature of the impost sought to be levied. In certain cases, the impost may be composite comprising of element of compensatory nature as well as penalty nature. Reliance in this regard is placed on the decision of the Hon’ble Andhrapradesh High Court in the case of CIT vs Bharat Television P Ltd reported in (1996) 218 ITR 173 (AP).
It is not in dispute that the demurrage and / or punitive charges were deducted from the bill raised by the assessee in its ordinary course of its business. We find that the Ld AO had misconstrued the nature of demurrage and / or punitive chages as being paid for infraction of law and opposed to public policy thereby disallowing the same by invoking the Explanation to Section 37(1) of the Act. We find that the Co-ordinate Bench of this Tribunal in assessee’s own case in dated 27.6.2014 for the Asst Year 2008-09 reported in (2014) 40 CCH 401 Kol, Trib observed that the assessee during the year derived income from execution of jobs of handling contractors under CCFL (Govt. Undertaking). That in the execution of such jobs, the assesese had not always been given adequate time and the delay in completion of job resulted in imposition of penalty. That demurrage charges are usual in the line of business. It was held that :-
6.1. Thus we find that when the amounts are paid on contractual obligation the same have to be allowed as business expenditure. The amount paid for non-delivery of goods in time is allowable as deduction even though such amount is designated as “Penalty” in the supply contract, time being the essence of the contract. In view of the above discussions and precedent we do not find any infirmity in the order of the ld CIT(A) and accordingly we uphold the same.”
We find that the decision relied on Hon’ble Allahabad High Court in the case of Nanhoomal Jyoti Prasad vs CIT reported in (1980) 3 Taxman 60 (All) wherein it was held demurrage charged by port authorities is in the nature of compensation for delay in clearing the goods from the godowns of the port authorities and it includes amount chargeable for storage and safe custody of the goods by the port authorities beyond the free period allowed under port rules. It was further held that the demurrage paid by the assessee was not a fine
M/s. Ripley & Company Ltd., AY 1010-11 paid for any criminal act but compensation for use of the port facilities beyond the permissible free period.
We also find that the decision of the Hon’ble Delhi High Court in the case of Mahalakshmi Sugar Mills Co. Ltd vs CIT reported in (1984) 19 Taxman 447 (Delhi) it was held that payment of demurrage is not in the nature of damage or penalty and it is merely a charge made by the railway administration to compensate itself for keeping the goods of the assessee in its custody beyond a particular time. Payment of demurrage is incidental to business and its impact is to increase the cost to the assessee of the goods transported. Therefore, the expenditure on this account can be said to be laid out wholly and exclusively for the assessee’s business.
In view of the aforesaid findings, in the facts and circumstances of the case and respectfully following the judicial precedents relied upon hereinabove, we find no infirmity in the order of the ld CITA. Accordingly, the ground raised by the revenue is dismissed.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 23.09.2016 Sd/- Sd/- (S. S. Viswanethra Ravi) (M. Balaganesh) Judicial Member Accountant Member Dated : 23rd September, 2016 Jd.(Sr.P.S.) Copy of the order forwarded to: APPELLANT – DCIT, Circle-7, Kolkata. 1. Respondent –M/s. Ripley & Company Ltd., Bhagyakul Mansion, Block- 2 C, 1st Floor, 22, Lee Road, Kolkata-700020. The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,