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Income Tax Appellate Tribunal, DIVISION BENCH, “A” CHANDIGARH
Before: SHRI VIKRAM SINGH YADAV& SHRI PARESH M. JOSHI
Order PER PARESH M. JOSHI, JM: Both the above appeals have been filed by the Assessee. Since the issues involved in both the above appeals are common and were heard together therefore they are being disposed off by this consolidated order for the sake of brevity. We shall take appeal of the Assessee in as a lead case.
This is an Appeal filed by the Assessee u/s 253 being aggrieved by order dated 22.03.2000 passed by learned CIT(A) under section 250 of the Income Tax Act, 1961 which is hereinafter referred to as the impugned order.
Factual Matrix
The Assessee Corporation is owned and controlled by Govt. of Himachal Pradesh.
The Assessee Corporation deals in Forest Produce like Timber etc. for and on behalf of Govt. of H.P and in return pays royalty to the state of Himachal Pradesh.
Asst. Year 1990-91 5. During the Corresponding to previous year 1989-1990, the Assessee Corporation had not filed a Return of income, by due date.
Accordingly, a notice u/s 142(1) dated 21.02.1991 was issued requiring the Assessee to file the return of income, Audited Accounts and other relevant documents.
That in response to the above Notice dated 21.02.1991 a return of income of Rs.92,52,000/- which had been worked out on the basis of Proforma Accounts was filed on 30.03.1991.
That despite letter dated 26.07.1991 of the Revenue, the Assessee failed to file Audit report as required u/s 44AB; within stipulated time of 15 days.
In view of aforesaid the return of income was held to be defective and invalidvide order u/s 139(9) dated 03.06.1992.
It is required to be noted that return of income for Assessment Years 1988-89, 89-90 and 1991-92 too were held to be invalid vide orders passed under section 139(9) in the respective Assessment Years.
11. Thereafter, the Assessee Corporation field Writ Petitions in the High Court of Himachal Pradesh for Assessment Years 1988-89 to 1991-92 being (CWP Nos.590/92 to 593/92) against orders dated 03.06.1992 passed u/s 139(9) and the Hon'ble Court as per order dated 28/08/1992 directed as under:-
He a r d, th e o rder da t e d 3 r d Ju ne 199 2 s t a ye d. H o w e v e r, l i be r t y w a s gi ve n t o Re ve nue to t a k e f ur th e r s te ps a s s u mi n g re t u rn w a s f i l e d b y th e Ass es se e w a s a v a l i d r e t u r n, s u bj e c t t o fi n al di s pos al of th e W ri t Pe ti t i o n (S u pra ) .
Thereafter, statutory notices under section 143(2) and 142(1) were issued to the Assessee from time to time and ultimately the Assessment was completed u/s 144 of the IT Act, 1961 on 31/03/1994 at the Returned income of Rs.92,52,000/- for the reasons given in the Assessment Order. The assessment framed by the Assessing Officer was confirmed by CIT(A), Shimla vide her order dated 21.08.1995. The Assessee Corporation had filed another Writ Petition (CWP No.125/95) dated 14/03/1995 before Hon'ble High Court of Himachal Pradesh on which the following orders dated 05.05.1997 came to be passed, the contents of which is reproduced hereunder in toto: -
In vi ew of th e order passed in CWP Nos.590 /91 to 593 /92, this Writ P etition doe s not survi ve as the en tire proceedin gs commenced from Invalid return. It is needl ess to say that subsequent orders of assessment p ass ed by the I ncome Tax Officer an d the appellate order s p assed on the app eal s fil ed agai nst the said asses sment order s a re i nvalid consequential ly. The Writ P etition di smissed wi th the above observations. I nterim order is vacated.
Since, the entire assessment proceedings completed in this case were held to be invalid and quashed as ha ving been finalized on the basis of an invalid return by the Hon'ble High Court, a proposal dated 23.10.1997 for issuing notice u/s 148 for the Assessment Year 1990-1991 was submitted to the CIT, Sihmla and his approval as provided u/s 151(2) of the IT Act, 1961 was re ceived in this office on 13.11.1997. Thereafter a notice u/s 148 dated 18.11.1997 was issued and served upon the Assessee but no return of income was filed in response thereto. A notice u/s 148(1) calling for the return of in come and a udited accounts was issued on 08.01.1998. Return declaring a loss of Rs.7,28,18,247/- was filed on 17.03.1998. The same was processed u/s 143(1)(a) on 30.03.1999 at loss of Rs.7,14,57,309/-. In response to statutory notice issued u/s 142(1) and 143(2) CA & FA of AssesseeCorporation a ttended the assessment proceedings from time to time and also filed the various details, particulars, evidences called for vide questionnaire dated 19.04.1999 a s well as order sheet entries, books of account maintained by the assessee corporation were also produced which were test checked and the case was discussed with them.
The Auditors of the Assessee Corporation in Note No.13 of their Audit Report had pointed out that a sum of Rs.12,19,000/- sent by FWD Chopal had been deposited by the bankers of the Assessee Corporation in some other branch which was not having account of the corporation. Due to non-transfer of this amount to the Corporation’s account there had been loss in interest earning of the Corporation’sof the Corporation to the extend of Rs.8.30 lakhs (approx). Accordingly, vide questionnaire dated 19.04.1999 the Assessee Corporation was required to show cause as to why an addition of Rs.8.30 lakhs be not made but no reply/explanation with regard thereto has been furnished by the Assessee. An addition of Rs.8.30 lakhs is therefore made.
