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TMI Blog2011 (12) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has given interest free advances to the following subsidiary companies under the same management: 1. Bajla Exports Rs.73,40,000/- 2. Palss Properties P. Ltd. Rs.22,75,765/- 3. Taurian Engg. P. Ltd. Rs.2,87,53,221/- Rs.3,83,68,986/- The A.O. asked the assessee to explain as to why proportionate interest on advances given to above mentioned parties should not be disallowed. The assessee explained that it has not taken any specific borrowing/loans for making advances to sister concern. It has got sufficient funds in the form of share capital, share application money and free reserve and surplus. The company has got own capital of Rs.37.40 crores as against outstanding loan of Rs.3.63 crores (excluding Rs.20 lacs given as deposit to Palss Properties) given to the sister concern as on 30.3.2006. Therefore, it cannot be said that the loan/advance given to sister concerns are out of borrowed funds. It was submitted that it was out of common funds from where the money has been advanced to the sister concerns. It was submitted that the company has also taken interest free unsecured loan of Rs.7.05 lacs from sister concerns. It was accordingly argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been given as interest free advances to the sister concerns and no borrowed fund has been utilized for such interest free advances. He submitted that the company has a fungible bank account and therefore it is not correct to say that any specific interest bearing funds were given to the sister concerns. The decision of the Hon'ble Bombay High court in the case of CIT v. Reliance Utilities and Power Ltd. reported in 313 ITR 340 was cited by the ld. counsel for the assessee. He submitted that the assessee had given an amount of Rs.2.88 crores out of the total interest free funds of Rs.3.84 crores to Taurian Engg. Pvt. Ltd. (TEPL), a sister concern which is a subsidiary of the assessee company. He submitted that TEPL is a company engaged in the business of manufacturing of crushing plant/screening plant and the said funds given by the assessee has been utilized for their business purpose only. During the year TEPL had just started its business operations and the borrowed funds were fully utilized by TEPL for the purpose of its business activities. The copy of balance sheet of TEPL filed in the paper book was shown to substantiate the same. Relying on the decision of Hon'ble Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Utilities and Power Ltd. reported in 313 ITR 340 has held that if there are funds available both interest free and overdraft and/or loan taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds are sufficient to meet the investments. Since in the instant case, the interest free funds i.e. shareholders funds and free reserves and surplus are much higher than the interest free advances made to the sister concerns and since the assessee is maintaining a mixed bank account, therefore, in view of the decision of the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd. (supra) no disallowance of proportionate interest can be made. 5.1 Further the case of the assessee is also squarely covered by the decision of Hon'ble Supreme Court in the case of S.A. Builders (supra) according to which disallowance of proportionate interest cannot be made if the interest free advances have been made to the sister concerns for commercial expediency. Since in the instant case the assessee has conclusively proved that the amount has been paid to subsidiary comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Goetze (India) Ltd. v. CIT reported in 284 ITR 323 (SC) and the decision of Hon'ble Delhi High Court in the case of CIT v. Jai Prabolic Springs reported in 306 ITR 42 (Del), he submitted that the Tribunal has power to allow deduction for expenditure to the assessee to which it was otherwise entitled to even though no claim was made by the assessee in the return. Referring to the decision of the Tribunal in the case of M/s Indian Steel and Allied Industries v. ACITT in ITA No. 3097/Mum/06 order dtd. 10.8.2009 for A.Y. 2005-06, he submitted that the Tribunal in the said decision relying on the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. (supra) has restored the issue to the file of the A.O. with a direction to allow the claim of deduction of gratuity which were not claimed either in the original return or in the revised return. Referring to the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT reported in 82 ITR 363, he submitted that the expenditure has to be allowed in the year to which it relates to. He accordingly submitted that the issue may be restored to the file of the A.O. for fresh adjudicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udicating the ground of appeal taken before him on the issue charging interest u/s 234B and 234C of the Income Tax Act, 1961 by the Learned Assessing Officer on the additions made at the time of assessment." 9.1 After hearing both the sides we are of the considered opinion that charging of interest u/s 234B and 234C is mandatory and consequential in nature. Accordingly, this ground by the assessee is dismissed. ITA No. 1613/Mum/2010 (By the Revenue) 10. The only effective ground raised by the Revenue reads as under:- "On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income-tax (Appeals) erred in treating 'punitive charges' as payments and not an offence or prohibited by law without appreciating the fact that 'punitive charges' are levied to deter people from overloading by levying charges in excess of normal freight and they are penal in nature." 