Income Tax Appellate Tribunal - Panji
Dcit, Jaipur vs Agribiotech Industries Limited, ... on 31 July, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI BHAGCHAND, AM & SHRI KUL BHARAT, JM
vk;dj vihy la-@ITA No. 272/JP/2017
fu/kZkj.k o"kZ@Assessment Year : 2012-13
Deputy Commissioner cuke M/s Agribiotech Industries
of Income Tax, Vs. Limited, SP-825, Road No. 14,
Circle-4, Jaipur. VKI Area, Jaipur.
PAN/TAN No.: AAFCA 1695 R
vihykFkhZ@Appellant izR;FkhZ@Respondent
jktLo dh vksj ls@ Revenue by : Shri Varinder Mehta (CIT DR)
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Ved Jain &
Shri Himanshu Goyal (CA)
lquokbZ dh rkjh[k@ Date of Hearing : 09/06/2017
mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 31/07/2017
vkns'k@ ORDER
PER: BHAGCHAND, A.M. This is the appeal filed by the revenue emanates from the order of the ld. CIT(A), Ajmer dated 10/01/2017 for the A.Y. 2012-13, wherein the revenue has taken only one effective ground of appeal, which is as under:
"1. Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in deleting the disallowance of Rs. 3,16,32,000/- made by the A.O. on account of penal excise duty debited in P&L account."
2 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
2. The only issue involved in this appeal is against deleting the disallowance of Rs. 3,16,32,000/- on account of penal excise duty debited in the P&L account. In this regard, the brief facts of the case are that the assessee had filed e-return for the financial year 2011-12 relevant to A.Y. 2012-13 on 26/09/2012 declaring total income of Rs.
1,32,46,790/-. The case was selected for scrutiny and the assessment was completed on 17/03/2015 U/s 143(3) of the Income Tax Act, 1961 (in short the Act). The assessee company is engaged in manufacturing and sale of ENA, Country liquor and IMFL. The total sale of IMFL was Rs.
6,62,62,503/- and the excise duty claimed in the P&L account was debited to the tune of Rs. 8,40,12,623/-. There was an audit noted in the account of the assessee, which read as under:-
"The Rajasthan State Excise Department has raised the demand of Rs. 1770.72 lacs vide various demand recovery notices on account of non verification of some of Export permits (relating to interstate sales) issued by the Excise Authority of importing states. The said demand has been challenged by the Company and Honorable Supreme Court of India vide its order dated 15.12.2011 has stayed the demand. However before the stay being granted by Apex Court, the Company has deposited up to 31.3.2012 Rs. 630.56 lacs (up to 31.3.2011 Rs. 314.24 Lacs) with State Government towards these demands under protest as the matter is sub- judice. The payment to/from government authorities on this account are being accounted for as expenditures/income in respective years on payment/refund basis, as the accrual of the demand is not certain and payment to Govt. in respect excise/cess etc. being an expense allowable in the year of payment."
3 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
The assessee has debited in the P&L account by amount of Rs.
3,16,32,000/- on account of demand raised by the State excise of Rajasthan due to non verification of some of export permits. The assessee company had made under bond interstate sale (export) of Extra Neutral Alcohol (ENA) to the following parties:
Letter Date Party Name Quantity of Demand
No. ENA exported amount
5758 22/10/2010 Premier Distillery, Puduchery 40000 11424000
5778 23/12/2010 Mauflang Bottling Ri-Bhoi, 120000 68544000
Meghalaya
Renaissance Bottling, Shillong 120000
304 20/04/2011 Mauflang Bottling Ri-Bhoi, 40000 74256000
Meghalaya
Renaissance Bottling, Shillong 220000
1050 02/06/2011 Blue Ocean Beverages P. Ltd., 20000 5712000
Goa
1049 02/06/2011 Deekay Export Ltd., 40000 11424000
Puduchery
1051 02/06/2011 Deekay Export Ltd., 2000 5172000
Puduchery
Total 582000 177072000
As per the excise rules of Rajasthan, the assessee has to obtain import permit issued by the State Excise Authority of the buyer's state to make export of ENA. The said import permit is then submitted to the Rajasthan State Excise Department and thereafter export permit for sale of a certain quantity of ENA is issued. On the basis of this export permit, the ENA is sold and dispatched to the buyer. For this purpose, the assessee 4 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
(seller) has to execute a bond stating that excise verification (of stock received by importing state) issued by the Excise authority of the importing state shall be submitted within 90 days of exporting ENA. If the seller (assessee) failed to do so then shall be liable for excise duty leviable at Rajasthan. In the case under consideration, the assessee sold and dispatched approximately 582000 BL of ENA to various states viz.