From the Audited profit & loss account it has been noticed that the Assessee Corporation has debited interest of Rs.10,43,81,684/- out of which interest of Rs.8,88,52,910/- has been paid to the H.P. Government. The Assessee Corporation has filed further details of the interest paid to the H.P. Government as per annexure A-1, A- 2, A-3, according to which the amount of interest has been worked out as under:
A n n ex ur e D es cri p ti on A m o un t A- 1 I nt e re s t o n i nt e r es t Rs . 3, 1 3, 5 5 , 1 5 7 f or t he y e a r 198 8 - 89 c har ge d i n t he bal a nc e s hee t f o r t he ye a r 1 98 8- 9 0. A- 2 I nt e re s t o n i nt e res t. R s . 3, 8 6, 1 4 , 9 8 6 / - A- 3 I nt e re s t o n r o ya lt y Rs . 1, 8 8, 8 2 , 7 6 6 / - and Sal e s - t ax 15.1 The Assessee-Corporation during the assessment proceedings was specifically requested to furnish the basis of calcu lation of interest year pertaining to which the interest is calculated division-wise and justification for claiming the deduction on account of interest. So far as calculation of interest is concerned, no such details have been filed by the assessee.
15.2 In justification for claiming the aforesaid interest as deduction in the profit & loss account the Assessee- Corporation has submitted that when the installments of royalty payable by it to the Govt. are not paid by the stipulated dates it has to pay interest and in the Pricing Committee meeting held on 04.12.1988 the rate of interest on all belated payments made beyond 90 days of the default was fixed @ 15% p.a. It was further submitted that the Pricing Committee in its meeting held on 06.10.1990 decided that in view of continued default by the Assessee- Corporation in the payment of royalty and interest, compounded interest had to be charged.
15.3 From the details of interest paid to the H.P. Government which are given Annexure A-1, it is noticed that the Assessee-Corporation itself admits that this interest on interest amounting to Rs.3,13,35,157/- relates to the financial year 1988-89 i.e. relevant to assessment year 1989-90. Since the assessee is maintaining its accounts on mercantile basis, this interest, if at all, should have been claimed by it in the assessment year 1989-90. Since the expenditure relates to the earlier year, the same is disallowed. On the top of it, there is another aspect of this matter i.e., the amount in question represents interest charged on interest for the charging of which a decision was taken by the Pricing Committee in the financial year 1990- 91. Since the decision was taken in a subsequent year, any liability arising therefrom pertaining to the earlier years, crystalized in that year and could not be claimed in an earlier year.
15.4 As regards interest on interest amounting to Rs.3,86,14,986/- as per annexure A-2, since the decision regarding charging of compounded interest was taken by the Pricing Committee on 06.10.1990 i.e. in the financial year 1990-91, this liability crystalized in that year and should have been claimed in that year only because the assessee is following mercantile system of accounting. Hence, assessee’s claim with regard to this amount of interest is also disallowed. interest on royalty and sales-tax 15.5 So far as amounting to Rs.1,82,82,766/- is concerned, it may be pointed out that the decision regarding charging of interest @ 15% p.a. on belated payments of royalty beyond 90 days of the default, was taken by the Pricing Committee in the financial year 1986-87 and, as such, the liability of the assessee to pay this interest crystalised in the year 1986-87. Since, the Assessee is maintaining its accounts on mercantile basis, it should have charged this interest to the accounts of the year 1986-87. This very issue came up for consideration in the assessment year 1988-89 and from the details and calculations filed by the assessee it was noticed that out of the total interest on royalty amounting to Rs.1,99,41,378/-, only interest of Rs. 13,89,762/- pertained to that year whereas the balance related to earlier years. Since, no calculations of interest claimed to have been paid to the H.P. Government have been filed on the basis of figures for the Asst. Years 1988-89, it is presumed that only an amount of Rs.13,10,000/- being interest on royalty and Sales-tax pertains to the year under consideration which is allowed and the balance-interest of Rs.1,75,72,766/- is disallowed.
15.6 In sum up, out of total interest of Rs.8,88,52,910/- paid to H.P. Govt. interest to the tune of Rs.13,10000/- only as allowable to the Assessee and the balance of Rs.8,75,42,910/- is disallowed.
The Assessee Corporation has debited a sum of Rs.32,210/- to the profit & loss a ccount on account of loss on sales/destruction of fixed assets. Since as per law this amount should have been reduced from the block of assets. The same is disallowed a nd added back.
In final analysis with above observations, total income of the Assessee Corporation was computed by A.O. as under:-
N e t lo ss as pe r ( - ) Rs . 7, 2 8, 1 8 , 2 4 7 / - s t at e m e nt o f t ot al i n c o me at t ac he d w it h t h e r e t ur n o f i nco m e .
Ad d- L o ss o f int e res t i n Rs . 8, 30, 000 / - i ) r e s pe c t o f F W D C ho pal, a s disc us s e d a bov e i i ) O u t of i nt e re st paid t o Rs . 8, 75, 42, 9 1 0 / - H . P. G ov e r nm e nt i i i ) D i s al lo w a nce as Rs . 32 , 2 1 0/ - di s c us se d i n pa r a No . 5 Rs . 8, 84, 05, 1 2 0 / -
N E TTAX AB L E I N C O M E: - Rs . 1, 55, 86, 8 7 3 / - R o u nde d o f f u/s 253 A of Rs . 1, 55, 86, 8 7 0 / - t h e I . T. Ac t , 19 61 C h a r ge i nt e r es t u / s 234A a nd 234 B Pe n al t y pro ce e di ng s u n de r se c . 271 - B & 271( 1 ) ( c ) ha ve b e e n i n i t i at e d se par at e l y. A ss e ss e d is s ue de m a nd n o t ic e & c ha ll an. 18. That order of A. O. is dated 31/12/1999.
