DCIT Vs Oswal Woollen Mills Ltd. (ITAT Chandigarh)
Conclusion: Payment paid by company to ESI department for delay in payments was nothing but compensation and was compensatory in nature. Thus, the impugned amount was to be allowed u/s 37(1).
Held: Assessee claimed Rs. 4,04,791/- paid to Employees State Insurance department, Chandigarh being the additional amount charged by ESI department for delay in deposing ESI payment. AO did not allow the claim of assessee on the ground that the said amount was nothing but the penalty levied by ESI department. It was held that the particular amount of ESI was an allowable expenditure and was allowed by AO u/s 43B on actual basis, therefore, any amount over and above paid by company for delay in the payment of the amount was nothing but compensation and was compensatory in nature. There was no material on record to controvert the categorical findings given by CIT(A). Therefore, the said amount was not a penalty but damages paid to ESI department and hence compensatory in character. Thus, the impugned amount was to be allowed u/s 37(1).
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
These two appeals filed by the Revenue and assessee are directed against the order of CIT(A)-II, Ludhiana dated 9.11.2011 relating to assessment year 2008-09.
2. Firstly, we will take up Revenue’s appeal i.e. ITA No.16/Chd/2012. Ground No.1 of the appeal reads as under:-
1. On the facts and in the circumstances of the case, the Ld. CIT(A)-II Ludhiana has erred in allowing the expenses amounting to Rs. 33,895!- though relating to previous year but crystallized and paid during the year.
3. The facts relating to this issue are that during the year under consideration the assessee company had paid expenses of Rs. 33,01,275/- in its various units which were related to earlier years. Out of the said amount claimed, the Assessing Officer disallowed and added Rs. 33,895/- by rejecting the contention of the assessee company. The Assessing Officer discussed this issue at pages 2 of 4 in para 1 of the assessment order.
4. On appeal, the CIT(A) deleted the addition for the reasons stated in para 3 of the impugned order, which reads as under:-
“3. I have carefully considered the submissions and arguments advanced by the Ld. A.R of the appellant company and perused the relevant documents produced before me. It was seen that Rs. 16,275!- on account of Trade Discount was decided to be paid during the year under appeal, though this trade discount was allowed at the sale made by the party M!s Vindh Traders, Lucknow, during the immediate preceding year. Since the liability was crystallized, determined and paid during the year under appeal, therefore, it is allowable during this year.
Similarly, the trade discount was determined and allowed to the party M!s Rohit Enterprises, Brailly, on the sales made by the said party in the preceding year. Since there was dispute which was settled during the year, therefore, it is an allowable during the year under consideration.
Regarding Cash Discount allowed by the appellant to M!s J. K. Sons, the dispute between the party and the appellant company arose. The party was claiming Cash discount on the payments made by M/s J. K. Sons to the appellant company on 30/6/2006. The said dispute was settled during the year and the appellant company allowed 7.5% Cash Discount on payment of Rs. 1,50 Lac, which comes to Rs.11,250/- and rightly claimed during the year under consideration. Therefore, it is allowable during the year only.
From the facts, documents and the arguments, the assessing officer is directed to allow the expenditure of Rs.33,895/-, being the liability crystallized and paid during the year under appeal. This ground of appeal is therefore allowed.”
5. We have heard the rival submissions and have also perused the materials available on record. We find that a similar issue came up for consideration before ‘A’ Bench of the Tribunal in assessee’s case in ITA No.1349/Chd /2011 relating to assessment year 2007-08. In that year, there was a dispute of Rs. 58,878/-. The Tribunal vide its order dated 27.12.2011 confirmed the order of CIT(A) stating that the expenditure of Rs. 58,878/- being the liability crystallized of earlier year and paid during the year under appeal is allowable expenditure. The order of the Tribunal referred to above is squarely applicable to the facts of the present year. Following the order of the Tribunal, we hold that CIT(A) was justified in directing the Assessing Officer to allow expenses which was crystallized and paid during the year, though related to earlier year. In view of the order of the Tribunal, we uphold the order of CIT(A) reproduced hereinabove. The ground No.1 is dismissed.
6. Ground No.2 of the appeal reads as under:-
On the facts and in the circumstances of the case, the Ld. CIT(A)-II, Ludhiana has erred in deleting the addition of Rs. 4,75,471/- on account of articles distributed among business associates on various occasions for want of detail of persons to whom the gifts were distributed.
7. While framing the assessment, the Assessing Officer disallowed Rs. 4,75,471/- on account of articles distributed amongst business associates on various occasions including Diwali for want of the detail of persons whom gifts were distributed.
8. On appeal, the CIT(A) allowed the claim of the assessee following his own order passed in assessee’s case for assessment year 2007-08.
