Case Law Details
CIT Vs Mahavir Multitrade Pvt. Ltd. (ITAT Delhi)
The action of the learned Assessing Officer clearly reveals that it is only because the assessee categorised the expenditure/deduction as in respect of the penalty that was levied for not complying to the terms of contract, the learned Assessing Officer jump or to the conclusion that such penalty was paid for infraction of law so as to attract the provisions under Explanation 1 to section 37 (1) of the Act. It seems the assessing officer did not read the submission of the assessee in a holistic manner, because what all the assessee had submitted is that the penalty was levied on the assessee company for not complying to the terms of the contract. Assessee clearly submitted before the learned Assessing Officer that in spate of their best efforts, sometimes the moisture content of the coal cannot be the same as required by the buyer in view of the open storage of coal, rain factor while storing and transporting, natural environment etc and also because while mixing the different lots having different GCV of coal, to match the specifications, the actual GCV may differ from what is required by the buyer since the mixing is handled by large machines. Assessee submitted that precisely this is the reason why it was a great that in such an event the buyer makes deduction on account of quantity and quality while releasing the payment.
It is therefore clear that the contract between the assessee and the buyers is clear in its terms that there was a specification as to the quality of coal that has to be supplied and should there be any variation in such quality, the price will be adjusted accordingly. In case of supply of coal with the high moisture under low grass calorific value, the buyer makes deduction on such account. So, the contract clearly stipulates the consequences of variation in the quantity and quality of coal that has to be supplied by the assessee to the buyers. Further, case of the assessee has been that they did not pass on the liability incurred by them on this count to their sellers. Learned Assessing Officer should have considered this aspect as to the possibility of assessee passing on such liability to their sellers, which was not possible in case of the penalty paid for an offence or infraction of law.
As rightly held by the Ld.CIT(A),the inability to meet the contractual obligation by the assessee cannot be termed as an offence or infraction of law so as to deny the claim of the assessee by invoking the expression 1 to sec 37(1) of the Act. We are in agreement with the Ld.CIT(A) that the eligibility of an item to tax or tax deduction can hardly be made to depend on the label given to it by the parties and at the same time the absence of a specific label cannot be destructive of the right of an assessee to claim a deduction, if in fact, the consideration for the receipt can be attributed to the sources indicated in the section. Merely because the assessee categorised the claim under “penalty levied on the assessee company for not complying to the terms of the contract”, is not permissible to the jump to the conclusion that such penalty was in respect of any offence or infraction of law committed by the assessee so as to invoke the provisions under Explanation 1 to section 37 (1) of the Act. The expression “penalty was levied on the assessee company for not complying to the terms of the contract”, clearly indicates that it is a civil consequence for not complying with certain terms of contract and has nothing to do with any offence.
FULL TEXT OF THE ITAT JUDGEMENT
Challenging the order dated 02/12/2016 in appeal No. 603/14-15, passed by the learned Commissioner of Income Tax (Appeals)-6, Delhi (“Ld. CIT(A)”) in the case of M/s Mahavir Multi-trade Private Limited (“the assessee”) for the Assessment Year 2012-13, Revenue preferred this appeal.
2. Brief facts of the case are that the assessee is a company engaged in the business of trading of imported coal. For the assessment year 2012-13, they have filed their return of income on 19/09/2012 declaring a loss of Rs. 12,44,66,628/-. Assessment was, however, was complete at a loss of Rs. 8,72,01,852/- after making many additions including the addition by way of disallowance under section 37(1) of the Income Tax Act, 1961 (for short “the Act”) to the tune of Rs. 3,66,68,504/-, which amount represented the penalty amount for supply of the coal with high moisture and low gross calorific value.
