The Gurdaspur Co-Operative Sugar ... vs Department Of Income Tax

Dy.Commr. of Income Tax, vs. The Gurdaspur Co-op Sugar Mills Ltd. Cir.VI, Pathankot. G.T.Road, Paniar, Gurdaspur. (Appellant) (Respondent)

Appellant by:Sh.Tarsem Lal, DR Respondent by:Sh. Padam Bahl, CA

Date of hearing:05/02/2015 Date of pronouncement:19/02/2015

ORDER

PER B.P.JAIN,AM:

This appeal of the Revenue arises from the order of the CIT(A),

Amritsar, dated 05.05.2014 for the assessment year 2010-11. The Revenue

has raised the following grounds of appeal:

"i) Whether the Ld. CIT(Appeals) is right on facts and law in deleting addition of Rs.27,81,468/- as the same payment was in nature of fine/penalty for infraction of law.

ii) Whether the Ld. CIT(Appeals) is right on facts and law in deleting addition of Rs.68,18,000/- on the ground that the RDF is not covered u/s 43B of the Act. However, the fact is that the 2 ITA No.474(Asr)/2014

RDF is established under the Act (Rural Development Act, 1987) of the Government of Punjab.

iii) Whether the Ld. CIT(Appeals) is right on facts and law in deleting addition of Rs.3,93,343/- Cess payable to parent body.

However, the fact is that the said parent body levies Cess which is based on purchase/production of the member society. This amount is payable to Sugarfed which is a Government Body, allowing relief of Rs.15,00,000/- on account of STCG as the assessee failed to file documentary evidences in support of sale of shops.

vi) The appellant craves leave to amend or add any or more grounds of appeal."

2. The brief facts in ground No.1, as per AO's order at page 2 & 3, are

reproduced for the sake of convenience as under:

"During the assessment proceedings it was found that the assessee has paid Liquidatory Damages to provident fund amounting to Rs.27,81,468/- during the year. This query was raised vide letter dated 14.12.2012. In response the assessee vide letter dated 26.12.12, stated that "Rs.27,81,468/- has been taken away by Provident Fund Department in the year 2009-10 as damages. The assessee filed an appeal against the order. The Hon'ble Punjab & Haryana High Court has set aside the order of the Provident Fund Department vide order dated 30.08.2011 and directed the department to refund Rs.15,34,257/- and to examine the issue afresh."

3.1. Reply of the assessee was considered. This payment, as per internal auditor's report, is shown as claims receivable in the balance sheet of the assessee meaning thereby that it has been passed through the P & L account. It is not correct to charge a payment of the nature of fine/penalty for infraction of law, to the profits for income tax purpose. A payment made under a statutory obligation, because the assessee was in default, could not constitute expenditure laid out for the purpose of business. Damages on account of provident fund rules violation, are not deductible in nature. In fact, the Hon'ble Supreme Court in the case of Organics Chemicals Industries IR 1979 SC 1803 3 ITA No.474(Asr)/2014

has clearly held such payments as not allowable. The legal position on this matter is very clear as can be observed from the following cases.

CIT vs. Albuquerque and Sons (Kar) 198 ITR 609 Hasimara Industries Ltd. vs. CIT (Cal) 200 ITR 659 Rohtak Textile Mills Ltd. Vs. CIT (Del) 226 ITR 485 CIT vs. Bharath Plywood and Timber Products P. Ltd. (Ker) 233 ITR

315.

The fact that the Hon'ble High Court has directed for fresh examination of the issue is all the more reason why the assessee should not have claimed this expenditure. In view of the nature of the said expenditure, the same is disallowed and added back to the income of the assessee. I am satisfied that the claiming a wrong deduction the assessee has concealed income and has furnished inaccurate particulars of income. Penalty proceedings u/s 271(1)(c) are being initiated accordingly."

3. The Ld. CIT(A) deleted the addition as the assessee has never claimed

expenses in the profit & loss account and therefore, the same are not

disallowable u/s 43B of the Act.

4. As regards ground No.2, the brief facts, as per AO's order at page 3 &

4 are reproduced for the sake of convenience as under:

"During the assessment proceedings it was observed that the assessee has charged interest payment on loan from RDF (Rural Development Fund) amounting to Rs.68,18,000/-. This amount is debited in the P & L account as interest on term loan in Financial expenses. The same is included in the interest payable 0 due to govt. in the balance sheet as part of total liability Rs.4,92,56,795/- out of which Rs.4,24,38,795/- is coming down from the last year. The query regarding the interest payable was raised vide letter dated 14.12.2012 and it was asked that why should the interest accrued not be disallowed u/s 43B.

4 ITA No.474(Asr)/2014 Reply of the assessee was received vide letter dated 26.12.2012 that "interest accrued Rs.4,92,56,795/- is payable to Punjab Govt. which is not covered u/s 43B."

Reply of the assessee was considered. The interest payment in question has accrued to the RDF . Thus, contention of the assessee is that RDF is not a Public Financial Institution and thus section 43B is not attracted in this case. A perusal of provisions of section 43B shows that it was incorporated to safe guard that interests of the governments and their institutions. That is why it was provided that the expenses of the nature of interest and taxes payable to the government and its institution, if otherwise allowable, would be allowed only on actual payment basis.

From the nature of RDF it is clear that it is a government body. RDF is constituted under Punjab Rural Development Act, 1987. The income of the Punjab Rural Development Board under which it functions, is from Rural Development Free levied on sale/purchase by the government. It is supposed to be used for agricultural development. Thus, it is established that RDF is a Public Financial Institution and falls under ambit of Sec.43B.

Accordingly, the interest payment of Rs.68,18,000/- is not allowable and is added back to the income of the assessee. I am satisfied that by claiming this expenditure the assessee has concealed income and has furnished inaccurate particulars of income and penalty proceedings u/s 271(1)(c) as being initiated."

5. The Ld. CIT(A) deleted the addition by giving finding that the AO has

not proved anywhere how RDF is a Public Financial Institutions covered u/s

43B of the Act and accordingly, as per clear list published by the

Government in this regard of Public Financial Institutions, Rural

Development Fund of Punjab Govt. cannot be considered as Public Financial

Institutions. Accordingly, section 43B of the Act are not applicable. 5 ITA No.474(Asr)/2014

6. As regards, ground No. 3, the brief facts of the case as per AO's order

at page 4 & 5 are reproduced for the sake of convenience as under:

"During the assessment proceedings it was observed that the assessee has charged a sum of Rs.3,93,343/- as production-cess payable to Sugarfed. This payment was outstanding at the end of the year and remained unpaid for the purposes of section 43B. The query regarding the production-css payable was raised vide letter dated 14.12.2012 and it was asked that why should the same not be disallowed u/s 43B.

Reply of the assessee was received vide letter dated 26.12.2012 that "Rs.3,93,343/- is production cess payable to Sugarfed which is not covered u/s 43B".

Reply of the assessee was considered. Section 43B of the Act clearly says that "(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force.......shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previos year in which the sum is actually paid by him....."

It is thus stated in unambiguous terms that 'any tax or cess' by whatever name called'. 'under any law' falls in the ambit of section 43B. Thus, the contention of the assessee cannot be accepted. Accordingly, the expenditure of Rs.3,93,343/- is disallowed and added back to the income of the assessee. I am satisfied that by claiming this expenditure the assessee has concealed income and has furnished inaccurate particulars of income and penalty proceedings u/s 271(1)(c) as being initiated."

7. The Ld. CIT(A) deleted the addition for the reasons that the said Cess

is not covered u/s 43B(a) of the Act.

6 ITA No.474(Asr)/2014

8. The Ld. DR relied upon the order of the A.O. whereas the Ld.

Counsel for the assessee, Mr. Padam Bahl, CA relied upon the submissions

made before the ld. CIT(A) and the order of the ld. CIT(A).

9. We have heard the rival contentions and perused the facts of the case.

As regards ground No.1 with regard to the deletion of addition of

Rs.27,81,468/- on account of Provident Fund damages recovered by the

Provident Fund Department during the year. The assumption made by the

AO that the amount must have passed through the Profit & Loss account.

Therefore, the said amount was disallowed by the AO. On perusal of the

balance sheet and profit & loss account on record, the said amount has never

been claimed by the assessee in the P & L account. Thus, the AO is not

justified in disallowing the same u/s 43B of the Act. Accordingly, we find

no infirmity in the order of the ld. CIT(A), who has rightly deleted the

addition made by the AO. Thus, ground No.1 of the Revenue is dismissed.

9.1. As regards ground No.2 with regard to deletion of addition of

Rs.68,18,000/- on account of interest claimed by the assessee on Govt. Loan

and RDF loan given by the Punjab Government to Co-operative Sugar

Mills., it was submitted before the Ld. CIT(A) that such loan does not fall

under section 43B(d) or section 43B(e). The provision of section 43B(d)

applies to Public Financial Institutions or State Financial Corporation or 7 ITA No.474(Asr)/2014

State Industrial Development Corporation. Such Public Financial Institutions

are held by the Government and with regard to section 43B(e), the same

covers loan taken from Schedule Banks. Therefore, in view of the findings

given by the AO himself that RDF is a Govt. body, constituted under

Punjab Rural Development Act, 1987. In the absence of anything on record

by the AO that how RDF is a Public Financial Institutions, we find no

infirmity in the order of the ld. CIT(A) that the said RDF cannot be

considered as a Public Financial Institution and accordingly section 43B(d)

& section 43B(e) are not applicable. Therefore, in the facts and

circumstances of the case, we find no infirmity in the order of the Ld.

CIT(A), who has rightly deleted the addition so made by the AO. Thus,

ground No.2 of the Revenue is dismissed.

9.2. As regards ground No.3 of the Revenue with regard to deletion of

addition of Rs.3,93,343/- on account of 'Cess' collected by M/s. Sugarfed

by applying provision of section 43B, it was submitted before the ld. CIT(A)

and before us that M/s. Sugarfed is a parent body which collects 'cess' from

all Sugar Mills and cess is not a tax or a levy but it is a contribution to its

parent body. It is utilised for the use of Co-operative Bodies. Accordingly,

we do not find any infirmity in the order of the ld. CIT(A), deleting said 8 ITA No.474(Asr)/2014

addition, since the same is not covered u/s 43B of the Act. Accordingly,

ground No.3 of the Revenue is dismissed.

10. In the result, the appeal filed by the Revenue in ITA

No.474(Asr)/2014 is dismissed.

Order pronounced in the open court on 19th February, 2015.

Sd/- Sd/- (A.D.JAIN) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 19th February, 2015 /SKR/ Copy of the order forwarded to:

1. The Assessee:M/s. The Gurdaspur Co-operative Sugar Mill, Paniar, Gurdaspur.

2. The DCIT, Pathankot.

3. The CIT(A), Asr.

4. The CIT, Asr.

5. The SR DR, ITAT, Amritsar.

True copy By order

(Assistant Registrar) Income Tax Appellate Tribunal, Amritsar Bench: Amritsar.