Meghalaya, Shillong, Goa and Pudduchery. The assessee paid prescribed sent out permit fee of Rs. 2/- per bulk linter on the goods export out of Rajasthan. The goods (ENA) did not reach the destinations mentioned in the export permits. The State Excise Authorities of buyer states informed the Rajasthan State Excise Department that the import permits shown to have been issued by them, were fake. In pursuance of the bond executed by the assessee, the District Excise Officer, Sikar had issued demand recovery notices. Out of the total demand of Rs. 177072000/-, the assessee had made payment of Rs. 3,16,32,000/- against the above demand, which has been disallowed by the A.O. in the income of the assessee.
3. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld. CIT(A), who after considering the submissions, has deleted the disallowance by observing as under:-
5 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
"5.4 I am of the considered view that -
i. The penalty by any statutory authority can be levied only for violation of the provisions of the law of the land. In the appeal under consideration the relevant law is the Rajasthan Excise Act, 1950 and Rajasthan Excise Rule, 1956.
ii. Penalty can be levied only under the specific section of the Act or the Rules. In the appeal under consideration the relevant Act is Rajasthan Excise Act, 1950 and the Rajasthan Excise Rules, 1956.
The appellant has filed the copy of the Rajasthan Excise Act, 1950. Under section 54 of the Act, penalty for unlawful import, export, transport, possession, etc has been provided. The AO has also quoted the provisions of section 54 in the assessment order. The provisions of section 54 of the Rajasthan Excise Act, 1950 are reproduced hereunder:
"54. Penalty for unlawful import, export, transport, manufacture, possession etc.
- Whoever in contravention of this Act or of any rule or order made or of any licence, permit or pass granted, thereunder -
(a) imports, exports, transports, manufactures, collects, sells or possesses any excisable article; or
(b) cultivates any hemp plant (Cannabis sativa); or
(c) constructs or works any distillery, pot-still or brewery; or
(d) uses, keeps or has in his possession any materials, stills, utensil, implements or apparatus whatsoever for the purpose of manufacturing any excisable article other than tari; or
(e) removes any excisable article from any distillery, pot-still brewery or warehouse established or licensed under this Act; or
(f) bottles any liquor for the purposes of sale; or
(g) taps or draws tari from any tari producing tree;
shall be punishable with imprisonment for a term which may extend to three years and with fine which may extend to twenty thousand rupees; Provided that if a person is so found in possession of a workable still for the manufacture of any excisable article or is found to be guilty of selling or possessing for sale any excisable article in contravention of the provisions of this Act or of any rule or order made or of any licence, permit or pass granted thereunder, he shall be punished with the minimum sentence of imprisonment for six months and fine of two hundred rupees;
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Provided further that if the quantity of liquor found at the time or in the course of detection of the offence exceeds fifty bulk litres, the person guilty for such offence shall be punished with the minimum sentence of imprisonment for one year and fine of ten thousand rupees. "
A plane reading of the section 54 of the Rajasthan Excise Act, 1950 makes it clear that maximum penalty (fine) that can be levied for unlawful import and export is only Rs.20,000/-. There is no other section in the Rajasthan Excise Act, 1950 under which the penalty or fine can be levied for unlawful import and export. The section 18 of the Rajasthan Excise Act, 1950 provides that no excisable article shall be removed from any distillery, brewery pot-still, warehouse or other place of storage established or licensed under this Act unless the duty (if any) payable therefore under this Act has been paid or a bond has been executed for the payment thereof.
A reading of section 18 and section 54 of the Rajasthan Excise Act, 1950 makes it clear that the maximum penalty leviable for removing the excisable articles without paying duty (if any) payable therefore, under the Rajasthan Excise Act, 1950 or without executing the bond for the payment thereof, is only Rs.20,000/-. Thus, it is clear that the amount demanded by the State Excise Officer, Sikar by issue of ekax olqyh uksfVl is not penalty under section 54 or any other section of the Rajasthan Excise Act, 1950, because the amount demanded by the State Excise Officer, Sikar by issue of ekax olqyh uksfVl is huge and far excess than the maximum amount of penalty prescribed under section 54 of the Rajasthan Excise Act, 1950.