3. Assessee explained before the assessing officer that they sold coal to different parties as per the specifications and requirements; that the requirements specify the quantity, moisture content, type of coal, Gross Calorific Value (GCV) etc; and that if the seller fails to comply the requirement, the buyer makes deduction on account of quantity and quality while releasing the payment. Assessee further submitted that sometimes even to the best efforts of the sellers, the moisture content of the coal cannot be the same as required by the buyer in view of the open storage of coal, rain factor while storing and transporting, natural environment etc, and that while mixing the different allots having different GCV of coal, to match the specification, the actual GCV may differ from what is required by the buyer since the mixing is handled by large machines. Assessee, therefore, submitted that there was no infraction of law whatsoever in the case of penalty for higher moisture and low GCV so as to attract the provisions of explanation is to section 37 (1) of the Act as the deduction represents compensatory levy by buyer parties for not meeting the specifications/agreed parameters of coal.
4. Learned Assessing Officer, however, did not agree with the assessee and held that since the assessee himself categorised the expenditure as “penalty was levied on the assessee company for not complying to the terms of the contract”, such penalty paid for violation of the contract in the course of the conduct of business cannot be regarded as a deductible expenditure.
5. Assessee challenged the said addition before the Ld. CIT(A). Ld. CIT(A), reappraised the entire material before him in the light of the provisions under section 37 (1) of the Act and also in the light of the decisions of the Hon’ble Apex Court in the case of Prakash Cotton Mills (P) Ltd 111 CTR SC 389, Swadeshi Cotton Mills Company Limited vs. CIT, Continental constructions Ltd vs. CIT (1992) 101 CTR (SC) 386 and also the decisions of the Kerala and the Andhra Pradesh High Courts in CIT vs. Catholic Syrian bank Ltd (2004) 265 ITR 177 (Ker) and CIT vs. or television private limited (1996) 218 ITR 173 (AP). On considering the provisions under section 37 (1) of the Act and the decisions referred to now, Ld. CIT(A) reached a conclusion that the exigibility of an item to tax or tax deduction can hardly be made to depend on the label given to it by the parties, and at the same time the absence of specific label cannot be destructive of the right of an assessee to climb a deduction, if in fact, the consideration for the receipts can be attributed to the source indicated in the section. He further held that the expenditure in question was the payment made by way of damages, the compensatory payment made by the assessee and it entitles him to claim the deduction from the income as earned by him and where an element of the delivery is concerned, it is such payment made for the contravention of law is inadmissible. According to the Ld. CIT(A) not meeting the contractual obligation cannot be equated to the infraction of law. Ld. CIT(A), therefore, deleted the addition and allowed the appeal of the assessee.
6. Revenue is, therefore, before us in this appeal contending that the supply of inferior quality of coal which is prohibited under the contract signed under the Indian contract act squarely falls in the ambit of the Explanation 1 to section 37(1) of the Act and such an act of the assessee which is prohibited by law and is an offence and invite the application of Explanation 1 to section 37(1) of the Act, and the assessee cannot be allowed to argue that such penal payment is compensatory nature.
7. Per contra, it is the submission on behalf of the assessee that failure to comply with the contractual obligation cannot be equated to the infraction of law or an offence,because not meeting the parameters set out in the contract will invite same consequences like payment at lesser rates or collection of some amount from the assessee which is exactly the case of the assessee. According to them, Ld. CIT(A) correctly applied the law laid down by the Hon’ble Apex Court and also the Kerala and Andhra Pradesh High Courts and therefore there is no ground to interfere with the impugned order.
8. We have gone through the record in the light of the submissions made on either side. According to the learned Assessing Officer also, the assessee incurred the expenditure/received the lesser payment from the buyers of the coal because of the supplied coal containing the high moisture and low calorific value. The allegations of the learned Assessing Officer against the assessee only reveals the failure of the assessee to meet the contractual obligations, but the entire assessment order does not reveal which provision of law was violated by the assessee so as to invite the penal consequences.
