DCIT, CIRCLE-2(1), BHUBANESWAR vs. SERAJUDDIN & CO. PVT. LTD., BHUBANESWAR

It was submitted by the ld. CIT-DR that in the course of assessment, it was noticed that the assessee has paid an amount of Rs.3,97,96,875/- under the head punitive charges in the profit and loss account. It was submitted that on verification it was noticed by the AO that the punitive charges was the charges levied by the East Coast Railway for transport of the excess material as prescribed by the railways. It was submitted by the ld. CIT-DR that as the punitive charges were crystal clear violation of the rules of railways, the levy has been made on the assessee and in view of the Explanation 1 to Section 37 of the Act the said expenses had been disallowed by the AO. It was further submitted that the ld. CIT(A) following the decision of the Nagpur Bench of the Tribunal in the case of Western Coalfields Ltd. Vs. ACIT, in & 290/Nag/2006 and also the decision of Mumbai Bench of the Tribunal in the case of Taurian Iron & Steel Co. Ltd., ITA No.847&1613/Mum/2010, dated 14.12.2011, deleted the disallowance. It was the submission that the Hon‟ble Supreme Court in the case of Apex Laboratories (P.) Ltd., reported in [2022] 135 taxmann.com 286 (SC) has categorically held that the acceptance of freebies by medical practitioners was punishable by Medical Council of India and consequently, the distribution of such freebies would also fall within purview of prohibited by law and, therefore, the expenditure incurred by the assessee-pharmaceutical company in distribution of such freebies could not be granted as deduction in terms of Explanation 1 to Section 37(1) of the Act. He also placed reliance on the decision of Hon‟ble Karnataka High Court in the case of Mamta Enterprises, reported in [2004] 135 TAXMAN 393 (KAR.), wherein the assessee had paid a compounding fine to the Town Planning Authority, the same could not be claimed as an expenditure u/s.37 of the Act as the same was a fine paid by the assessee. He further placed reliance on the decision of the Hon‟ble Supreme Court in the case of Maddi Venkataraman And Co. (P) Ltd., reported in [1998} 229 ITR 534 (SC), FERA and the fines and penalties levied thereunder is not deductible u/s.37 of the Act. It was the submission that as the punitive charges is in the nature of fine paid to the railways authorities, which is a branch of Government of India, the punitive charges is not allowable as a deduction in view of the provisions of Explanation 1 to Section 37(1) of the Act.

In reply, ld. AR drew our attention to page 13 of the order of Mumbai Bench of the Tribunal in the case of M/s Taurian Iron & Steel Co. Pvt. Ltd., passed in dated 14.12.2011, wherein in para 10.4, it has been held as under :- 10.4 Based on the arguments advanced by the assessee, the ld. CIT(A) deleted the addition made by the A.O. by observing as under:- “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 dated 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 —I‟, „Part-II, „Part-III of Situations A & B” It provides that in case of overloading upto 1/2 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‟. (ii) 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.” Aggrieved with such order of the ld. CIT(A), the Revenue is in appeal before us.

It was also submitted that the punitive charges are nothing but overloading charges and it was not an expenditure prohibited by law. He vehemently supported the order of the CIT(A).

We have considered the rival submissions. The term “prohibited by law” as occurring to Explanation 1 to Section 37(1) of the Act has been explained by the Hon‟ble Supreme Court in the case of Apex Laboratories (P.) Ltd., reported in [2022] 135 taxmann.com 286 (SC). The Hon‟ble Supreme Court after considering the term “prohibited by law” came to the conclusion that such acts which would wholly undermine public policy and which would defeat the object of a statute or is an illegality which goes to the root of the matter, the expenditure in relation to the same is not allowable. With this kept in mind, if one is to understand the concept of punitive charges, clearly the punitive charges are plain and simple overloading charges. These charges are not levied on account of any act done by an assessee in violation of any law, nor it is a fine levied on the assessee for an infraction of the law much less the doing of a prohibited activity. This being so, we are of the view that the ld. CIT(A) was right in deleting the disallowance as made by the AO.

The decision relied upon by the ld. CIT-DR in the case of Maddi Venkataraman And Co. (P.) Ltd. (supra), does not apply to the facts of the present case insofar as in the case of Maddi Venkataraman And Co. (P.) Ltd. (supra), the expenditure was in the nature of fines and penalties in respect of the transaction carried out in violation of the provisions of FERA. It was a clear case of infraction of law. Further, the reliance placed on by the ld. CIT-DR on the decision of Hon‟ble Supreme Court in the case of Apex Laboratories (P) Ltd. (supra) is also not applicable to the present facts of the case as it was a clear case of infraction of law being the Medical Council of India Rules and also the said expenditure was against the public policy. In the case of Mamta Enterprises (supra), again there was clear infraction of law which was compounded. Thus, the facts considered in the above cases, as relied on by the ld. CIT-DR, are totally different from the facts of the present case in hand. In view of the above, the findings recorded by the ld. CIT(A) on this issue stand confirmed and consequently the appeal of the revenue stands dismissed.