10.1 Facts of the case in brief are that during the course of assessment proceedings the A.O. noted that the assessee has debited punitive charges of Rs.1,01,85,788/- in its PandL account. On being questioned by the A.O. regarding the allowability of the same, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw. These charges are not in the nature of penalty for infraction of law. It is purely commercial expenses i.e. compensatory in nature. It is paid as per the scheme of Railway, circular is attached here with. Hence the assessee is aware of punitive and under good faith/intention has paid under scheme of the circular. Hence it is a incident of business laid out and expended wholly and exclusively for the purposes of the business (Ref CJT v. Ahmedabad Cotton Mfg. Co. Ltd. [1993] 7) Taxman 56/[1 994] 205 ITR 163 (SC).) In addition to above the punitive charges includes the normal charges i.e. basic freight. In view of above, punitive charges incurred by the assessee should be allowed as expenses u/s. 37(1) of the Income Tax Act by treating the same as incurred wholly and exclusively for the' business of the assessee. Copy of determination of punitive charges are enclosed for your reference. 10.2 However, the A.O. was not convinced with the explanation given by the assessee. According to him the dictionary meaning of "punitive" is "inflicting or intending to inflict punishment of taxation etc.". Therefore, the punitive charges are penal in nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overloaded in the wagons by collecting the overloading charges termed as punitive i.e. it is not prohibited to overload the goods in the wagons. 4. Overloading charges paid to Railways was not in the nature of penalty for violation/infraction of any law but by way of compensation for permitting to overload the goods beyond the permissible limit allowed by the railway administration though the terminology for the same has been given by the railway as punitive. 5. There is no provision for criminal action/personal liabilities/prosecution/confiscation of goods for overloading the goods. 6. The payment as fine/punitive charges was not in the nature of punishment but by way of compensation 7 Overloading is very common in nature, which the railways is allowing/permitting by paying additional freight termed as punitive. In view of above and notification issued by the Railway Board, you will appreciate that punitive charges are paid for overloading the wagon but not for any violation/infraction of law. The heading of terms of punitive charges for overloading itself starts with Punitive charges for overloading". 10.4 Based on the arguments ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lways dated 23.12.2005. It is, therefore, held that Explanation to Section 37 is not applicable and the payment of Rs.1,O1,85,788/- is allowable. Hence, the addition is deleted and Ground No. 4 is allowed." Aggrieved with such order of the ld. CIT(A), the Revenue is in appeal before us. 10.5 The ld. D.R. submitted that the punitive charges paid to the Indian Railways due to overloading are purely penalty in nature. Merely because the Railways are allowing the same, it cannot be said that it is not a penalty and it is compensatory in nature. He submitted that since the expenditure incurred by the assessee is an offence as per the Indian Railways Act, therefore, the same should not be allowed as a deduction. Referring to the decisions relied on by the A.O. in the body of the assessment order, he submitted that the A.O. was fully justified in disallowing the punitive charges of Rs.1,01,85,788/- claimed by the assessee. He accordingly supported by the order of the A.O. 10.6 The ld. counsel for the assessee while supporting the order of the ld. CIT(A) submitted that although the payments made were termed as punitive charges but such payments were routine payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature." 10.8 He submitted that the Railways allow overloading of the wagons. Therefore, it is the commercial decision of the assessee to overload the wagons since the wagons are not available easily and the assessee has to remain in queue. Referring to the decision of Hon'ble Punjab and Haryana High Court in the case of CIT v. Hero Cycles Ltd. reported in 178 Taxman 484 he submitted that penalty paid to State Electricity Board for violating power regulations i.e extra charges paid for drawing extra load in peak hours was allowed as a revenue expenditure. He submitted that the decisions relied on by the A.O. are distinguishable on facts and not applicable to the facts of the present case. He accordingly submitted that the order of the ld. CIT(A) be upheld and the ground raised by the Revenue should be dismissed. 11. We have considered the rival arguments made by both the sides, pursued the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture especially when there is no dispute that these expenses have been incurred in the course of business operations and, therefore, merely because the Railways is a Govt. owned Institution and works under an Act of Parliament, and nature of overloading charges which are essentially of commercial nature cannot be characterized as of penal nature irrespective of nomenclature given to such charges by the railways. Further, it is not in dispute that the quantity treated as overloading has been unloaded by the railways nor it has been a case of violation of safety rules/norms, hence, the overloading so incurred cannot be equated with traveling without ticket, hence, the said contentions of the ld. D.R. are rejected. It is also noted that such overloading is not correct due to a deliberate act on the part of the assessee but due to lack of infrastructure and nature of commodity, hence, the ratio of the decision of the Hon'ble Punjab and Haryana High court in the case of Hero Cycles Ltd. (supra) is squarely applicable. It is also a settled judicial principle that substance of the matter should be looked into and be given to the nomenclature given by the Railway to such charges. The obj ..... X X X X Extracts X X X X X X X X Extracts X X X X
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