Alongwith the ekax olqyh uksfVl no order levying the penalty has been issued by the State Excise Officer, Sikar. Only it has been
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mentioned in the ekax olqyh uksfVl that the penalty has been levied as the appellant has violated the conditions of the affidavit filed by the appellant. The appellant in its written submission filed during the course of proceedings, has given at page No. 8, the working of the amount demanded by the State Excise Officer, Sikar by issue of ekax olqyh uksfVl. The same is reproduced at page No. 7 & 8 of this order. It can be seen from the working given by the appellant that the amount demanded by the State Excise Officer, Sikar by issue of ekax olqyh uksfVl is only Excise Duty. No interest or any penalty is included in the amount demanded by the State Excise Officer, Sikar. In support of the rate of excise duty mentioned by the appellant in the working given by the appellant, the appellant has filed the copy of notification dated 01.04.2005 (F.4(17)FD/Excise/2004) issued by the Deputy Secretary to the Government of Rajasthan Finance Department Excise Division and notification dated 01.04.2012 (F.4(1)FD/Ex/2012 part 1) issued by the Deputy Secretary to the Government of Rajasthan Finance Department Excise Division. In both the notification the rate of excise duty is the same which has been applied by the appellant for working out the amount of excise duty demanded by the State Excise Officer, Sikar as penalty by issue of ekax olqyh uksfVl .
In view of the facts discussed above, after going through the contents of the ekax olqyh uksfVl, contents of the affidavit filed by the appellant, Rajasthan Excise Act, 1950, Rajasthan Excise Rules, 1956 and the notifications dated 01.04.2005 and 01.04.2012 issued by the Deputy Secretary of the Government of Rajasthan Finance Department Excise Division, I am of the considered view that the amount demanded by the State Excise Officer, Sikar was 8 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
not panel in nature. The amount was demanded by the State Excise Officer, Sikar for violation of the conditions of the affidavit filed by the appellant, in which it had undertaken to pay the excise duty extra, leivable if the appellant failed to submit within 90 days of exporting ENA from its distillery the excise verification issued by the Excise Authority of the importing State. The amount paid by the appellant in response to the ekax olqyh uksfVl was excise duty paid by it during the ordinary course of the business carried on by it, wholly and exclusively for the purpose of the business of manufacturing ENA and Rectified Spirit, which is allowable as deduction under section 37(1) of the I. T. Act, 1961. Hence, the disallowance of Rs.3,16,32,000/- made by the AO stands deleted. Accordingly, this ground of appeal is allowed."
4. Now the revenue is in appeal before us. The ld. CIT DR has vehemently supported the order of the Assessing Officer and submitted that the ld. CIT(A) was not justified in deleting the disallowance.
5. At the outset, the ld AR of the assessee has submitted as under:-
1. This is revenue appeal arising from the order passed by the Id. CIT(A), dated. 10.1.2017 in which the disallowance of Rs. 3,16,32,000/- made by the Ld. AO on account of excise duty paid by the assessee treating the same as penalty in nature has been deleted.
2. The brief facts of the case are that the assessee is a Limited company and is engaged in the business of manufacturing of ENA & Rectified Spirit.
3. For the year under consideration, the assessee filed its return of income for the AY 2012-13 declaring an income of Rs. 1,32,46,790/-.
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4. Thereafter, the return of the assessee was processed under section 143(1) and the case was selected for scrutiny and notice under section 143(2) was issued on 06/08/2013.
5. During the course of assessment proceedings Ld. AO raised the query in relation to the payment of excise duty claimed by the assessee in respect of profit & loss Account.
6. Assessee submitted the detailed reply in respect of the same along with necessary supportive evidences.
7. Ld. AO ignoring the reply and evidences filed by the assessee treated the payment as penalty added the amount of Rs. 3,16,32,000/- in the hands of the assessee despite the fact that payment has been made as per the option provided in the Rajasthan Distillery Rules.
8. Aggrieved by the order of Ld. AO, assessee preferred an appeal before the Ld. CIT (A) and Ld. CIT(A) has passed a well reasoned order and has given a categorical finding in Pg. 16 Para 5.4 onwards of his order and deleted the addition on the ground that the payment made by the assessee cannot be in the nature of any penalty specified in the relevant Rajasthan Excise Act as well as Rajasthan Excise Rules. Payment has been made in made in violation of the conditions of the bond filed by the assessee in which it had undertaken to pay extra excise duty, if the assessee failed to submit within 90 days of exporting ENA from its distillery the excise verification issued by the Excise Authority of importing state. Thus, by his detailed finding Ld CIT(A) has explained the nature of payment made by the assessee and its allowability u/s 37(1) of the Income Tax Act.