Bein g Aggri ev ed by th e order dat ed 31/12/1999 of Ld. A.O., the Assess ee fil ed an appeal before the Fi rst Appellate Authority under the Ac t in term of Secti on 250. The sai d first appeal order of Ld. CIT( A) which is dated 22/03/2000 has h el d as under: -
“ ( 1) T h e ad d it io n of R s .5 7, 235/ - ag ai ns t g r o u n d N o .1 of t h e A ss ess ee was de le t e d . ( 2) T he ad d i t io n o f R s. 8, 75, 4 2 ,9 1 0/ - wh ic h wa s c h al l e n g e d as g r o un d N o . 2 on ac c ount o f int er es t o n r o yal t y an d in t e r es t o n in t er e st e tc . j us t on t he b as is o f th e p r e v io u s y e ar wit h o u t ap p r ec i at ing the f ac t s th at i t is an al lo wab le e x pe n se th e L d . C IT (A ) hel d as u nd er in p ar a 3. 1 “ I h ave c ar ef ull y c ons id er e d t he f ac t s o f t h e c as e an d t h e r iv al s ub mi s s io ns. T h e A ss es sin g Of f ic e r , wh o w as p r e s e n t d ur in g t he co ur s e of the h ear in g , in v it e d my at te n t io n t o c l aus e 1 9 of the s t an d ar d le as e d ee d/ in s tr u me n t o f le as e o f f or est s f o r pur po s es o f f al li n g of m a rk e d t re e s , t h e ir c on ve r sio n and ex t r ac t io n of t i mb er wh e r e t h e le s s ee do e s no t mak e t he p ay me nt of ro yal t y p a y ab le t o t h e F o r e s t D ep ar t me nt wi t h in th e s pe c if ie d p er io d t h e n th e d e p ar t m e n t w as at l ib e r t y to c h ar g e the pe n al in t e r e s t at 1 5 % p e r an n u m. H e thu s s u b mit te d t h at s inc e t h is in te r e s t w as c al c u l at e d on d ef er r e d pay men t o f r oyal t y an d was p e n al in n at ur e , th e r ef or e , it was no t all o wab l e as a de du ct io n . T h e p e r us al of th e as se ss me n t o r d er r ev e al s th at t h e ap p e l l an t h a d de bi te d a su m of R s. 1, 8 8, 82, 766 / as i nt e re s t o n ro y al t y. O u t of th i s a m ou nt, th e A s se s s i n g of f i ce r h as al l o we d t h e d e duc t i o n o f R s. 13, 10, 0 0 0 / - a s i t pe rt a in e d t o th is asse s sm e nt ye a r. T he r e main in g in te r e s t h as b e e n d is allo wed o n th e g ro und t h at t he s a me p e r t ain to t h e f in an c i al ye ar 19 8 4- 85, 1 985 - 86 a n d 1 9 8 6 - 8 7 . I h av e e xam ine d t he c alc u l at io n st at e m e n t of th e i n t e r e s t d e pot wise , su mm ar y of wh i c h w as f ile d b ef o re t h e A ss ess in g O f f ic e r h i mse lf . T he c al cu l a t io n is b as e d an d h as b e e n mad e on th e lo ts of t i mb er o n wh i c h t h e r o y al ty r e mained un p ai d . H o we v e r , s o f ar as t h e c l a i m is c o n c e r n e d , t he s ame p er t ai ns t o th e f in an c i al ye ar r e le v an t to t h e as s e s s ment ye ar o n l y. T h e A ss es s in g O f f ic e r h ims e lf in t er p r e te d t he s t ate me n t and r e ac he d t h e c o n c lu s io n t h at t he i n te r e st p er t ain e d to t he e ar l ie r f i n a n c i a l ye ar s wh e r e as t he ac tu al po si t io n was t h at t he lo t s of t i mb e r o n wh i c h t h e r o yal t y r e m aine d unp ai d p er t ai n to d if f e r e n t acc o u n t i n g p e r iod s an d s in c e r oy al t y on t he s e lo ts r e m a in e d u n p aid e ve n d u r ing t he ac c ou nt i ng p er io d , t h e in t e r e s t was c al c u l at e d and c l a i med as a d e d u c ti o n du r in g t h e ac c ou n t ing p er io d r e le van t to t h is as s e s s me n t ye ar . T h e H o n' bl e S up r e me Co u r t o f Ind ia in th e c as e o f P r ak as h C ot to n M i l l v s. CIT , 2 01 IT R 68 4 (S C ) h as h e l d t h at , “ w h e n e ve r an y stat u t o ry i m po se p a id b y an A s se ss ee b y w ay o f d a mag es o r pe n al t y or int e r e s t is c l a i me d an al l o wab l e e xp e ndit ur e u/s 37 ( 1) of In c o me - t ax A c t, 1 9 6 1 , t he as se ss ing au th o r it y is r e q uir e d t o e x a min e th e s ch e me of th e p r ov is ion s of th e r e lev an t s t a t u t e p r o v id in g f o r p ay me n t o f suc h i mp o st no t wit hs t an d in g t h e n o me n c l a tu r e of t he i mp os t as g iv en b y t he st at u te , to f in d wh e th e r i t is c o mp ens at or y o r p en a l i n n at u r e . Th e au t h o r it y h as to al l o w d e d uc t io n u/ s 37( 1 ) whe r e ve r s uc h e xa m in at io n r e v e al s t h e c on