9. After hearing the Ld. representatives of both the parties, we find that the issue is squarely covered in favour of the assessee and against the Revenue by the order of the Tribunal dated 27.12.2011 in ITA No.1349/Chd/2011 in assessee’s case relating to assessment year 2007-08. While deciding a similar issue, the Tribunal in assessment year 2007-08 followed the order of ITAT Chandigarh Bench ‘B’ passed in assessee’s case in ITA No. 594/Chd/2005 dated 26.5.2006 relating to assessment year 2001-02. The relevant findings given by the Tribunal in assessee’s case in assessment year 2001-02 reads as under:-
“8 We have heard both the parties at length and carefully gone through the material available on record. In the present case it is not in dispute that the assessee distributed the gifts on the occasion of Diwali. The Assessing Officer while making the disallowance had considered that those expenses were not related to the business of the assessee. Similar issue had been decided by the Tribunal in ITA No. 895/Chandi/2 000 in the case of DCIT C.C. V, Ludhiana V Nahar International Ltd, Ludhiana (Supra). In the detailed order dated 24.2.2005 in the aforesaid referred to case, ITAT Chandigarh Bench ‘A’ has held as under:
“16 We have considered the rival submissions and the material available on record. In the instant case, it is not in dispute that the expenses had been incurred by the assessee on the occasion of Diwali. The Assessing Officer disallowed 50% of expenses considering the same in the nature of entertainment on the basis that the assessee had not filed the details of persons to whom those gifts were delivered. No other basis had been given. In our opinion, the reasons given by the Assessing Officer in making the disallowance were not sufficient particularly when it is customary to incur such type of expenses on the occasion of Diwali. It is also noticed from the assessment order that the Assessing Officer had mentioned the names of the persons from whom the purchases were made. He also pointed out that few of the items were “shawl” which shows that vouchers/bills were available and those had been considered by the Assessing Officer. Therefore, it cannot be said that the expenses were not incurred by the assessee and the details of expenses were not available to the Assessing Officer.”
We are of the view that the facts of assessee’s case are similar to the facts involved in the case of Nahar International Ltd (Supra) so, respectfully following the earlier order of the Tribunal dated 24.2 .2005 in the case of Nahar International Ltd (supra), we do not see any merit in this ground of departmental appeal.”
10. Respectfully following the order of the Tribunal passed in assessee’s case referred to above, we dismiss the ground raised by the Revenue.
11. Ground No 3 of the appeal reads as under:-
On the facts and in the circumstances of the case, the Ld. CIT(A)-II Ludhiana has erred in deleting addition of Rs. 35,000/- made out of total expenditure of Rs. 91,032/- incurred on guest house.
12. After hearing the Ld. representatives of both the parties, we find that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of this Bench of the Tribunal dated 27.12.2011 in assessee’s case in ITA No.1349/Chd/2011 relating to assessment year 2007-08. The relevant findings of the Tribunal reads as under:-
“9. In Ground No.4, the Revenue challenged the deletion of addition of Rs.35,000/- made out of total expenditure of Rs.1,21,404/- incurred on Guest House. Ld. ‘AR’ placed reliance on CO No. 61/Chd/2004 for the assessment year 1999-2000 in the case of Nahar Industrial Enterprises. Before CIT(A), it was contended by the assessee that the impugned addition was made on surmises and conjectures and without bringing relevant material on record. Guest House expenses are allowable. Any adhoc disallowance, without any evidence, is not sustainable in the eyes of law. This is established proposition of law that addition cannot be made on surmises and conjectures. It should be founded on cogent and credible evidence. In the present case, we do not find any evidence brought on record by the AO to support his addition. Therefore, findings of the CIT(A) are upheld and this ground of appeal is dismissed.”
13. Respectfully following the order of the Tribunal (supra), we do not see any merit in this ground of appeal and dismiss the same.
14. Ground No.4 of the appeal reads as under:-
4. On the facts and in the circumstances of the case, the Ld. CIT(A)-II , Ludhiana has erred in deleting addition of Rs. 11,462/- on account of subscription expenses of club, or director and employees of the company.
15. After hearing Ld. representatives of both the parties, we find that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of this Bench of the Tribunal passed in assessee’s case in ITA No.1349/Chd/2011 relating to assessment year 2007-08. The Tribunal vide its order dated 27.12.2011 held as under:-
“10. In Ground No.5, Revenue contended, that CIT(A) erred in deleting addition of Rs.15,458/- on account of subscription expenses of club, of Director and employees of the company. Ld. ‘DR’ placed reliance on the assessment order and ld. ‘AR’ placed reliance on the order or the CIT(A) and contended that the issue stands covered in its favour vide ITA No. 594/Chd/2005 (assessment year 2001-02) in assessee’s own case.
11. We have carefully perused the factual situation of the present case, the assessment order and the order passed by the Tribunal in assessee’s own case and found that such expenses are admissible, hence, same are allowed. There is no infirmity in the order of the CIT(A), therefore, this ground of appeal of the Revenue is dismissed.”
16. Respectfully following the order of the Tribunal referred to above, we uphold the order and dismiss ground No.4 of the appeal.
17. Ground No.5 of the appeal reads as under:-
5. On the facts and in the circumstances of the case, the Ld. CIT(A)-II, Ludhiana erred in directing the Assessing Officer to allow expenditure of Rs. 4,04,791/- paid to ESI department being additional amount charged by ESI department for delay in depositing ESI payment.