9. The nature of excise duty paid by the assessee is explained as under:
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a. The assessee is engaged in manufacture of Extra Neutral Alcohol and Rectified Spirit and its complete sales are made on FOR (Free on road) basis. Extra Neutral Alcohol and Rectified Spirit manufactured by the assessee are free from excise duty.
b. The party who wish to make purchases from the assessee gets Excise Permit (Import Permit) from excise department of its State (issued by the State Excise Office of Receiving State).
c. In order to deliver the goods the assessee needs to obtain Export Permit from the Excise Department of its State. In order to receive the Export, Permit, the import permits received are forwarded to, Assistant Excise Officer (AEO) of State Excise Office posted at assessee company's factory for necessary permission.
d. As per the procedure laid down in Rajasthan State Excise law, the AEO processes the permit and forwards the same to District Excise officer (DEO), Sikar for his permission after doing necessary verification at his level. A detailed check list to be filled by AEO as per excise laws and the check list to be sent to DEO is enclosed at pages 91 to 92 of the paper book.
e. Thereafter the DEO forwards the same to Additional Commissioner, Excise, to obtain permission to export the goods. Additional Commissioner after doing the necessary verifications at his level forwards the same to Excise Commissioner, Udaipur for his permission.
f. The office of the Excise Commissioner Udaipur after following the necessary procedure issues the permission for export/ dispatch and returns the permit to DEO Office Sikar. Office of the DEO returns the permit to AEO posted at the assessee company's factory.
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g. On getting the necessary permission from the excise department the consignment is dispatched by the assessee under the supervision of AEO posted at its factory.
h. On receipt of the goods by the buyer, the State Excise Department of the buyer's state issues a receipt to the Excise Department of the assessee's state.
i. The assessee also executes a bond with the excise department to make good the losses incurred to the department on account of loss of duty in case the goods delivery receipts are not received by the excise department of the assessee's state from the excise department of the buyer's state.
10. In the present case the assessee sold the goods after obtaining the Export Permit from the Excise Department and under the supervision of AEO posted at its factory premises thereby discharging its contractual obligation.
11. Unfortunately, the excise department of the assessee's State i.e. Rajasthan did not receive the material delivery receipt from the Excise Department of the receiving State of purchasers i.e. Premier Distillery Pvt. Ltd, M/s D Renaissance Bottling, Lower Lachumiere and M/s D Mauflang, Ri-Bhoi.
12. As per the bond executed by the assessee it was liable to pay the loss of duty to the excise department of Rajasthan. Since in this case there was no duty on the item sold by the assessee, a presumptive calculation was made by the excise authorities and accordingly duty was levied.
13. The Rajasthan State Excise Deptt has raised demand by issue of recovery notices of Rs. 1,14,24,000/- and Rs. 6,85,44,000/- vide their demand 12 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
letter Nos. Excise/ Spirit/10/5758 dated 22.12.2010 and Excise/ spirit/10/5778 dt. 23.12.2010 on account of part of the consignment of ENA (Extra Neutral Alcohol) not reached the declared destination by referring the demand as penalty on the basis of bond/ bond executed by the company.
14. It clear from the aforesaid bond that Excise Duty Extra could only be charged if the consignment (ENA) does not reach to declared destination. There is no provision for penalty.
15. However, for the reasons best known to the excise department the word "penalty" was used by the excise authorities while levying the said demand as against the word "duty".
16. In the present case the assessee supplied the material as per the excise rules and on the basis of permits duly vetted by them.
17. The Excise department has calculated the duty by applying the rates as applicable on manufacturing of 1MFL on the quantity of ENA Sold by the assessee as is evident from the PB Pg. 139.
Calculation of demand of Rs. 114240007-
Bulk
Quantity of ENA in dispute = 40000 Ltr
London Proof
1 Bulk Litre = 0.5714 Ltr
Strength of ENA = 96%
Total London Proof Ltr = 40000/.5714*96%
= 67200 LPL
Per
Excise rate on IMFL Rs. 170 LPL
Excise demand Rs. 11424000
b. Calculation of demand of Rs. 68544000
Quantity of ENA in dispute = 240000 Bulk Ltr
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DCIT Vs. M/s Agribiotech Industries Ltd.
1 Bulk Litre = 0.5714 London Proof
Ltr
Strength of ENA = 96%
Total London Proof Ltr = 40000/.5714*96%
= 403200 LPL
Excise rate on IMFL Rs. 170 Per LPL
Excise demand Rs. 68544000
18. From the above calculation, it is clear that the Excise Authorities have just recovered the Excise Duty which would have been levied on IMFL produced from the ENA sold by the assessee. Thus the amount shown by them is actually of Duty and not of "Penalty" as stated by them in their recovery order.