ce r ne d i mpo st t o t he p ur e l y c o m p e n s at o r y i n n at u r e . W h er eve r suc h i mp os t is f ou nd to be o f a c o mp o s it e n at u r e , t h at is , p ar t l y o f co mp en s at or y n at ur e an d p ar t ly o f p en a l n at ur e , t he au tho r it ie s h av e t o b if ur c at e th e t wo c o mp o n e n t s of t he imp o s t an d g iv en de d uc t io n o f t h at co mp o n e n t wh ic h is co mp e ns ato r y in n at ur e and r ef us e t o g iv e de d u ct io n s o f t h at c o mp on e nt wh ic h is p e n al i n n at u r e . S i m il a r v ie w h as b e e n r e - it er ate d b y t he ape x c ou r t in t h e c as e o f M al waV an as p at i a nd Che mi c al C o . v s . C IT , 2 2 5 I T R 3 8 3
( S C ), t he H on' b l e’ b le C alc u t a H ig h Co u r t in t h e c as e o f V ishn u S u g ar M i l ls L td. vs . C IT ( 197 8 ) 1 1 3 IT R 5 8 3 ( C al . ) . h as al s o he ld th at, “ if a s u m is p a id b y an as s e s s e e c on duc t i ng h is b usine s s , b e c aus e in c o n d u c t in g it h e h as ac t ed i n mann er wh ic h h as r e nd e r ed h i m l i ab le to p e n al t y , it c anno t b e c l ai me d as a d e d u c t ib le e x p e ns e . T h u s , in t e r e s t p aid f o r de laye d p ay me n t of c es s to t h e G o v t . b y t h e as s e s see was no t al lo wab le as b u s in e s s e x p e n d it u r e as it w as i n th e n at ur e of pe n al t y f or b r eac h o f la w. ” T h u s , in v ie w of t he af o r e- me nt io ne d de c is io ns o f th e A p ex C o u r t an d t he H o n' bl e H ig h Co u r t , t he is s ue h as to b e de c ide d wh e th e r in t er e st p ay ab l e o n the d e l aye d p ay m e n t of r o y al t y is p en a l in n at ur e o r c o mpe ns at o r y in n a t ur e . I n c as e , it is p e n al in n at ur e t hen th e e n t ir e in te r es t c la ime d as a d e d u c t io n is t o b e d is all o we d and if it is c o mp en s at o r y th e n it is t o b e al l o we d . In o r d e r to de te r min e th i s , it is p e r t i n e n t t o e xam ine t he ins tr u me n t s of l e ase wh ic h th e ap p e l l an t c or p or at io n h as e nt e r e d in to wi t h t h e C o n s e r v ato r of Fo r e s t s ac t ing on b e h alf of t he G o vt . of Hi m ac h a l P r ad e s h . T he ap p ell an t h ad e nt e r e d into o ne s uc h ag r e e me n t f o r l o t N o. 15/ 1 979- 80 wit h th e Co nse rv at or o f F o re s t s , N ah an . A s p e r c l aus e 19 of t h is ag r ee me n t f o r p ay me n ts b e yo n d 9 0 d ays of the due da t e , t h e ap p ell an t is l iab le t o p ay p e n a l in t er e st at 15% p e r ann u m. T hu s, it is e v id e n t th at t h is i s a p e nal in t er e s t f o r inf r ac t io n o f c on tr a ct u al o b l ig at io n s . T h e r at io l a id d o wn b y t he H o n ' b le S up r e me C o u r t an d t h e C alc u t t a H ig h Co ur t in the af o r e me n t i o n e d c as e l a ws s q uar el y c o v e r s an d ap p l ies t o th e f ac t s of t h is c as e , S i n c e , t he in te r e s t o n d ef e r r e d p ay me nt of r o y a lt y is p e n al in n at ur e t he s ame c an no t be al lo wed as a de d u c t io n u / s 3 6 ( 3 ) of In co me- t ax A c t , 1 96 1 an d 37 ( 1 ) of In c o me - tax A ct , t h e ref ore, t he e nt i re i nt e r e s t c l ai m e d a s 196 1 and , i n t e re st pay able of r o y al ty a m o u nt i n g t o R s. 1, 88, 82, 766 / - i s t o b e di s al lo w e d i n t h is as s e s s me nt y e ar. T h e a c t io n of t he As se ssi ng O f f i ce r i n al l o wi n g t h e i n t e re s t of R s. 1 3, 1 0, 0 00 / - is, t h e re f o re, e rr o ne o u s an d c a nn ot be u ph el d. T h e As se ss i ng O ff i c e r i s , t h e r ef o re, re qui re d t o m ake a f u rt h e r a ddi t i o n of R s. 13, 1 0, 0 00/ - to t h e al re a dy ad d e d a m o u n t o f R s. 1, 75, 72, 766 / -, A ppe l l a nt 's pl ea o n th i s g r o u nd i s , t h e r ef o re, di sm i s se d. S i m i l a rl y , t h e am o u nt o f R s. 3, 86, 14, 986 / -b ei ng i nte re st on i n t e r e s t I hav e al r e ad y he l d i n gro u nd N o. 1 ab ove , t h at t h e i n te res t o n de f e r re d pa ym e n t of ro y al ty i s pe n al i n na t u re a n d t h e r ef o re, no t a l l ow ab l e a s a de d uc t i o n an d, t h e re f o re , t h e i n te r e st o n th i s i nt e re s t al so pa rt a k e s th e col o ur o f a p e n al i m po st an