Interest on delayed payment of VAT and TDS is only compensatory and is not penal in nature. Therefore, the CIT(A) has correctly deleted the disallowance made for the interest expenditure claimed on delayed payment of VAT and TDS.
FULL TEXT OF THE ITAT JUDGMENT
These appeals at the instance of the Revenue are directed against two separate orders of the CIT(A), both dated 06.04.2018. The relevant assessment years are 2013-2014 and 2014-20 15.
2. Since common issues are raised in these appeals, they were heard together and are being disposed off by this consolidated order.
3. The common issue raised in both the appeals is whether the CIT(A) is justified in granting the assessee benefit of section 10(26B) of the I.T.Act ?
4. Brief facts of the case are as follows:-
The assessee is a Government of India undertaking and its primary objective is development and upliftment of members of the Scheduled Tribe community in the Union Territory of Lakshadweep. For the assessment years under consideration, the assessee had filed its returns of income claiming its entire income as exemption u/s 10(26B) of the I.T.Act. The assessments u/s 143(3) of the I.T.Act were completed by denying the exemption claimed by the assessee u/s 10(26B) of the I.T.Act.
5. Aggrieved, the assessee filed an appeal before the first appellate authority. The CIT(A) allowed the claim of the assessee by relying on the order of the Cochin Bench of the Tribunal in assessee’s own case for the immediately preceding assessment years, i.e., A.Ys 2011-2012 and 2012-20 13 in ITA 18 & 19/Coch/2017 (order dated 01st August, 2017).
6. Aggrieved by the order of the CIT(A), the Revenue has filed the present appeal before the Tribunal. The learned DR supported the findings of the Assessing Officer. None was present on behalf of the assessee, however, we proceeded to dispose off the appeal on merits.
7. We have heard the learned DR and perused the material on record. We find an identical issue was decided in favour of the assessee by the order of the Tribunal for the Asst.Years 2011-2012 and 2012-2013. The relevant finding of the Tribunal reads as follows:-
“7. We have heard the rival submissions and perused the material on record. The assessee was established on 22.12.1987 under the Companies Act, 1956. The shares of the assessee-Company is entirely held by the Fisheries Department of Union Territory of Lakshadweep, Collector and the Development Commissioner of Union Territory of the Lakshadweep . The fact that assessee is Government undertaking is admitted by the Assessing Officer in the impugned assessment orders for AYs 2011-12 and 2012-13. In other words, the assessee is an entity financed wholly by the Government and no private entities have any stake in the assessee-Company. The Memorandum of Association of the assessee-Company is produced as Annexure A in the paper book filed by the assessee. The main objects of the assessee as per the Memorandum of Association are as follows:
i) The prime objective of the corporation is to work for the development and upliftment of the Scheduled Tribe community of the Union Territory of Lakshadweep.
ii) Survey, prospect and catch, develop, manufacture, conserve, culture and artificially breed, preserve, process, and convert deal in wholesale and/or retail and buy, sell, market, import export all varieties of fish, shellfish, squids, cattle fish, octopus, marine products like oysters, pearls and seaweed, and corals and jelly fish which are available from the sea and other waters.
iii) Procure, market, sell, process, preserve, develop, deal in import and export of agricultural produce, undertake civil supplies operations, industrial raw materials and finished industrial products.
iv) To carry on the business of operation of ships, both passenger and cargo and also acquire ships for operation and act as agents for operating and maintenance of both passengers and cargo vessel of UT of Lakshadweep Administration (UTLA) and other Government and private bodies.
7.1 It is stated in the written submission that the assessee company undertakes various activities for promoting the interest of scheduled tribe living in the Lakshadweep Islands.
The relevant portion of the written submission for ready reference, reads as follows:
“The appellant is involved in the following activities:
“A) Desicated Coconut Powder manufacturing units and Oil Extraction units at Kadamat, Androth, Amini and Kalpeni and Tuna Canning Factory at Minicoy, Lakshadweep. These units are run for social objectives of providing employment to the local islanders and to provide market for their local produce. These units are all at a loss. Employments to 110 islanders who are members of the scheduled tribes are given in the above factories for a total annual expenditure of Rs.162 Lakhs towards salary. And an amount of Rs.65 lakhs were paid during April 2016 to Feb 2017 for the procurement of local produce to provide market for the islanders who are members of the scheduled tribes. A true copy of the statement showing the purchases made by the appellant from the Islanders and also the statement showing the salary paid to the staff of the appellant during the year 2010-11 and 2011-12 is produced herewith and marked as Annexure B.
B) The appellant is also entrusted by operation of Port Control Towers in Lakshadweep by the Union Territory of Lakshadweep, Administration. For operation and maintenance of Port Control Towers a commission of 5% is provided to the appellant as stated above. Employment to 74 islanders who are members of the scheduled tribes are given in the above division for total annual expenditure of Rs.229 lakhs towards salary.