18. During the year under consideration, the assessee claimed Rs. 4,04,791/- paid to Employees State Insurance department, Chandigarh being the additional amount charged by ESI department for delay in deposing ESI payment. The Assessing Officer did not allow the claim of the assessee on the ground that the said amount was nothing but the penalty levied by ESI department.
19. On appeal, the CIT(A) allowed the claim of the assessee for the reasons
20. We have heard the rival submissions and have also perused the materials available on record. It is apparent from the record that the assessee company paid an amount of Rs. 4,04,791/- to ESI department on account of additional amount levied by ESI department, Chandigarh for delay in depositing ESI payment. The assessee claimed the said expenditure as Revenue in nature. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of Prakash Cotton Mills P. Ltd v CIT (1993) 201 ITR 684. Shri Neeraj Sharma, Ld. Counsel for the assessee also relied upon another judgment of Hon’ble Supreme Court in the case of Standard Batteries Ltd v CIT (1995) 211 ITR 444 (SC). In these decisions, it has been held that any amount which is compensatory in nature is an allowable expenditure in respect of its nomenclature a penalty. Shri Neeraj Sharma, Ld. Counsel for the assessee further furnished a copy of order dated 1.1.2008 passed by Regional Officer, ESIC, Chandigarh under section 85(B) of the ESI Act, 1948. As per this order, the impugned amount paid by the assessee to ESI department is an additional amount for delay of payment on ESI charges. Since the particular amount of ESI was an allowable expenditure and was allowed by the Assessing Officer u/s 43B of the Act on actual basis, therefore, any amount over and above paid by the company for delay in the payment of the amount is nothing but compensation and is compensatory in nature. The Ld. CIT(A) has also categorically held that the impugned payment paid by the company to ESI department for delay in payments is nothing but compensation and is compensatory in nature. There is no material on record to controvert the categorical findings given by the CIT(A). In our view, the said amount is not a penalty but damages paid to ESI department and hence compensatory in character. Thus, in view of the decisions of the Hon’ble Supreme Court referred to above, the impugned amount is to be allowed u/s 37(1) of the Income Tax Act. Accordingly, we uphold the order of CIT(A) and dismiss the ground raised by the Revenue.
21. In the result, appeal of the Revenue is dismissed.
22. Now we will take up assessee’s appeal i.e. ITA No. 53/Chd/2012 relating to assessment year 2008-09.
23. Ground No.1 of the appeal reads as under:-
1. That the Ld. CIT (A)-II erred in law and on facts in not deleting the addition of Rs. 1,00,6483/- made by the Ld. Assessing Officer u/s 14A of the Act by applying rule 8D for expenses alleged to have been incurred to earn dividend income. Directions may be given not to disallow any expenditure u/s 14A of the Act merely on surmises & conjectures in view of Hon’ble Jurisdictional High Court’s decision in the case of CIT Vs HERO CYCLES LTD dated 4/11/2009 in ITA No. 331 of 2009.
However without prejudice to the above submissions the Ld. CIT(A -II, Ludhiana has further erred in law and facts in not directing the Ld. Assessing Officer to make disallowance u/s 14A by disallowing some administrative expenses on proportionate basis which works out at Rs. 23,560/- as submitted by the humble appellant during the assessment proceedings on the basis of ITAT decision in earlier years.
24. The Assessing Officer has discussed this issue in para 5 of the assessment order which reads as under:-
“5. Disallowance u/s 14A
The company has made investment in shares from year to year. The total investment as on 31/3/2008 as shown in the balance sheet is at Rs. 13.39 Crore. The assessee has earned dividend income of Rs. 1893345/- on the said investment. The assessee was asked to compute the expenses incurred to earn the dividend income which has been claimed to be exempt u/s 10(34) of the Income Tax Act. The assessee was also asked to explain as to why the disallowance u/s 14A should not be made as per Rule 8D of the Income Tax Rules. In reply to the query the assessee filed its written reply dated 17/8/2010 which is reproduced as under
“During the year under consideration the assessee company has earned exempt income u/s 10(34) & 10(38) comprising of dividend income of Rs. 1893345/- and Long term Capital Gain of Rs.1499596/-. No expenses were incurred to earn the said dividend income. Also no collection charges were paid for the credit of dividend warrants as the warrants were sent for local clearing. The investment made during the year as well as in earlier year was made from current accruals, reserves and surplus available with the company. Your kind self would appreciate that sufficient funds in the form of reserves were available with the company to make the investments. Since no amount was borrowed for the purpose of making investments, therefore neither interest nor any other expenditure out of Administrative expenses can be disallowed u/s 14A of the Act.
However, without prejudice to the above submissions if at all some expenses are attributable for earning the said dividend income of Rs. 1893345/- the same principle for computing such amount as laid down by the Hon’ble ITAT in CONO 17/2001 for Asstt. Year 1997-98 in case of Nahar Industrial Enterprises Ltd one of the group company and also followed by your predecessor in Assessment proceedings for Asstt. Year 2006-07 are worked out as under.
Disallwoance u/s 14-A
(Amount in Rs.)
In case u/s 115HB In case of regular
computation