19. Here it is important to read the bond at executed between the assessee and the Excise Authorities specifically communicates that the assessee is supposed to indemnify the Excise Duty to the government Exchequer and not of any penalty. The duty paid is exactly the same as per the rates notified in PB Pg. 140 to 143.
20. In the present case the assessee has supplied the material under supervision of Excise Authorities, and after getting due clearances from them. In the present case the assessee has made an FOR (Free on road) sale which has been made after vetting of Excise Authorities. There is no fault of the assessee if the permits received from other state end out to be fake which have been duly vetted by the Excise Department of the assessee company.
21. Any liability arising due to the any failure would be considered as a business loss and cannot be considered as a penalty that too when there is no such provision in the Excise Act. The assessee has executed a contractual bond to make good the losses to the government and thus the loss arising from the same would be contractual business loss.
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22. In this respect a prayer was made before the AO to kindly seek information from the Excise Authorities to bring forward the specific provisions/section(s) of the Statutory Act (any) under which the payment made by the assessee towards Excise Duty (as in this case) is considered either as an Offence or is Prohibited by Law. In this respect the assessee also sought an opportunity to file an explanation against the provisions brought forward by AO against the assessee.
23. The ENA was exported after verification of the import permit at 4 stages by the Excise authorities and the Excise Authorities on being satisfied issued the Export Permit for export of ENA. Any loss arising to the assessee on account of non performance of other party shall be construed as business loss.
24. Thus, in the present case the assessee has acted bonafide in supplying the material under the guidance of Excise Authorities. The Excise Authorities have simply used the word "penalty" as against the correct word "duty" recovered from the assessee. A mere use of different word by an authority cannot alter the nature of transaction. The assessee vide its bond promised to make good the loss of duty to Excise Department which has been done by it. The same is an expenditure in the hands of the assessee and thus allowable.
25. In any statute there are three component of demand- Tax, interest and demand. Whenever there is any default first of all the tax is recovered i.e., the tax that would be payable if there is no default. Then interest is charged for delay in making payment and then the penalty proceedings are initiated and penalty is levied. Similarly, in the present case, there are separate penalty provisions prescribed in the Rajasthan Excise Act, 1950- Chapter IX from Section 54 to 70. A perusal of all the provisions clearly shows that issue involved in the present case is nowhere covered by 15 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
these sections. Thus, penalty is not leviable for such default as per Rajasthan Excise Act, 1950.
26. Secondly, export of liquor under the special bond is governed by the Rajasthan Excise Rules, 1956 and there is a specific rule- Rule 14 for the same. Rule 14 clearly specifies that duty on consignment issued under a general bond shall be written off on receipt of pass and certificate provided none of the conditions of the bond has been infringed meaning thereby in case the pass is not received, the duty has to be paid and not any penalty.
27. Now coming to the The Rajasthan Distilleries Rules, 1976 which specifies the rules for making export under bond, it clearly specifies that in case the items were not delivered at the destination , the distiller shall indemnify for any loss of duty which the governor may suffer by reason of such non-delivery or short delivery by paying to him on demand the duty at the rate where in force on any quantity not so delivered. (Rule 94 and Form R D 15)
28. Thus, this is the only duty which is paid by the assessee. This is not the penalty. Penalty would be levied separately as per the specified sections of the Act. This amount has been paid to indemnify the excise duty loss by the revenue due to non-delivery of assignment. The penalty would be levied separately and that's why assessee is in further litigation.