9. The entire edifice of the case of learned Assessing Officer is that the assessee himself stated in respect of the claim in respect of the amount of Rs. 3,66,68,504/-that “penalty was levied on the assessee company for not complying to the terms of the contract”. Learned Assessing Officer, therefore, concluded that the penalty paid for the violation of the contract in the course of conduct of business cannot be regarded as a deductible expenditure, as the assessee is accepting to carry on the business in accordance with the contract and any default is likely to be penalised in terms of the contract, but for which any sum paid cannot be regarded as deductible expenditure. On this premise, learned Assessing Officer proceeded to apply the ratio laid down by the Hon’ble Apex Court in the case of Bharat commercial industries Ltd vs. CIT (1998) 230 ITR 733 to the facts of this case.
9. The action of the learned Assessing Officer clearly reveals that it is only because the assessee categorised the expenditure/deduction as in respect of the penalty that was levied for not complying to the terms of contract, the learned Assessing Officer jump or to the conclusion that such penalty was paid for infraction of law so as to attract the provisions under Explanation 1 to section 37 (1) of the Act. It seems the assessing officer did not read the submission of the assessee in a holistic manner, because what all the assessee had submitted is that the penalty was levied on the assessee company for not complying to the terms of the contract. Assessee clearly submitted before the learned Assessing Officer that in spate of their best efforts, sometimes the moisture content of the coal cannot be the same as required by the buyer in view of the open storage of coal, rain factor while storing and transporting, natural environment etc and also because while mixing the different lots having different GCV of coal, to match the specifications, the actual GCV may differ from what is required by the buyer since the mixing is handled by large machines. Assessee submitted that precisely this is the reason why it was a great that in such an event the buyer makes deduction on account of quantity and quality while releasing the payment.
10. It is therefore clear that the contract between the assessee and the buyers is clear in its terms that there was a specification as to the quality of coal that has to be supplied and should there be any variation in such quality, the price will be adjusted accordingly. In case of supply of coal with the high moisture under low grass calorific value, the buyer makes deduction on such account. So, the contract clearly stipulates the consequences of variation in the quantity and quality of coal that has to be supplied by the assessee to the buyers. Further, case of the assessee has been that they did not pass on the liability incurred by them on this count to their sellers. Learned Assessing Officer should have considered this aspect as to the possibility of assessee passing on such liability to their sellers, which was not possible in case of the penalty paid for an offence or infraction of law.
11. As rightly held by the Ld.CIT(A),the inability to meet the contractual obligation by the assessee cannot be termed as an offence or infraction of law so as to deny the claim of the assessee by invoking the expression 1 to sec 37(1) of the Act. We are in agreement with the Ld.CIT(A) that the eligibility of an item to tax or tax deduction can hardly be made to depend on the label given to it by the parties and at the same time the absence of a specific label cannot be destructive of the right of an assessee to claim a deduction, if in fact, the consideration for the receipt can be attributed to the sources indicated in the section. Merely because the assessee categorised the claim under “penalty levied on the assessee company for not complying to the terms of the contract”, is not permissible to the jump to the conclusion that such penalty was in respect of any offence or infraction of law committed by the assessee so as to invoke the provisions under Explanation 1 to section 37 (1) of the Act. The expression “penalty was levied on the assessee company for not complying to the terms of the contract”, clearly indicates that it is a civil consequence for not complying with certain terms of contract and has nothing to do with any offence.
12. CIT(A) rightly applied the law laid down by the Hon’ble Apex Court in the case of Prakash Cotton Mills (supra), Swadeshi Cotton Mills (supra) and Continental Construction Limited (supra) and also the Kerala High Court in the case of Catholic Syrian Bank (supra) and the Andhra Pradesh High Court in the case of Bharat Televisions Private Limited (supra) to the facts of this case, and reached a right conclusion that the disallowance cannot be sustained. We are in agreement with the Ld. CIT(A) and consequently find that the grounds of appeal are devoid of merits. Grounds of appeal of the Revenue are dismissed.
13. In the result, appeal of the Revenue is dismissed.
Pronounced in open court on this the of November 2019.