d t h e ref o re , i s n o t a l l o w ab l e a s a de d uc t i o n f o r t he r e as on s m e nti o ne d ab o v e . I n v i e w o f t h e se f ac t s, th e i n t e re s t o n i nte re s t a m o u nti n g t o R s. 3, 86, 14, 986 / - i s n ot an al l o w abl e de d uc ti o n f o r t h e as se ss m e n t ye ar 1 99 0- 91 as t h e l i ab l i t y h a s n o t c rys t al i se d du ri ng t h e ac co un t i ng pe r i o d r e l e v a nt t o t h i s asse ss m en t ye a r an d m o reo ve r, t h e i m po s t i s pe na l i n na t u re and t he ref o re , n ot an a l l o w ab le d e duc ti o n. T h e appe l l an t 's pl e a o n t h i s gr o u nd i s, th er e f o re, no t ac c e pt a bl e and i s d is mi s se d. D uri n g th e c o u rs e o f h e ar i ngth e a ppe l la nt h as ra i se d a n ad d i t i o n a l g r ou n d o f a ppe al f o r th e as se ss me nt ye ar 1 98 9 - 9 0 r e g a r di n g t h e i nte re s t o f R s. 3, 1 3, 5 5, 157 / - wh ic h w as i nte r es t o n i n t e re st an d per t ai n e d t o the a c co u nt i n g peri o d re l ev ant t o th e as se ss me n t ye a r 198 9 - 90 a nd t h ey s ub mi t t e d th a t i n c a se th e a dd i ti on al g r o un d o f a ppe al i s adm i t t e d th e n t h e y we re no t co nt e s ti ng th e a dd i ti o n m ad e h e re. I h av e al re ady a dm i t t e d th i s g ro u n d o f ap p e a l i n th e a sse ss me n t y e ar 1 989 -9 0 a n d t h e refo re , t h i s gro und o f appe a l pe r t ai ni n g t o t he a dd i t io n o f R s. 3, 13, 55, 157 / -i s di s mi s s e d as not pr es se d. [ E mp h as is sup p l ie d b y us ] N ot e: T h is g r ou n d and is sue is no t r a is e d in F o r m No . 3 6 and no t p r e s se d bef o r e us . ( 3) In respec t of ground No. 3 which pertained to the ad dition of Rs.32210/- on ground of loss of on sale of ass ets. The Ld. CIT(A) has sai d and held that this ground of appeal has been wi thdr awn and is accordi ngl y dismiss ed. ( 3A) On Notic e u/s 148 the ground was dismiss ed. The Appeal was par tl y al lowed . ( 4)
Being aggrieved by above order of ld. CIT(A) the Appellant/Assessee is before us and inter-alia has raised following grounds of a ppeal:-
“ 1) T h at t he C IT (A p p e al) was n ot j us t if ie d in h o ld i n g t h at t h e p r o c ee d ing s u/ s 147 h ad b e e n v al id l y in i ti at e d v id e n o t ice u / s 148 d at ed 18. 1 1.
H e h as f ail e d t o a p p r e c iate t h at t h e p r o c ee d ing s in it i at e d u/ s 142( 1) d ate d 2 1. 2 . 9 1 we r e p en d in g an d h ad no t b e e n q uas h ed b y the H o n' b le H ig h C o u r t . 2) T h at the C IT ( A p pe al) was no t ju st if ie d in h o ld in g th e in te r e s t o f R s. 1, 88, 82, 7 66 / was no t al lo wab l e as a de d u c t io n a s it was p e nal in n at u r e . N o s uc h is s ue h ad b e e n r ais e d b y t h e A O . wh il e m ak ing the d is al l o w an c e n or was an y s uc h o b je ct io n r a i s e d o r
ar g ue d at t he t i me of he ar ing of ap p e al. T h u s th e f in d i n g o f t h e C IT ( A ppe al) is il le g al f r o m t h is c or e i ts elf . 3) T h at t he C IT ( A pp e al) h as f ai le d to ap p r e c iat e th a t th e p ay me n t of in t e r es t was a c o n tr ac t u al l i ab il i t y an d d id n o t In v o lv e an y inf r ac t io n of an y s t at u to r y p r o v is io n an d as n o t i n a n at u r e of an y d am ag e o r p en a lt y. T h at at an y r at e t h e t es t f or dis al lo w ab il it y o f an y li ab il it y o f in t e r es t as l aid d o wn by t h e Su p r e me C o u r t an d as no t ic ed b y t he CIT ( A p pe al) h i ms e lf th e lia b i l it y o f R s. 1, 88, 82, 7 66 / - was c l e ar l y an ad mi ss ib le e x p e n d it u r e b e in g t ot al l y c o mp e ns at o r y in n atur e. T he ac t io n o f C IT ( A p p e al) in up h ol d ing t he d is al lo wan c e of R s . 1 ,7 5 ,7 2 , 7 6 6 / - an d i n o r de r in g f ur the r enh an c e m e nt of dis al lo wa nc e of R s . 1 3 , 1 0 , 0 0 0 / - is t her ef or e i lle g al an d un war r an te d. 4) T h at the C IT ( A p pe al) was no t j us t if ie d i n d is al l o w in g t h e d e d uc t io n of R s .3, 8 6 ,14 ,9 24/- o n ac c ou nt o f in te r e s t o n in t e r e s t o n e r r o ne o us an d ins uf f ic ie nt g r ou n ds and wit h o u t r e f e r ri n g to t h e wr it t e n su b m iss io n s f ile d b ef or e h i m . H is o b s e rv a t io n th a t t h e i mp o st was p e n al in n atu r e and t her ef or e , n o t an a l lo wab l e e xpe nse s is als o i l l eg al as n o s uc h is s ue h ad b e e n ra is e d o r d isc u ss ed at t he t i me o f he ar ing of ap pe al . 