29. This issue involved in present case is squarely covered by the order of Gujrat High Court in the case of CIT, Gujrat vs Tarun commercial mills Co. Ltd (1977) 107 ITR172 in which it has been held that:
"We are of the opinion that having regard to the terms contained in the bond we find that it is optional for the manufacturers to achieve the export target prescribed for them or to pay to the Government the sum or sums calculated at the rate of 10 paise by linear yard to 16 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
cover up the shortfall in the export obligations. The option envisaged in the bond entered into between the parties clearly indicates that the option was with the manufacturers and that option may be availed of for a variety of reasons in the interest of commercial expediency. The export obligations which the textile manufacturers may have incurred for the use of trade mark "sanforized " may not be fulfilled for various factors over which the manufacturers may not have control. The trend and competition in the international market, the quality and quantity of the goods produced by the manufacturers may be some of the factors which may ultimately have a bearing on the question of achieving the target. In the interest of business, textile manufacturers opt for payment of compensation or damages to cover up the shortfall in the export obligations. It is no doubt true that the word used in the scheme which we have set out above for the sum to be paid in default of fulfilling the export obligation has been described as a penalty but in the ultimate analysis it is the substance of the transaction between the parties which has to be considered for purposes of determining what is the nature and import of the scheme and the bond executed in pursuance thereof. The exercise of option, as stated above, may be the result of the commercial expediency as well as certain extraneous factors over which the manufacturers might not have the control and, therefore, in view of the scheme and the bond with which we are concerned here, it cannot be said that there is a breach of a public policy which may render the payment, agreed to be made for the default arising as a result of the breach, as one akin to penalty. Under no circumstances, without violence to the language, it can be said to be infraction of the law. In that view of the matter, therefore, we do not find any reasons to interfere with the order of the Tribunal when it viewed the payment in question as expenses wholly and exclusively laid out for the business. In that view of the matter, therefore, we answer the question referred to us in the affirmative and in favour of the assessee. The Commissioner of Income-tax shall pay costs of this reference to the assessee."
Nomenclature used in any provision of law is not conclusive.
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30. It is well settled law that the nomenclature used in any provision of law to describe any payment, to be made by a person, as interest, compensation, penalty etc. is not conclusive.
31. In this regard reliance is placed in the order of the Division Bench of the Andhra Pradesh High Court in CIT v Hyderabad Allwyn Metal Works Limited [1988] 172 ITR 113, the Supreme Court , in Prakash Cotton Mills Pvt. Ltd. v CIT (Central) Bombay [1993] 201 ITR 684 (SC) held that whenever any statutory impost paid by an assessee by way of damages or penalty or interest, is claimed as an allowable expenditure under section 37(1) of the I.T. Act, the assessing authority is required to examine the Scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal, in nature. The authority has to allow deduction under Section 37(1) of the I.T. Act, where ever such examination reveals the concerned impost to be purely compensatory in nature. Where ever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature.
Similarly, the Hon'ble Apex Court in the case of CIT v Ahmedabad Cotton Manufacturing Co. Ltd. 205 ITR 163 held as under:-
"what needs to be done by an assessing authority under the Income-tax Act; 1961, in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under section 37 of the Income-tax Act although called a penalty is to see whether the law or scheme under which the amount was paid required such payment to be made as penalty or as something akin to penalty, that is imposed by way 18 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the act that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, then one has to regard such payment as business expenditure of the assessee, allowable under section 37...."
32. Amount paid is compensatory in nature and not penalty in nature Thus, it is important to submit here that the action of levying excise duty on the assessee in case the delivery receipts are not received from the importing state is compensatory in nature and not penal in nature and thus the payment of the said duty cannot be considered as a penalty for any offence or an act prohibited by law. In the following cases amount paid on account of penalty being compensatory in nature have been allowed by the Honorable Supreme Court and the High Courts a. In the case of CIT vs. Regalia Apparels (P) Ltd. [2013] 352 ITR 71 Honorable Bombay High Court stated Deduction u/s 37(1) - penalty paid to the Apparel Export Promotion Council - Forfeiture of gurantee - failure to fulfill the obligation to export - IT AT allowed the deduction - Held that:- respondent took a business decision not to honour its commitment of fulfilling the export entitlement in view of loss being suffered by it. The Assessing Officer does not dispute this fact nor does he doubt the genuineness of the claim of the expenditure being for business purpose. In these facts the Tribunal held that respondent assessee has not contravened any provisions of law and thus the forfeiture of the bank guarantee was compensatory in nature under section 37(1) of the Act.
b. In the case of CIT vs. Neo Structo Construction Ltd. honorable Gujarat High Court vide its order dated 09.07.2013 stated as under:
Business expenditure u/s 37(1) - Encashment of bank guarantee - compensation for non performance - whether in the nature of penalty - Held that:- ONGC encashed the bank guarantee, which was 19 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
furnished by the assessee (performance guarantee) due to the non- fulfillment of the contract by the assessee. It can be said to be compensatory in nature and not penal in nature, the ITAT has rightly held that the assessee would be entitled to the deduction of the same as business expenditure under section 37(1) - Following decision of Prakash Cotton Mills P. Ltd. vs. Commissioner of Income-Tax [1993 (4) TMI 3 - SUPREME Court] - Decided against Revenue.
c. In the case of M/s Usha Microprocess Controls Ltd. vs CIT ITA 101/2000 dated 5th August 2013 and Commissioner of Income Tax v. N.M. Parthasarathy, 1995 (212) ITR 105- It was held that the amount of redemption fine was compensatory and therefore, fell outside the mischief of explanation of Section 37(1) of the Income Tax Act.
