Case Law Details
DCIT Vs Shriram Chits Maharashtra Ltd (ITAT Mumbai)
ITAT Mumbai held that penalty levied for late filing of Profession Tax Return is penal in nature accordingly is not allowable as business expenditure.
Facts- The assessee company is into the business of chit fund. The assessee by running this chit fund business has been earning 5% of the chit fund as its commission claimed as income under the head “Foreman Commission”. AO by following A.Y. 2010-11 to 2013-14 proceeded to hold that the assessee has given understatement of income from foreman commission and computed the same at Rs.30,46,66,310/- against which the assessee has shown corresponding income of Rs.21,00,000/- thus understatement of income of Rs.8,96,22,310/- which the assessee was required to credit to the profit & loss account. AO thereby made addition of Rs.8,96,22,310/- to the total income of the assessee being the foreman commission received during the year under consideration. AO also noticed from the profit & loss account that amount of Rs.11,000/- has been debited on account of penalty on account of late filing of profession tax return. On admission of the assessee that the same has been debited to profit & loss account due to oversight, the AO made addition thereof to the income of the assessee.
The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has partly allowed the same. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the Revenue has come up before the Tribunal by way of filing present appeal.
Conclusion- Held that the assessee has not filed the profession tax return it was charged with late fee which is penal in nature and cannot be considered as a compensatory in nature. So the disallowance of Rs.11,000/- made by the AO being penal in nature is liable to be sustained but the Ld. CIT(A) has erred in deleting the same. Hence, deletion of disallowance made by the Ld. CIT(A) is hereby set aside and order passed by the AO qua this addition is restored.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The assessee by filing the present appeal, sought to set aside the impugned order dated 10.01.2023 passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as CIT(A)] qua the assessment year 2014-15 on the grounds inter-alia that :-
“1. On the facts and circumstances of the case and in Law, the Ld. CIT(A) has erred in disallowing the addition made by the Assessing Officer of Rs.8,96,22,310/- being difference between the foreman commission receivable of Rs.30,46,66,310/- (@5 timed of the agency commission to paid to the agents, which is debited to the Profit & Loss Account of Rs.60,93,326/-) and there is no definite correlation between agency commission and foreman commission even as the assessee has admitted to the contrary in his submission to the Assessing Officer?
2. Whether on the facts and circumstances of the case and in Law, the Ld CIT(A) has erred on deleting the addition of expenditure of Rs 11,000 made in the assessment order as penal in nature on account of fine or penalty levied due to late filing of Profession Tax Return, ignoring the fact that as per the provision of the Act. penalty or interest or fine levied on the assessee for delay in filing return will not be allowable as business expenditure?
3. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the assessing officer be restored.
4. The appellant craves leave to amend, or alter any grounds or add a new ground, which may be necessary”
2. Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee company is into the business of chit fund. During the year under consideration the assessee filed return of income declaring total income of Rs.84,16,650/- after claiming deduction under section 80G to the tune of Rs.7500/- and computed the book profit under section 115JB of the Income Tax Act, 1961 (for short ‘the Act’) @Rs.24,55,160/-, which was subjected to scrutiny. The assessee filed necessary submissions/details. The assessee by running this chit fund business has been earning 5% of the chit fund as its commission claimed as income under the head “Foreman Commission”. The Assessing Officer (AO) by following A.Y. 2010-11 to 2013-14 proceeded to hold that the assessee has given understatement of income from foreman commission and computed the same at Rs.30,46,66,310/- against which the assessee has shown corresponding income of Rs.21,00,000/- thus understatement of income of Rs.8,96,22,310/- which the assessee was required to credit to the profit & loss account. The AO thereby made addition of Rs.8,96,22,310/- to the total income of the assessee being the foreman commission received during the year under consideration. The AO also noticed from the profit & loss account that amount of Rs.11,000/- has been debited on account of penalty on account of late filing of profession tax return. On admission of the assessee that the same has been debited to profit & loss account due to oversight, the AO made addition thereof to the income of the assessee.
3. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has partly allowed the same. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the Revenue has come up before the Tribunal by way of filing present appeal.
4. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.
Ground No.1
5. At the very outset, the Ld. A.R. for the assessee contended that the issue raised by the Revenue vide ground No.1 has already been decided by the co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2010-11 to 2013-14 and brought on record order passed by the Tribunal in ITA No.947/M/2017 A.Y. 2013-14 date of order 11.07.2018.
6. We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2010-11 to 2013-14 which is qua the identical issue and operative part of the Tribunal order is extracted for ready perusal as under:
“10. We have heard the counsel of both the parties and we have also perused the material placed on record as well as the orders passed by the revenue authorities. Before we decide the merits of the case it is necessary to evaluate the orders passed by Ld. CIT(A). The operative portion is reproduced below: –
“I find that the appellant earns a commission of 5% on the total chit fund collection. Such, chit schemes are-normally-of-30. months to 50 months duration. Therefore, the said commission of 5% is spread over a period of more than 2 to 5 years. It is also seen that the assessee earns commission on a month to month basis on the monthly collection made and on the successful bidding by the subscribers. However, the agents are paid a commission of 1% of the total chit value, in respect of each subscriber enlisted by him provided such subscriber pays at least four months instalment, immediately on receipt of four such instalment. Thus there is no definite co-relation between the foreman commission earned and the agency commission paid. The appellant also may have to make additional expenditure on failed chit collections. Therefore, the addition made by the AO in computing the income of the appellant by applying 5 times of the payment of commission to the agents is not based on any objective yard stick. In view of the above, the addition of Rs.4,72,17,435/- made by the AO is deleted.
After analyzing the aforementioned order passed by Ld. CIT(A) and after hearing the arguments of both the parties, we find that the CIT(A) has taken into consideration that the assessee earned commission of 5% on the total chit fund collection. The said commission is spread over the total period of scheme and in this way the assessee earns commission on a month to month basis on the monthly collection made and on the successful biding by the subscribers. As per the facts, the agents are paid a commission of 1% of the total chit fund value in respect of each subscriber enlisted by him provided such subscribers pays at least 4 months installment, immediately on receipt of 4 such installments and in this way there is no definite co-relation between the foremen commission earned and the agency commission paid. After appreciating the facts, the Ld. CIT(A) had rightly decided that the addition made by the AO in computing the income of the assessee by applying five times of the payment of the commission to the agents is not based on any objective yardsticks, therefore deleted the said additions. We have also noticed that the Ld. CIT(A) while deciding this issue had also taken into consideration the submission made by assessee which are contained in para no. 4 and also the findings of AO which are contained in para no. 3 of CIT(A)’s order.
Apart from the above, the Ld. DR appearing for the appellant has not placed on record any new facts or contrary judgments of higher courts before us in order to controvert or rebut the findings recorded by learned CIT (A), and therefore, there are no reasons for us to deviate from or interfere into the well reasoned findings recorded by the Ld. CIT (A). Therefore, after hearing both the parties and analyzing the impugned order, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and well-reasoned. Accordingly, we uphold the same and dismiss this ground of appeal filed by revenue.”
7. So fact of the issue raised before us being identical having already been decided by the Tribunal in favour of the assessee, we find no illegality or perversity in the impugned findings returned by the Ld. CIT(A) on ground No.1. Hence, ground No.1 raised by the Revenue is dismissed.
Ground No.2
8. The AO has made addition of Rs.11,000/- debited by the assessee to its profit & loss account pertaining to late filing of profession tax return on the ground that the same was penal in nature and as such cannot be allowed as deduction.
9. However, the Ld. CIT(A) decided this issue in favour of the assessee by returning following findings:
“5.1 The main issue here is whether the late filing fees for filing Profession Tax late is allowable as business expenses or not. For that it is vital to understand that whether the fees paid for late filing of Profession Tax Return is compensatory in nature or penal in nature. It is seen that the expenses allowed as deductions against Profits and Gains of Business or Profession are covered from Section 30 to 37 of the Income Tax Act. Section 37(1) says that any expenditure (except expenditure described in sections 30 to 36, capital expenditure or personal expenses of the assessee), expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, “Profits and Gains of Business or Profession”. It is an accepted notion that the penalty or fine levied on the assessee is allowed as expenditure under provisions of Section 37(1) only on the basis of their nature, whether such fine or penalty is of compensatory nature or penal nature. If fine or penalty is of compensatory nature then it will be allowed as expenditure or in case it is penal not allowed as deductible expenditure. A fine or penalty consisting of monetary as well as prosecution will be always considered as penal action and not allowed as deduction. In my humble opinion, late fee is not paid for a purpose which is an offence or prohibited. In fact, late fees are paid for the purpose of the compliance with the Act. Hence, it will be allowed under Section 37 as it is is not an offence or prohibited under any law. Thus, the issue is decided in favour of the appellant, the disallowance of Rs.11,000/- made by the AO is directed to be deleted.”
10. We have perused the order passed by the Ld. CIT(A) but unable to agree with the same because when the assessee has not filed the profession tax return it was charged with late fee which is penal in nature and cannot be considered as a compensatory in nature. So the disallowance of Rs.11,000/- made by the AO being penal in nature is liable to be sustained but the Ld. CIT(A) has erred in deleting the same. Hence, deletion of disallowance made by the Ld. CIT(A) is hereby set aside and order passed by the AO qua this addition is restored.
11. Resultantly, the appeal filed by the Revenue is hereby partly allowed.
Order pronounced in the open court on 31.05.2023.
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