C) The appellant is also engaged in the operation and maintenance of vessels between mainland and Lakshadweep Island Union Territory of Lakshadweep consist of 36 islands and are peculiarly located in such a manner that there is no direct connection either from the mainland or in between two islands. Therefore only connectivity between the islands and mainland is through ships and helicopter. (Helipad is only possible mode due to paucity of land). All daily consumables are procured from mainland and it is difficult to transport the same in monsoon due to rough condition of sea. The assessee is entrusted with operation and maintenance of ships/vessels between mainland and islands and between islands. Hence this corporation was entrusted to provide cheap and subsidized transport to the residents as well as for transportation of goods and for evacuation of the sick and wounded in case of emergency. For operation and maintenance of ships/vessels a commission of 2.5% is provided to the appellant. Employment to 390 islanders who are members of the scheduled tribes are given in the vessels for a total annual expenditure of Rs.2145 Lakhs towards salary and also employments to 51 islanders who are members of the scheduled tribes are given in the office to carry out the administrative activities of the appellant for a total annual expenditure of Rs. 160 Lakhs towards salary.
D) The appellant is also the Nodal agency for disbursement of funds sanctioned and received from National Scheduled Tribe Financial Development of Corporation (NSTFDC). The appellant is entrusted with the disbursement and recovery of loans granted to scheduled tribes from NSTFDC. There is no revenue from this activity. The appellant is carrying out the said activity only for the benefit of the Scheduled Tribes in Lakshadweep.
E) The appellant coordinates and monitors the procurement of vessels on behalf of UTL. The funds for this purpose are transferred to the appellant and disbursement is made as per the instruction of UTL. There is no revenue from this activity.
7.2 On a perusal of the Financial Statements of the assessee for the assessment years 2011-12 and 2012-13, it is clear that the assessee company had undertaken the above activities. The assessee company for the relevant assessment years were operating tuna canning factory and desicated coconut powdering manufacturing factory and oil extracting units in Lakshadweep Islands. It was marketing the local produce like tuna, coconut etc. and providing employment to the Islanders. The assessee is also operating ships owned by the Lakshadweep administration which is the main transportation facility available to the residents of the Lakshadweep islands. The assessee is also the nodal agency for channelizing of loan to islanders under the NSTFDC (National Scheduled Tribe Finance and Development Corporation) Scheme. All the activities of the assessee are directly or indirectly benefiting the Islanders who are all Scheduled Tribes living in remote areas and not for any commercial purpose. It is also clear from the Annexure C and C1 of the paper book that the employment preferences are given to scheduled tribes living in Lakshadweep Islands. The assessee has also filed the roaster list of its employees and it is clear that majority of the employees of the assessee-Company are Islanders. From the totality of the activities mentioned above, and the employment preferences given to the local Islanders, it is abundantly clear that the assessee-Company is established for the development of the scheduled tribe community in the Lakshadweep Islands. Having understood the assessee-Company and its activities, now let us examine the relevant provisions, namely, section 10(26B) of the I. T. Act and whether the assessee would be entitled to the benefit of section 10(26B) of the Act.
7.3 Section 10(26B) was inserted by the Finance Act, 1980. The Section provides for exemption from income tax to any body, institution or association wholly financed by the Central or a State Government, or to a statutory corporation, established for promoting the interests of the members of the Scheduled Castes and/or the Scheduled Tribes. The then Finance Minister while introducing the Finance Act for the year 1980 had stated the following:
“37. Some State Governments have set up statutory corporations for the promotion of socio-economic interests of members of the Scheduled Castes and the Scheduled Tribes. I propose to exempt from income-tax the income of all statutory corporations or bodies, associations or institutions wholly financed by the Central or a State Government, established for promoting the interests of the members of the Scheduled Castes and the Scheduled Tribes “.
7.4 It is in this background that Section 1 0(26B) of the Act was introduced. Section 10(26B) of the I. T. Act reads as follows:
10(26B) any income of a corporation established by a Central, State or Provincial Act or of any other body, institution or association (being a body, institution or association wholly financed by Government) where such corporation or other body or institution or association has been established or formed for promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them.
(a) “Scheduled Castes” and “Scheduled Tribes” shall have the meanings respectively assigned to them in clauses (24) and (25) of article 366 of the Constitution;
(b) “backward classes” means such classes of citizens, other than the Scheduled Castes and the Scheduled Tribes, as may be notified-
(i) by the Central Government; or
(ii) by any State Government,
as the case may be, from time to time;
7.5 The above provision makes it clear that the income of the following entities are eligible for exemption:
a) The income must be of Corporation established by a Central, State or Provincial Act where such corporation has been established or formed for promoting the interest of the members of schedule castes or schedule tribes or backward classes or any of two or all of them.
b) The income must be of any other body, Institution or Association being wholly financed by the Government where such other body, Institution or Association has been established or formed for promoting the interest of the members of schedule castes or schedule tribes or backward classes or any of two or all of them.