33. There is only procedural default and it is neither an offence or infringement of law In the case of the assessee none of the Act done by it is either an offence or anything prohibited by law. In this respect reliance is placed on following case laws.
Case Laws:
a. Prakash Cotton Mills Pvt. Ltd. v CIT (Central) Bombay (Supra): The Supreme Court held that whenever any statutory impost paid by an assessee by way of damages or penalty or interest, is claimed as an allowable expenditure under section 37(1) of the I.T. Act, the assessing authority is required to examine the Scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal, in nature. The authority has to allow deduction under Section 37(1) of the I.T. Act, where ever such examination reveals the concerned impost to be purely compensatory in nature. Interest paid 20 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
for delayed payment of sales-tax and ESI contribution is in the nature of compensation, the same will be allowable irrespective of the nomenclature used.
b. CIT v Prasad and Co. [2012] 341 ITR 480: The Delhi High Court dealt with the case of assessee, a share broker, paying penalty to the Delhi Stock Exchange and National Stock Exchange for late deposit of margin monies and other violations of timely delivery. Following an ITAT decision in Master Capital, the High Court held that these payments were in the normal course of business of the assessee and there was no infraction of law.
c. Dwarka Dass & Co. vs. Excise & Taxation Commr. 1969 Current Law Journal 290: It was held that a penalty under s. 18(2) of the Punjab Excise Act was not in the nature of punishment and the option to pay the penalty was in the nature of enabling provision which could have some relation with the approximate quantum of loss which the licensee might suffer in case of an order cancelling the licence for the remaining period. Further, this Bench had an occasion to consider this matter in the case of Shadi Singh Kashmira Singh vs. ITO (1983) 15 TLR 485 (Chg.-Trib.) and it was held therein that the payment made in respect of default under s. 36B of the Punjab Excise Act, 1914, was incidental to trade and was allowable as such.
d. COMMISSIONER OF INCOME TAX vs. HOSHIARI LAL KEWAL KRISHAN : CIT (1961) 41 ITR 350 (SC): The fine was incurred by the assessee for making belated payments of the said excise duty. Though termed as fine, the payment was not in the nature of punishment but was by way of compensation. The payment was in effect intended to compensate the loss on account of delay in making the payment and was not by way of penalty for breach of law. The amount paid can be considered to be 21 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
legitimate business expense of the assessee, though technically, it may be called penalty.
e. Master Capital [2008] 23 SOT 60: it was held by the tribunal that amount paid by the assessee, a share broker to NSE for violation of trading beyond exposer limit, late submission of margin certificate and delay in making deliveries of shares due to deficiencies were deductible as a business expenditure, as the amount was paid during the course of business of assessee's business and these was no infraction of law.
f. Gold Crest Capital Markets Limited v ITO 36 ITR 177 (2010) : Mumbai ITAT in another landmark case decided that fine or penalty imposed by NSE to its members is regulated by their in house laws and could not be termed as violation of statutory laws and hence cannot be disallowed.
g. VRM Share Broking (P) Ltd. 27 SOT 469 : Again, Penalty paid by assessee a share broker, for excess utilization limits comparable to it for doing trade of its clients at a particular time was allowable u/s. 37(1) of the Income- tax Act.
h. DCIT v Bharat C Gandhi [2011] 10 taxmann.com256: Compounding fees paid to RTO by a transporter for transporting over dimensional consignments is an allowable business expenditure u/s 37. These are not in contravention of law and the RTO authorities neither seized the vehicle nor booked any offence but are generally collecting as a routine amount at the check post itself while allowing the goods to be transported.
i. COMMISSIONER OF INCOME TAX vs. HERO CYCLES LTD. 17 DTR 281:
There is no doubt that payments made in the nature of penalty or fine for any wrongful act cannot be allowed as permissible deductions but mere label of the payment is not conclusive. Certain payments may be incidental to the business and have to be allowed on the test of
22 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
'commercial expediency', if no violation of law or public policy is involved. Where penalty is not for deliberate violation of law, the amount may be allowed as deduction. Penalty, fines, etc paid by the assessee to State Electricity Board for violating power regulation (drawing extra load in peak hours) was allowable deduction u/s. 37(1) of the Act.