5) T h at a d ed uc t io n of Rs . 48, 23 , 305 / - on a cc o u n t o f liab i l i ty o f r o yal t y and s al e s t ax , e x te n s ion f ee and d a m ag e b i l l s o u g h t t o h av e b e e n al lo we d o n t he b as is of t he f in d in g r e c o r d e d in A ss ess me n t . Ye ar 1995 - 96 when th e s ame was d is al l o we d o n t h e g r o un d t h at it p er t ai ne d to the ye ar u nde r c o n s ide r at i o n . 6) That t he o r der of the C IT ( A pp e al ) is t o t al l y i l l e g a l an d un war r an t ed b e in g c on tr ar y to th e p r in c ip l e s of e q u it y an d n at ur al j us t i c e. Record of Hearing
The hearing took place on 28/5/2024 when both AR and DR were heard at length. The Ld. Ld. AR Shri Y.K. Sud brought to our notice back ground of the Assessee that it is a State Govt. undertaking of Govt of H.P. and is involved in several activities related to forest. It picks up falling trees / or marked falling trees in entire state of Himachal Pradesh and in turn pays royalty to Govt. of H.P. Upon delay in payment; interest and interest on interest becomes payable to Govt. of Himanchal Pradesh. There is a lease contract interse between the Assessee Corporation and Govt. of Hima chal Pradesh. He invited our attention to few specific clauses which are as under:-
Clause-19 “19. That if th e Lesse e fai ls to p ay any i nstalment of p ur chase money or any p art thereof on the due date he w ill be liable to p ay interest at 10% p er a nnum within the contr ac t period after the l apse of three d ays grace w hich pay ment al ong w ith the royalty will be realizable from his security mone y an d by se izure a nd reten tion of hi s timber extracted from the forest as may be lyi ng in the forest, on th e road si de, afloa t in river or l ying in any other p lace. If such failure- exten ds to 9 0 days w ithout written permission of the Conservator of F orests, Nahan, Circle, the Lessee shall be liable to lose all cl aims to the trees and timber and to the reten tion by the F orest Officer of all mon ey already paid by the L esseor on his behalf under the terms o f this i ndenture as liquidate d damages and the Forest Offi cer subje ct to the approval of the Con servator of Forest,Nahan Circle may cance l this indenture. However , the Con servator of F orests, Nahan Circle, ma y for s pecial reasoncondone the delay beyo nd 30 da ys but not exceeding 6 0 days on char gi ng the penal interest at 15% per annum in case no wri tten permiss ion is sought within the said p eriod of 30 days by the Lessee. I t is however, understood that no rafting, removal/expor t of timber by road whatsoever w ill b e permitted w ithout p ayment of royalty due s as p er clau se 18 above.”
21.1 He then placed reliance on 95 of the Paper Book and inter alia contended that in their own case Chandigarh Bench of I TAT in for A.Y.1996- 1997 in case of Ha ryana State Forest Corporation vs. DCIT, Circle Shimla with regard to disallowance of Rs.51,10,941/- which was upheld by CIT(A) on a ccount of interest on interest on the belated payment of royalty on the ground that the expense is penal in nature; the Hon'ble Tribunal has held as follows in para 4.2 page 105 of PB. “that interest relates to previous years and hence not allowable is not main tainable. The Assessee also submitted before the CIT(A) th at the conten tion of A.O. that this in terest is penal in nature is also not correct as on one hand the A.O. is allowing the interest on belated payment of royalty holding it to be compensatory in nature, on the other hand he is holding that interest payable on non-payment of this interest is penal in nature. It was argued that the A.O. has failed to understand what is meant by the termintere st on interest. In simple words it is thecompound interest which is charged by every lenderfrom the borrower in case the borrower fails to paythe interest due on the principle amount. If thesimple interest is compensatory in nature, thecompound interest cannot be penal in nature. Hence,this amount is clearly allowable and the disallowancema de by the AO deserves to be vacated.
