TMI Blog2017 (11) TMI 186X X X X Extracts X X X X X X X X Extracts X X X X ..... y allowed. Disallowance of interest on account of interest expenses being of capital nature - Held that:- The interest earned on money received from share capital was temporarily placed in fixed deposits, which has been held as interest in the nature of capital receipt liable to be set off against preoperative expenses. In the instant case also identical issue of netting off of interest income earned on borrowed money deposited in banks, against the interest expenditure during construction is involved, thus, respectfully following the decision of the Tribunal in the case of Bokaro Power Supply Company Pvt. Ltd. (2015 (1) TMI 45 - ITAT DELHI) we uphold the finding of the learned CIT-(A) on the issue in dispute and accordingly, the ground No.1 of appeal of the Revenue is dismissed. - ITA No.3405/Del/2014 And ITA No. 3692/Del/2014 - - - Dated:- 31-10-2017 - SH. AMIT SHUKLA, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER For The Assessee : Sh. M.P. Rastogi, Adv. Sh. Anil Sharma, AGM For The Respondent : Sh. Sandip Kumar Mishra, Sr.DR ORDER PER O.P. KANT, A.M.: These two cross appeals of the assessee and Revenue are directed against order date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the year under consideration. The assessee filed return of income for the year under consideration on 12/10/2010 declaring total income of ₹ 85,05,74,950/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short the Act ) was issued and complied with. In assessment completed under section 143(3) of the Act on 14/03/2013, the Assessing Officer made certain additions to the returned income and assessed the total income at ₹ 87,02,64,730/-. On further appeal, the Ld. CIT-(A), allowed part relief to the assessee. Aggrieved with the finding of the Ld. CIT-(A), both the assessee as well as the Revenue are in appeal raising respective grounds. ITA No. 3405/Del/2014 5. First we take up appeal of the assessee in ITA No. 3405/Del/2014. The ground Nos. 2 and 3 being general in nature, we are not required to adjudicate specifically and accordingly dismissed as infructuous. 6. In ground Nos. 1.1 and 1.2, the only addition which has been challenged is penal interest of ₹ 86,72,759/- paid to Sales-tax Department relating to assessment year 2006-07. Facts in respect of issue in dispute are that during the year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either purchase or sales which are subject to taxation, the obligation to pay the tax arises tax ability is attracted. The liability for payment of tax is independent of the assessment which quantifies the demand at a later point of time. The assessee maintaining accounts on the mercantile system is to be allowed the deduction for the amount of sales tax in the year of sale, though the demand was made in a later year. Moreover, the statutory liability which is disputed is allowable either in the year in which sales are made (CIT Vs. Kalinga Tubes Ltd. (1996) 218 ITR 64 (SC) or in the year of assessment in which, the Sales Tax Demand is raised (CIT Vs. Bharat Carbon Ribbon Mfg Co (P) Ltd. (1999) 239 ITR 505 (SC), so far as provisions of section 43B are concerned. Therefore, any expenses pertaining to prior period that are debited in the profit loss account are not allowed as business expenditure. The exception to the same is where the liability in respect of such expenses has been crystallized in the year under consideration e g disputed liability or additional statutory liability. It has been held that liability in respect of such expenditure accrues in the year in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio of judgment in Swadeshi Cotton Mills Vs. CIT Ltd. of the Hon ble Supreme Court (Supra), where it was held that where the amount paid is partly penal and partly compensatory, the amount to the extent that is compensatory could be allowed as deduction jurisdictional High Court in CIT Vs, Bharat Steel Tubes Ltd 193 ITR 597, that penalty for delayed payment of sales tax is not a deductible expenditure, addition to the extent of ₹ 86,72,759/- is hereby sustained while additional payment of Sales Tax liability of ₹ 35,45,033/- is hereby directed to be deleted. The appellant shall get part relief on this ground of appeal. 6.1 Before us, the Ld. counsel of the assessee filed a paper book containing pages 1 to 16 and also filed separately detailed breakup of the amount of ₹ 86,72,759.42/-, which has been challenged before us, as under: S.No. Particulars Amount in rupees 1. Penalty for delay in filing of revised/amended VAT return under section 30(4)(d) of the Jharkhand VAT Act, 2005 ₹ 5,000.00 2. Pena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Profits and gains of business or profession . Explanation 1.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. 6.6 In the case of Swadeshi Cotton Mills Vs. CIT Ltd. (supra) the Hon ble Supreme Court has held that, where the amount paid is partly penal and partly compensatory, the amount to the extent that it is compensatory could be allowed as deduction . Further, Hon ble Jurisdictional High Court in the case of CIT Vs. Bharat Steel Tubes Limited (supra) has held that the penalty for delayed payment of sales tax is not a deductible expenditure . In the instant case, the Ld. counsel has claimed that penalty paid is compensatory in the nature and therefore, allowable, in terms of Explanation -1 to section 37 of the Act. Now, we have to examine in the light of various sections of the Jharkhand VAT Act 2005, whether the penalty paid by the assessee is compensatory in the nature. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... # from the end of that year and obtain a report of such Audit in the Prescribed Form, duly signed and verified by such ―Accountantǁ or ―Tax Practitionersǁ, and setting forth such particulars, as may be prescribed. ( 2) A true copy of such report shall be furnished by such Dealer to the Prescribed Authority by the end of the month after expiry of the period of nine months during which the Audit would have been completed. ( 3) If any dealer liable to get his Accounts audited under sub-Section (1) fails to get his Accounts audited and furnish a true copy of the Audit Report within the time specified in sub-Section (2), the Prescribed Authority shall, after giving the Dealer a reasonable opportunity of being heard, impose on him, in addition to any Tax Payable, a sum by way of penalty equal to 0.1% of the turnover as he may determine to the best of his judgment in his case in respect of the said period. 6.10 On perusal of the above provision of the VAT Act, it is clear that the penalty was for not getting the accounts audited and furnishing a true copy of the audit report within the time specified. Thus, we agree with the contention of the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or which he has failed to furnish return; ( iv) for the period he fails to furnish return including monthly abstract; at the rate of 1% per month from the date the tax payable has become due to the date of its payment or to the date of order of assessment, whichever is earlier and penalty as specified in clause (d) of sub-section (4) of this Section. 6.14 On perusal of the clause 30(1) above, it is evident that amount paid is toward interest at the rate of 1% per month, for the period from the tax payable has become due to the date of payment or to the date of order of assessment whichever is earlier. Thus, the interest amount paid is towards delay in payment of tax, is compensatory in nature. Penalty of ₹ 5,000/- for the default under section 30(4)(d) of the Jharkhand VAT Act, 2005, has already been upheld by us as not in the nature of compensatory. Accordingly, the amount of ₹ 16,46,444.96 being compensatory in the nature, is allowable in terms of the decision of the Hon ble Supreme Court in the case of Swadeshi Cotton Mills Ltd. Vs.CIT (supra). 6.15 In view of above discussion, we summarise that out of amount of ₹ 86,72,759.42, amount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Assessing Officer, in relation to acquisition of assets, prior to introduction of proviso to section 36 of the Act, the assessee had an option to capitalise the interest expenditure or claim it as revenue expenditure. However, with the introduction of proviso to section 36 of the Act w.e.f. 01/04/2004, by the Finance Act, 2003, the position has become clear and the interest in connection with acquisition of the asset is to be treated as part of actual cost of the asset before the asset is put to use. The Assessing Officer cited the ratio of the judgement of Hon ble Apex Court in the case of DCIT versus Core Health Care Limited, (2008) 298 ITR 194 (SC) in this regard and accordingly, he disallowed the amount of ₹ 48,71,000/-. 7.3 Before the learned CIT-(A), the assessee claimed that in accordance with relevant accounting standards and provisions of section 36(1)(iii) of the Act, the interest expenses of ₹ 471 .39 Lacs relating to the borrowing for the new unit was capitalized and transferred to the Incidental Expenses During Construction (IEDC) and then to Cost of Work in Progress (CWIP). He further submitted that in accordance with Accounting Standards and on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble jurisdictional High Court on the related issue, the AO is directed to allow the netting off of interest before determining the business profit of the appellant company. 7.4 Before us, the learned Sr. DR submitted that the temporary interest earned on surplus funds available has already been treated by the assessee as income from other sources and, therefore, the interest income of ₹ 48.71 lakhs earned from temporary deposits in banks of money borrowed or raised through share capital, is also in the nature of revenue receipts and taxable as income from other sources. The Ld. Sr. DR submitted that interest in respect of money borrowed for utilization in acquisition of asset is liable to be capitalized till the asset is put to use and, thus, the said interest expenditure is capital expenditure, but if the said money is put temporarily in the bank, then the sole objective of the assessee is to earn interest on such money lying ideal him, and therefore the interest income is in the nature of revenue income and liable as taxable under the head Income from other sources and no netting off can be allowed against capital expenditure. 7.5 The Ld. counsel of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch fact was confirmed by the AO, while observing the entire income of the entire expenditure was capital in nature. 12. All these facts have been duly taken into consideration by the CIT(A) while passing the order under appeal. Therefore, there is no merit in the grievance raised by the department by way of ground nos.l 2. Accordingly, ground nos. 1 2 are rejected. It is further seen that the Jurisdictional High Court of Delhi in the case of C/T Vs. Shree Ram Honda Power Equipment, 289 ITR 475 has held that for the purposes of excluding interest receipts from business income for determining the business profit, the net interest has to be excluded and not the gross receipts. In other words, the principle of netting of has been upheld by the Hon'ble High Court of Delhi. In view of the aforesaid decision of the Hon'ble High Court of Delhi, the AO is directed to allow the netting off of interest before determining the business profit of the appellant company. 4. From the above, it is evident that the learned CIT(A) allowed the relief following the decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. Sasan Power Ltd. vide ITA No.10/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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