Income Tax Appellate Tribunal - Hyderabad
Deputy Commissioner Of Income-Tax vs Fosan And Co. on 29 October, 1991
Equivalent citations: [1992]40ITD306(HYD)
ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is a departmental appeal directed against the order of the Commissioner of Income-tax (Appeals) - II, Hyderabad dated 12-2-1988.
2. The appeal relates to assessment year 1984-85. Two points are involved in this appeal. The first is with regard to the allow ability of Rs. 8,625 paid towards electricity charges by the assessee as business expenditure. The assessee paid a total sum of Rs. 37,488 towards electricity charges. It has produced all the receipts of having paid electricity charges and also filed photo copies of the same before the Income-tax Officer. Out of the receipts so produced, No. 9408 was perused by the ITO. According to him, the payment under the said receipt (Rs. 8,625) was not towards electricity consumption. He further held in the assessment order that the assessee was unable to explain for what purpose this amount was paid. The ITO took it as deposit made with the Electricity Board and consequently he held that this payment cannot be held as expenses. The Inspecting Asstt. Commissioner (Assessment) disallowed the sum of Rs. 8,625 under his assessment orders dated 17-2-1987. When the matter came up in appeal before the learned CIT (Appeals), the learned Counsel for the assessee produced before her, copy of the letter dated 5-10-1982 which was addressed to the assessee from the APSEB. For a correct appreciation, the contents of the said letter are very essential. A copy of the said letter is furnished at page 11 of the paper compilation filed before me. The said letter is addressed by the Asstt. Divisional Engineer, APSEB, Sangareddy to the assessee. The following is the text of the letter:
On 18-6-1982 at 14.20 hours your service bearing S.C.No. 693 Door No. was inspected by Asstt. Engineer, DPE-I, Hyderabad. It was then noticed that you had
(i) Exceeded the sanctioned connected load of 27 HP by connecting 16 HP +18 KW = HP which constitutes malpractice.
The above factors indicate that you are guilty of malpractice. An enquiry will be made into the matter by the Superintending Engineer Operation Rural Hyderabad who will fix the amount of loss sustained by the Board, you may make appropriate representation to him in this regard.
I have provisionally estimated the value of energy misused by you at Rs. 17,111-05. If you are desirous of continuity of supply pending enquiry, you may pay Rs. 8,555-55 (being half of the estimated value) plus Rs. 50 towards supervision charges plus Rs. 20 for reselling charges within fifteen days from the date of receipt of this notice to the Asstt. Accounts Officer/ERO/APSEB Sangareddy failing which the supply will be disconnected without any further notice.
The above notice would clearly show that by connecting a higher load then what is contracted for, the assessee is alleged to have pilfered the energy. It is specifically alleged that the seals of the switch board meter in the assessee's business premises were found to have been tampered with and excess energy than what is recorded in the meter is drawn. The fact that higher load was connected would probabilise the higher consumption. It is very clear that each one of these allegations in the notice were mere allegations. Under the powers given by the APSEB Tariff Rules, the Asstt. Divisional Engineer who inspected the factory premises was entitled to cut off the energy if he found the electricity meter tampered with. However, in this case, before exercising his powers he tentatively wanted to mitigate the transgression by insisting on a payment of Rs. 8,555 towards loss of energy to APSEB. Rs. 50 towards supervisory charges and Rs. 20 towards resealing charges. As is made very clear the immediate competent authority to decide about the loss of energy and impose damages for the said loss was the Superintending Engineer, Operations Rural. It is not known till now whether the Superintending Engineer had enquired into and determined the quantum of damages to be paid by the assessee, for the assessee addressed its reply dated 20-10-1982 for the letter dated 5-10-1982 referred to above which is as follows:--
While we are taking up the matter with the Superintending Engineer Operations Rural Hyderabad, and expect to clarify and explain to his satisfaction that there has been no intentional malpractice, we are herewith making payment of Rs. 8,625-55 in cash as per the above referred letter. The amount of Rs. 8,625-55 comprises of Rs. 8,555-55 plus Rs. 50-00 towards supervision charges and Rs. 20-00 towards resealing charges.
Please acknowledge receipt.
