IN THE ITAT AHMEDABAD BENCH ‘B’
Deepak Nitrite Ltd.
versus
Deputy Commissioner of Income-tax
IT Appeal No. 50 (Ahd.) of 2010 (by assessee)
IT Appeal no. 470 (ahd.) of 2010 (By Department)
[Assessment year 2005-06]
April 20, 2012
ORDER
Anil Chaturvedi, Accountant Member
These are the cross appeals, one filed by the assessee and the other filed by the Revenue against the order of Ld. CIT(A)-I, Baroda dated 9-10-2009 for the Assessment Year 2005-06.
2. ITA No.50/AHD/2010 (Assessee’s Appeal)
In this appeal, the assessee has taken following grounds :-
“1. The Ld. A.O. has erred in holding the interest of Rs.1,55,357/- on sales tax is not eligible for deduction.
2. The Ld. A.O. has further erred in assessing a sum of Rs.38,20,047/- as deemed dividend.
3. The Ld. A.O. has further erred, in the process of computing book profits under section 115JA(2) of the Act, in adding deemed dividend of Rs.38,20,047/-.
4. The Ld. A.O. has further erred in the process of computing book profits under section 115JA(2) of the Act, in adding Provision for Gratuity of Rs.12,03,707/-.”
3. Ground No.1 is with respect to interest on sales tax.
Since the ground No 1 of Assessee’s and Revenue’s appeal are connected the same are taken together for disposal.
Brief facts are that during Assessment Year 2005-06 the assessee availed certain benefits under the Sales tax Amnesty Scheme in order to discharge unpaid sales tax dues of financial year 1995-96, 1996-97 and 1997-98. The total amount of outstanding arrears of sales tax of the erstwhile amalgamating company was to the order of Rs. 36,43,260/-. Against this, the amnesty scheme permitted the full and final settlement by payment of Rs 20,06,132/- comprising of Rs 18,35,946/- towards sales tax, Rs 1,55,357/- towards interest and Rs 14,829/- towards penalty. Before the A.O. it was submitted by the assessee that the dues pertained to the earlier years and the same was not claimed as deduction in the respective years. The assessee claimed the payment of Rs 20,06,132 and requested that the same should be allowed as deduction to it on payment basis u/s 43B. The assessee claimed this expenditure for the first time during the assessment proceedings. The A.O. did not take cognizance of the claim and neither he admitted nor allowed the assessee’s claim.
3.2 Being aggrieved with the order of A.O., assessee preferred appeal before the CIT (A).
3.3 On going through the Balance Sheets and Profit and Loss accounts for financial years 1995-96, 1996-97 and 1997-98, CIT(A) observed that in those years the sales tax had been directly taken to Balance Sheet without debiting/crediting to the Profit and loss account and hence the payment of sales tax had not been allowed as deduction in earlier years. He further observed that even otherwise the claim would have been disallowed u/s 43B in the earlier years since the tax was not actually paid during those years. However, since the total tax payment of Rs 20,06,132/- comprised of sales tax (Rs 18,35,946/), interest (Rs 1,55,357/-) and penalty (Rs 14,829/-), he allowed only the payment of sales tax amounting to Rs 18,35,946/-and disallowed the balance amount Rs. 1,70,186/- for the reason that amount was in the nature of penal interest and penalty.
3.4 Aggrieved by the disallowance of interest of Rs.1,55,357/-, the assessee is in appeal before us and the Revenue is aggrieved by the decision of allowance of deduction of Rs. 18,35,946/- u/s 43B.
3.5 Before us, the Ld. A.R. submitted that in respect of sales tax liability for FY 95-96, 96-97 & 97-98 the assesse had made the payments under the Sales tax Amnesty scheme during the assessment year under consideration. The total aggregate payment made was Rs 20,06,132/- which consisted of sales tax of Rs 18,35,946/-, interest of Rs. 1,55,357/-, and penalty of Rs. 14,820/-. The payment was not charged to the Profit & loss account and taken directly taken to the Balance sheet as per the accounting policy consistently followed by the assessee. CIT (A) allowed the claim of sales tax u/s 43B but not of interest holding the same to be of penal in nature. It was submitted by the Assessee that it had complied with the sales tax law, though belatedly. For such delay, in depositing the sales tax it had to pay interest and penalty. The Ld. A.R. strongly argued and stated that the interest charged and paid under the Amnesty Scheme is only for deferment of payment of sales tax and was not penal in nature and therefore the same should be allowed as deduction u/s 43B.
3.6 Ld. D.R. on the other hand argued and pointed out that the assessee has not debited/credited Sales tax to the Profit and loss account and the sales tax was directly taken to Balance Sheet. He further stated that nothing is available on record to prove that in the earlier year the sales tax that was collected and not paid was added to the total income. According to him as per the provisions of section 43B, the sales tax deduction can only be allowed on payment basis in the year of payment only if in the earlier year the amount was debited to the Profit and loss account and while computing the income the same was disallowed and was added to the income. Further, the Ld. D.R. could not controvert the fact that the interest paid on sales tax was of penal in nature.
3.7 We have heard the rival contentions, perused the material on records placed before us. The issue before us is whether the interest paid on sales tax under the amnesty scheme is an allowable deduction as business expenditure. The law is well settled that the interest paid on sales tax is not of penal in nature and is therefore allowable as business expenditure. Therefore, in our opinion the interest on sales tax is an allowable business expenditure. Further, .the interest paid on sales tax under the amnesty scheme is not for infringement of any law. We accordingly hold that the entire amount of interest of Rs. 1,55,357/- as allowable. As far as the fact of allowance of sales tax in earlier years is concerned, nothing has been placed on before us to prove that in earlier years the sales tax that remained unpaid was added to the income. We therefore feel that this aspect needs to be verified. We accordingly, remit this issue back to the file of A.O. for limited purpose to verify as to whether in the earlier years the unpaid amount of sales tax at the year-end was added to the income. If the same was added then the same should be allowed as deduction in the current assessment year u/s. 43B. As far as the Revenue’s appeal is concerned, based on the above facts, we do not find any infirmity in the order of the CIT (A) and accordingly dismiss the Revenue’s 1st ground. The claim of the assesse is accordingly allowed for statistical purposes and of the Revenue is dismissed.
Regarding ground No.2.
4. The A.O. observed that the assessee had paid purchase consideration of Rs.53,92,50,000/- to acquire 2876 equity shares of Rs.10 each of Yerrowada Investment Pvt. Ltd. (YIPL). This amount was shown under the schedule of fixed assets as part of “Building”. Assessee claimed that by virtue of its holding the shares, it holds occupancy rights of the property owned by YIPL. YIPL had acquired land and had constructed about 5 lac sq. ft. of residential and commercial space. In the year 1996, YIPL allotted occupancy rights to its shareholders with respect to constructed, unconstructed and unutilized FSI. The A.O. was of the view that in the present case, YIPL has distributed its assets which are in the form of occupancy rights in respect of the properties owned by it to its shareholders. According to A.O., the income in respect of the properties in which the assessee has been transferred occupancy rights will be in the nature of deemed dividend. The A.O. held that the annual rental value in respect of the occupancy rights held by the assessee has to be computed and to be taxed in the hands of assessee as “deemed dividend” under the head “Income from other sources”. He considered the rate for residential property at Rs.8.855 per sq. ft. per month and computed deemed dividend and taxed it as “Income from other sources”. The computation of deemed dividend was made as under:-