21.2 He then invited our attention to page 109 para 4.6 of Paper Book which as under:
“4.6 Fi rstly, we do no t agree wi th the observation of the tax au thori ti es belo w that the paymen t of i nterest u pon the i nteres t o n the bel ated payme nt of royal ty can be termed as penal in nature b ecause i t c an s impl y be cal led an c harging of compound inte rest f rom the as sess ee i n ord er to curb the te ndenc y of part payment of royal ty and to ensure the speedy payment of i nterest to the f ores ts depar tment. Hence, we ar e of the opi ni on that o n this bas is, the tax authori ti es were not jus tif i ed i n disal l owing the c lai m of the p ayment of i nteres t up on the interes t of del ayed of royalty treati ng the same to b e penal in nature. ”
21.3 He subsequently placed reliance the order of the ITAT Ahmedabad Bench in case of ACIT vs. Chittorgarh Kota Toll way (P) Ltd. reported in [2024] 204 ITD 223 / 2023] 156 taxmann.com 469 (Ahmedabad) wherein para 8 it is held as under:-
“8. We have heard the rival contentions of both the parties and perused the materi als avai lable on record. The provision of Exp lanati on 1 to sec ti on 37( 1) of the Act, exc ludes al lowi ng the d educ tion of the expendi ture i ncurred f or the purpose whic h is an of f ence or prohi bited by l aw. However, i n the gi ven c ase, we note that the penal ty has been paid by the as s ess ee on account of breach of contract which can not be e quated with the of f ence, o r s omething prohibi ted by law. As s uc h, the assess ee could not mee t the d eadli ne to f ulfil the cri teria l ai d do wn by the contr ac tee bei ng the NHAL and theref or e the d amages were l evied by NHAL. The Hon'bl e Gu jarat Hi gh C our t i n the c ase of Pr. CIT v. Mazd a L td . [2017] 86 taxmann. com 27/250 Tax man 510 has hel d th at the de ducti on o n ac count of li quidated damages cannot b e dis allowed under the provi si on of se ction 37(1) of the Act. The rel evant extr act of the ord er is reproduc ed as und er: "10. Sec tion 37 of the Ac t i s the residuary provision gran ti ng deducti on of an expe nd iture not being ex pendi ture of the n atu re of capi tal expend i ture or pers onal e xpenses of the as sessee, which is l aid out or ex pended who ll y and exc l usivel y f or the purposes of busi ness or prof essi on and not specif ied i n the precedi ng se ctions 30 to 36 of the Act. Explanati on to se ctio n 37(1) woul d cl arif y that any expend i ture i ncurred by an asses see for any purpose which is an of fence or which is prohi bi ted by l aw sh al l not be d eemed to have been i nc urred for the purpose of busi ness or profes si on and no deduc ti on or all owanc e shal l b e made in respect of s uch expendi ture.
As note d, the expe nditure i n question was pur ely in rel ati on to the ass essee's no rmal bus iness acti vi ty and was inhere nt par t of i ts business tr ans actions. The ex pendi ture was c ertainl y no t i ncurred f or any purpose whi ch is an of f enc e or whi ch is prohibi ted by law. The Tribunal theref ore was perf ec tl y jus tif ied i n gr ant ing such expenditure."
21.4 It was finally contended by Ld. AR that ground No.1 & 5 are not pressed.
The ground No.2 is on disallowance of Rs.1,88,82,756/- and Ground No.3 is related to ground No.2 i.e., not penal in nature.
The Ground No.4 is on disallowing the deduction of Rs.3,86,14,986/- on a ccount of interest on interest.
The Ground No.6 is general.
Per contra, Ld. DR has supported the order of Ld. CIT(A) and has vehemently contended that there is no infirmity in law and same be upheld.
Findings and Conclusions
In the foregoing, we now examine the legality, validity and proprietary of order of Ld. CIT(A) dated 22/03/2000.
26.1 We have noted the long history of the present case carefully. Finally after several decades the case is at last reached before us a s per direction of Hon'ble Supreme Court of India vide their order dated 14/01/2020 in Civil Appeal No. 6417 of 2010 wherein in it is held as follows:-
Heard learned counsel for the parties.
The issue raised in companion appeals (Civil Appeal Nos. 6418 and 6421 of 2010), does not arise in the present appeals. For, the appellant-assessee did not file any return accompanies by audit re port pursuant to notice issued under Section 142 of the Income Tax Act. Hence, these appeals fail and are dismissed.
“How ever , dismi ssal of these appeals will not preclude the app ellant to pursue the remedy before ITAT on merits.”
This Hon'ble Tribunal by it’s order dated 19.10.2023 has recalled these appeals i.e. & 281/Chd/2000. Hence, appeal on merits before us.
26.2 After hearing both the sides on merit and after perusing the records of the case, we find that there are broadly two issues which needs determination by us on merits. The first being whether Ld. CIT(A) is justified in holding the interest of Rs.1,88,82,766/- was not allowable as deduction as it was penal in nature for infraction of contractual obligation. The second being whether the Ld. CIT(A) was not justified in disallowing the deduction of Rs.3,86,14,086/- on account of interest on interest i.e; compound interest. It partakes character of or colour of a penal impost.