j. Ahmedabad Cotton Mfg. Co. Ltd. & Ors. (supra): The Hon'ble Supreme Court in the case held as under: "In examining the claim of an assessee that a payment made by him is a deductible expenditure under s. 37 of the IT Act, 1961, what needs to be done by the assessing authority is to see whether the law or scheme under which the amount was paid required such payment to be made as a penalty or something akin to penalty imposed by the way of punishment for breach or infraction of the law or the statutory scheme; if the amount so paid (although called a penalty) is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, the assessing authority has to regard such payment as business expenditure of the assessee, allowable under s. 37 as an incident of business laid out and expended wholly and exclusively for the purpose of the business."
k. KAIRA CAN COMPANY LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX [2 ITR (Trib) 20] :Payment, made under SEBI Regulation scheme, 2002 for failure to make disclosure as required under SEBI (Substantial Acquisition of shares and Takeovers) Regulations 1997 could not be treated as penalty as it is a payment for regularizing the default committed hence such payment cannot be disallowed by invoking explanation to s. 37(1).
a. DCIT v. Messee Duvsseldorf India (P) Ltd. (2010) 129 TTJ 81 T (Del.).
b. Mahalaxmi Sugar Mills Co. v. CIT (1980) 123 ITR 429 (SC).
23 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
l. Remfry & Sagar Consultants Pvt. [ITA No.5887/Del/2011Dated.- July 20, 2012 ITAT Del] : The amount of interest paid for delayed payment of service tax is compensatory in nature and has the same character a service tax and it is not in nature of any penalty or fine disallowable as expenses u/s 37 of the Income Tax Act. 1961.
34. In view of the above submission it is requested to kindly allow the expenditure of Rs. 3,16,32,000/- incurred by the assessee which is purely during the course of business as allowable u/s 37(1) of the Income Tax Act, 1961."
6. We have heard the rival contentions of both the parties, perused the material available on the record and also gone through the orders of the authorities below. The assessee company is engaged in manufacturing and sale of ENA and rectified liquor. The party who wish to make purchases from the assessee gets Excise Permit (Import Permit) from excise department of their State. In order to deliver the goods the assessee needs to obtain Export Permit from the Excise Department of Rajasthan. In order to receive the Export Permit, the import permits received from the Assistant Excise Officer of that State is necessary for permission. As per the procedure laid down in the Rajasthan State Excise law, the Assistant Excise Officer processes the permits and forwarded the same to District Excise officer for his permission. The District Excise Officer forwards the same to Additional Commissioner, Excise, to obtain permission to export the goods. After following the procedure, the Excise 24 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
Commissioner issued the permission for export and returned the same to the District Excise Officer, who further returned the same to the Assistant Excise Officer posted at the assessee's company factory. Thus, after getting the necessary permissions from the Excise Departments, the consignment is dispatched under the supervision of Assistant Excise Officer. On the receipt of the goods by the buyer State, the Excise Department of the buyer State issues a receipt to the Excise Department of the assessee i.e. Rajasthan. The assessee also executes a bond with the Excise Department to make good the losses incurred to the department on account of loss of duty in case the goods delivery receipts are not received by the excise department of the assessee's state from the excise department of the buyer's state. The assessee executed a contractual bond to make good the losses to the government, thus the assessee indemnify the excise duty to the government exchequer. The duty paid is exactly the same as per the rates notified by the government, therefore, the said payment in discharging the contractual obligation to indemnify the excise department for the payment of the excise duty to the government exchequer, cannot be held in penal nature. Therefore, whatever nomenclature given by the Excise Department for the demand notice cannot be held as penalty. In view of these facts and circumstances, we find no merit in the appeal of the 25 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd.
revenue. This view is supported by the decision of the Hon'ble Supreme Court in the case of CIT Vs. Hyderabad Allwyn Metal Works Limited (supra), Prakash Cotton Mills Pvt. Ltd. Vs. CIT (supra) and the Hon'ble Gujarat High Court in the case of CIT, Gujarat Vs. Tarun Commercial Mills Co. Ltd. (supra). In view of the above facts and circumstances and the case laws, we uphold the order of the ld. CIT(A).
7. In the result, the appeal of the revenue is dismissed Order pronounced in the open court on 31/07/2017.
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vkns'k dh izfrfyfi vxzsf'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- The DCIT, Circle-4, Jaipur.
2. izR;FkhZ@ The Respondent- M/s Agribiotech Industries Limited, Jaipur.
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6. xkMZ QkbZy@ Guard File (ITA No. 272/JP/2017) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar