2017 (4) TMI 1282 - AT - Income Tax

Disallowance as the overloading charges - whether it is nothing but a penalty as per Provision of section 73 of the Indian Railway Act 1989 - Held that - This issue raised by the revenue in this appeal is squarely covered in favour of the assessee by the decision of ITAT Mumbai bench in the case of Taurian Iron & Steel Co.(P)Ltd (2011 (12) TMI 410 - ITAT Mumbai) after considering the decision in the case of Prakash Cotton Mills P.Ltd. (1993 (4) TMI 3 - SUPREME Court) and also the nature of railway punitive charges held that the payments made to the railways for overloading of the wagons is compensatory in nature and cannot be disallowed under Explanation to Section 37(1) of the Act. Addition u/s 14A - Held that - As rightly held by CIT(A) disallowance under Rule 8D(2)(ii) (indirect interest expenditure) cannot be sustained in the light of the uncontroverted finding of the CIT(A) that assessee had sufficient interest free funds which were more than the value of investments which are likely to yield tax free income. As far as disallowance under Rule 8D(2)(iii) is concerned it is only the investment which yield dividend income that should be considered for the purpose of applying the formula as held by this tribunal in the case of REI Agro Ltd. (2013 (9) TMI 156 - ITAT KOLKATA) which has since been affirmed by the Jurisdictional Calcutta High Court. In view of the above we find no merits in the ground raised by the revenue. Treatment to the NPV expenditure - revenue OR capital in nature - Held that - As decided in assessee s own case the above expenditure paid by the assessee as NPV to enable the assessee to carry on its mining business is revenue in nature which is allowable as business expenditure under section 37(1) of the Act. - Revenue appeal dismissed.

Summary

Issues Involved:
1. Disallowance of overloading charges under Section 37(1) of the Income Tax Act.
2. Addition under Section 14A for disallowance of expenditure related to exempt income.
3. Treatment of Net Present Value (NPV) payment as revenue or capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Overloading Charges:
- Facts: The Assessee, part of the Rungta group engaged in mining, paid Rs. 33,02,103/- as "Railway Punitive Charges" for overloading beyond permissible limits. The AO disallowed this expense under Explanation to Section 37(1) of the Income Tax Act, considering it as an expenditure incurred for an offence or prohibited by law.
- Assessee's Argument: The charges were compensatory and not penal, as they were additional freight charges for overloading, a common practice due to infrastructural limitations at loading stations.
- CIT(A) Decision: Following the ITAT Mumbai Bench decision in M/s. Taurian Iron & Steel Co. (P) Ltd., the CIT(A) held the charges as compensatory, not disallowable under Explanation to Section 37(1).
- Tribunal Decision: The Tribunal upheld CIT(A)'s order, dismissing the Revenue's appeal, affirming that the charges were compensatory and not penal.

2. Addition under Section 14A:
- Facts: The AO disallowed Rs. 5,05,411/- under Section 14A read with Rule 8D, attributing expenditure to earning exempt income.
- Assessee's Argument: The Assessee had sufficient own funds (Rs. 304.63 crores) compared to the investment (Rs. 4.5 crores) and no dividend income was earned during the year.
- CIT(A) Decision: The CIT(A) deleted the disallowance under Rule 8D(2)(ii) due to sufficient own funds and directed the AO to verify and restrict disallowance under Rule 8D(2)(iii) to investments yielding tax-free income.
- Tribunal Decision: The Tribunal upheld CIT(A)'s order, noting sufficient interest-free funds and applying the principle from HDFC Ltd. (Bombay High Court) and REI Agro Ltd. (ITAT Kolkata).

3. Treatment of NPV Payment:
- Facts: The Assessee paid Rs. 32,16,09,530/- as NPV to the State Government for mining operations, which the AO treated as capital expenditure.
- Assessee's Argument: The payment was a statutory obligation for environmental balance, not for acquiring an asset, thus revenue in nature.
- CIT(A) Decision: The CIT(A) followed the ITAT's decision in the Assessee's own case for A.Y.2006-07, treating the NPV payment as revenue expenditure.
- Tribunal Decision: The Tribunal agreed with CIT(A), referencing the Assessee’s own case and other judicial precedents, confirming the NPV payment as revenue expenditure.

Conclusion:
In all three appeals (A.Y.2010-11, 2011-12, and 2012-13), the Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decisions on all issues. The overloading charges were deemed compensatory, the Section 14A disallowance was restricted to investments yielding tax-free income, and the NPV payment was treated as revenue expenditure.