26.3 We notice that before ITAT Chandigarh Bench in for Assessment Year 1996-97 in respec t of Asse ssee’s own case, it is held as under in para 3.8 &4.2:-
“ 3. 8 A c co r d ing l y the o r d e r of C IT ( A ) c o n f ir m i n g t h e i mp u g n e d ad d i t ion of R s . 14, 43, 5 01 / - is s e t as i d e and th e A O is d i r e c te d t o d e le t e t he i mpug ned add it i on o f R s . 14 ,4 3 ,5 0 1 / - .A c c o r di n g l y t h e G r oun d N o . 2 of th e ap p e al f il e d b y t he ass e s s e is al lo we d . ” “ 4. 2 T h at in te r e s t r el ate s to p r e v io us y e ar s an d h e n c e n o t al l o wab l e is no t m ain t a in ab le. T he ass es se e als o s u b mi tt e d b ef o r e t he C IT ( A ) t h at t he c o n te nt io n of A O th at t h i s i n t e r e s t is p e nal in n at ur e in also not c o r re c t as o n o n e h an d t h e A O is al l o wi ng th e In t er e s t o n b el ate d p ay me nt o f r o y al t y h o l d in g i t t o b e c o mp e ns ato r y i n n atu r e, o n th e o t he r h an d h e is h o ld in g t h at in t er e st p ayab le o n no n- p ay me n t of th is i n t e r e s t is p e n al in n at ur e . It was ar g u ed th at th e A O h as f lail e d t o u n de r s t an d wh at is me an t b y t he t er m in t er es t on in t er es t. In s i mp le wo r d s it is t h e c o mp ound in t er es t wh ic h is c h ar g e d b y ev e r y le n d e r f ro m t h e b o r ro wer in c ase t h e bo rr o wer f ail s to p ay t h e in t e r e s t du e o n t h e p r in c ip le amo un t. I f the si m pl e i n te re st i s c o m pe ns at o ry i n na t ure , th e c om po u nd i nt e re s t c ann o t b e pe na l i n n a t ure . H e n ce, th i s am o un t i s c l e arl y al l o w ab l e and t h e di s al l o wa n c e m a de by th e AO de se rv es t o b e v ac a te d .” The Hon'ble Tribu nal has further held as under in Para 4.6
“ 4. 6 F i r s tl y , we d o no t ag r e e wit h the o b s e rv at io n o f th e t ax au t ho r it i e s b e l o w t h at t h e p ay me n t of in te r e s t u p o n t h e in t e r e s t o n th e b e l at ed p ay men t of r o yal t y c an b e te r me d as p e n al in n at ur e b e caus e it c an s i mp l y be c al l ed an ch ar g in g o f c o mp o u n d in t er e st f r o m t he as ses se e in o r d er to cu r b th e te n de n c y o f p ar t p ay me n t of r oyal t y and t o e ns ur e t he sp e edy p a y me n t o f in t e r e s t t o the f o r es ts d epar t me n t . H e nc e , we ar e of t h e o p in io n th at o n t h is b as is , the t ax au th or it ie s we r e n ot j u s t if ie d in d is allo win g t he c l ai m o f the p ay men t of in t er es t up o n th e in te r e s t of d e l a ye d p ay me n t of r oyal t y t r e at i ng t he s ame t o b e p e n a l i n n at u r e .” 26.4 The above finding of the Hon'ble Tribunal is in respect of following question which was as under:-
“ 4 N o w we sh al l t ak e up g r o und N o .3 of t h e as s e s s e e ’ s ap p e al r e l at ing to t he p ay me n t o f inte r e s t o n b e l ate d p ay me n t o f r o y al t y. 4. 1 T he r e le v an t and mate r i al f ac t s f or th e d is p o s a l of t h is g r o un d of ap p e al ar e th at t he ass es se e has c l a i me d d e d u c t io n o f R s. 51, 10 , 94 1 o n ac c o unt of p ay me n t o f int er e s t o n t h e in t e r e s t in r e sp ec t of d el aye d p ay me n t of r o y al t y. T h e A O as k e d t h e as s e s ses to g iv e t he b as is of c l ai m i n g th is a mo u n t in t h e ye ar und e r c ons id er at i o n. In r ep l y, th e as s e ss ee c o n te n d e d t h at th is amo un t h as b e e nc l ai me d in v ie w of t he l e t t e r o f th e P r in c i p a l C h ief C o nse rv at or of F o res ts , d ate d 4. 1 2 . 9 5 . T h e A O dis a l lo we d t h is a moun t and a d d ed t he s ame t o t he r e tu r n e d in c o m e o f t h e as s e s see b e c ause ac c o r d in g to h i m, t h e l i ab il it y w as n o t as c e r t aine d o r c r ys t al iz e d in the ye ar un de r c o n s ide r a t io n an d s ec on d l y, t h is p ay me nt was t r e ate d a s p e nal in n a t u r e . ” We endorse above finding as facts are parimateria here and squarely covers the issues raised in the appeal before us.
26.5 Further, we also hold the finding of Hon'ble ITAT, Ahmedabad Bench in the case of ACIT Circle (1)(1), Ahmedabad vs. Chittorgarh Kota Toll way (P.) Ltd. (supra)as applicable to the facts of this case too in view of the observation and findings as recorded in para 8 of the order. We hold that interest expenditure are in relation to the assessee’s normal business activities and was part of its business tra nsactions as per bare reading of the lease deed i.e; interest of Rs . 1,88,82,766/- and the compound interest of Rs. 3,86,14,924/- (interest on interest). We also further hold that such impost are not penal in nature. Be it noted that Rs. 3,13,55,157/-(supra) is not pressed before us nor before CIT(A).
Respectfully following above judgement, we set aside the order of CI T(A) dated. 22/03/2020 and allow this appeal.
In the result, the present appeal of Appellant/Assessee is allowed and impugned order of Ld. CIT(A) is set aside.
Now we shall deal with the appeal in s ince the facts involved in the present case where initially state d to be similar and identical to the facts involved in I TA No. 280/Chd/2000, but during the course of the hearing held on 28/05/2024 after the hearing in I TA No. 280/Chd/2000 was over and when this matter was called the Ld. AR of the assesse informed the Tribunal that this appeal is required to be dismissed as the larger issue of return of income not filed with Audit Report pursuant to the notice of the Department a lready stands dismissed by virtue of the order of the Supreme Court of India (supra) and that no issues on merit has been raised by the assessee and therefore, nothing survives before us for adjudication and adjudgement. In view thereof we dismiss this appeal on merits in light of what is stated at Bar by the Ld. AR.
In the result, the appeal of the assessee bearing for the A.Y 1990-91 is allowed whereas the appeal of the assessee bearing ITA No. 281/Chd/2000 for the A.Y. 1991-92 is dismissed.
Order pronounced on 06th June ,2024.