7.6 From the above, two categories of entities are forthcoming (i) corporation established by a Central, State or Provincial Act (statutory corporations) and (ii) other body, Institution or Association being wholly financed by the Government. The statute does not by any stretch of imagination makes exclusion of entities based on nature of incorporation. Any entities be it a company, firm, society, association, institution which are wholly financed by the Government are entitled to the benefit under Section 10(26B). A close reading of the Section 10(26B) also makes it clear that the object for which a statutory corporation, or any other body, association or institution is created is the crucial aspect for determining the eligibility for availing benefit u/s. 10(26B). The Assessing Officer and the CIT(A) wrongly assumed that the activities carried on by the assessee-company are not for the benefit of the scheduled tribes inhabiting the Lakshadweep Islands.
According to us, the paramount consideration for eligibility u/s. 10(26B) is to examine the primary objective for establishment of assessee whether it is for promoting the interest of the scheduled tribes or not. If the Government undertaking is established for promoting the interest of scheduled tribes, it would be entitled to the benefit of Section 10(26B) of the Act. In the instant case, apart from the object of creation of the assessee company, being for development and upliftment of the scheduled tribes inhabiting the Lakshadweep Islands, it activities are also directly and indirectly, promoting the interest of the members of the scheduled tribes.
7.7 The Hon’ble High Court of Allahabad in its judgment reported in 226 ITR 696 on the question of interpreting Section 10(26B) held that:
“Clause (26B) like other clauses of Section 10 provides exemption in respect of any income of a corporation established by a Central or State Government. The assessee being a body within the meaning of Clause (26B) may qualify for exemption under that clause if it is established that it was formed for promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or of both. Simply because the assessee has some other main objects besides one of the objects for promoting the interests of the members of the Scheduled Castes, there seems to be no good reason to deny the exemption, envisaged by Clause (2 6B). The principle of severability of common law is well recognised in our country. In so far as the income of the assessee from the main object No.1, is severable from the income accruing to it from other main income attributable to the housing schemes undertaken for promoting the interests of the members of the Scheduled Castes will be entitled to exemption under Clause (26B). “
7.8 Adopting the above observation and relying as Articles 46 and 47 of the Constitution of the India, Gauhati High Court in its judgment reported in 290 ITR 139 held that:
“Clause (26B), therefore, deserves to be interpreted in such a way as to promote the schemes undertaken for ameliorating the lot of the members of the Scheduled Castes or the Scheduled Tribes or of both. A corporation or other bodies may be formed having one of the objects for promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or of both and if strict interpretation is put on Clause (26B), then they will be precluded from taking the benefit of exemption. Clause (26B) is, therefore, to be interpreted in such manner as to encourage the corporations or other bodies to undertake the activities to promote the interests of the members of the Scheduled Castes and the Scheduled Tribes more and more, rather than to defeat the purpose of Clause (26B). Viewed from this angle, there is no justification to put a restricted interpretation on Clause (26B).”
7.9 In the light of the above said reasoning and the judicial pronouncements cited supra, we are of the view that the assessee which is financed and established by the Government for promoting the interest of the members of the scheduled tribes living in the Lakshadweep Islands, is entitled to the benefit of section 1 0(26B) of the I. 2′. Act. Since we hold that the assessee is entitled to the benefit of section 1 0(26B) of the I. 2′. Act, the other grounds relating to the issue of disallowances/additions made by the Assessing Officer has been rendered infructuous and we dismiss the same as not adjudicated. It is ordered accordingly. Hence the appeals filed by the assessee for the assessment years 2011-12 and 2012- 13 are partly allowed as indicated above.”
8. In view of the above order of the Tribunal in assessee’s own case for the immediately preceding assessment years, i.e. Ys. 2011-2012 and 2012-2013 (supra), we hold that the CIT(A) is justified in granting exemption u/s 10(26B) of the I.T.Act, as claimed by the assessee, for both the assessment years under consideration. It is ordered accordingly.
9. The only other issue raised by the Revenue in ITA No.312/Coch/2018 for assessment year 2014-2015 is whether the CIT(A) is justified in holding that the interest on delayed payment of VAT and TDS are allowable expenditure? The Assessing Officer had made disallowance of Rs.6,573 being interest for delayed payment of VAT and TDS.
The relevant observation of the A.O. in making the disallowance, reads as follows:-
“It is also seen that the assessee has provided interest on VAT of Rs.290 and interest on TDS of Rs.6,283. As these are penal in nature, cannot be claimed as business expenditure. Disallowance comes to Rs. 6,573/-.”
11. On appeal to the first appellate authority, the disallowance made by the A.O. has deleted. The CIT(A) held that interest on delayed payment of VAT and TDS is not in the nature of penal, and therefore, it is an allowable expenditure. The learned Departmental Representative was heard.
12. We have heard the learned Departmental Representative and perused the material on record. Interest on delayed payment of VAT and TDS is only compensatory and is not penal in nature. Therefore, the CIT(A) has correctly deleted the disallowance made for the interest expenditure claimed on delayed payment of VAT and TDS. Hence, this ground raised by the Revenue is rejected.
13. In the result, the appeals filed by the Revenue are dismissed.