The question having regard to the facts and circumstances of this case as above is whether it can be said that Rs. 8,625-55 is a penalty paid for any infraction of law. I am of the opinion that as the matter stands now, no competent authority had decided the matter and found the assessee having contravened any provision of law nor such competent authority levied any penalty as such. Payment of Rs. 8,625-55 insisted upon in the notice dated 5-10-1982 was only to keep the service connection live without being disconnected. Without electricity connection it is impossible for the assessee to carry on its manufacturing activity and whatever expenditure that is incurred to keep its business going on is allowable expenditure under Section 37 of the Income-tax Act. I am of the view that the ratio of the following decisions relied upon by the learned DR docs not apply to the facts of the present case.
1. Haji Aziz & Abdul Shakoor Bros. v. C1T [1961] 41 ITR 350 (SC).
In this case, the dates were imported from Iraq. Importing dates by steamer is prohibited and hence the Customs authorities confiscated the dates under Section 167 of the Customs Act.
However, in this case, there is no transgression of any particular provision of the Electricity Act as it is yet to be established against the assessee. Thus, it is too premature to say in this case that the assessee had contravened any definite provision under the Indian Electricity Act. Therefore the Supreme Court's decision does not apply to the facts of the case. Learned DR also relied upon the Delhi High Court's decision in Nawabganj Sugar Mills Co. Ltd. v. CIT [1984] 149 ITR 151.
In that case a penalty was imposed under Section 3(5) of the U.P. Sugarcane Cess Act, 1956 for default in paying sugarcane cess. It is explained by the Delhi High Court in that case that the said penalty is not automatic and before levy of penalty, procedure laid down in Rule 8 of the Rules prescribed under the Act are to be meticulously followed. Under the said rule, the Collecting Officer should give an opportunity to the assessee to show cause why a penalty should not be imposed on him under Section 3(5) of the Act and before imposing penalty he should be satisfied that there was no sufficient cause for non-payment of cess in time and so the penalty imposed under Section 3(5) arises as a result of the imposition by the competent authority empowered to collect the cess. In that case, the said competent authority after hearing from the assessee and after having satisfied that there was no sufficient cause for non-payment of cess in time and so imposed Rs. 20,095 against the assessee under Section 3(5) of the UP Sugarcane Cess Act, which was ultimately held by the Delhi High Court as not an allowable business expenditure. However, in this case, the S.E. (Operations) Hyderabad who is the competent authority to find out any pilferage and to assess the proper damages for pilferage, did not pass any order till now and the only expenditure under consideration is the sum paid to keep the electricity connection to the business premises of the assessee. Thus, the Delhi High Court decision is not applicable to the facts of the case.
The third decision relied by the learned DR is that of the Madhya Pradesh High Court in Suneela Laboratories Ltd. v. CIT [1986] 162 ITR 883. In that case, for delayed payment of Provident Fund and Excise Duty and for delay in filing the sales-tax return, penalty was imposed as the said delays contravened specific statutory provisions made in that regard. In those circumstances, the amount of penalty paid were held as not allowable as business expenditure under Section 37 of the Act. However, in this case, no specific provisions of the Indian Electricity Act or the AP Electricity Board Rules were brought to my notice which were said to have been contravened by the assessee. Further, the authority which is empowered to decide the damages suffered by the APSEB did not as yet pass any order. Therefore, the Madhya Pradesh High Court decision also cannot be of any help to the revenue.
3. The learned counsel for the assessee Shri Ajay Gandhi had relied upon the decision of the Delhi Bench of the Tribunal in ITO v. Om Parkash & Co. [1982] 1 ITD 992. In that case, the assessee occupied for its business purposes, a piece of land in Delhi since 1948 without payment of any rent. The Delhi Development Authority which came into being with effect from 1958 demanded damages from the assessee by issuing a show-cause-notice dated 31-12-1974 for the unauthorised occupation of the assessee under the provisions of the Public Premises (Eviction of Unauthorised Occupants) Act, 1971. The DDA later made it a condition that unless the damages were paid, the assessee would not be eligible for allotment of alternative plots. Pending the final decision, the assessee made an ad hoc. Payment on 24-2-1975 and claimed it as business deduction for assessment year 1975-76. Ultimately allowing the ad hoc payment as a valid business expenditure, the Tribunal held the following at page 995 of the reported decision:
It is not controverted before us that the piece of land in respect of which damages came to be paid was used by the assessee for purposes of the business. Any payment made by the assessee for purposes of business had to be allowed as a business expenditure so long as it is not for acquiring a capital asset or on account of personal expenditure. By making this payment the assessee did not acquire any capital asset nor the expenditure incurred can be said to be of a personal nature. The assessee may have unauthorisedly occupied a piece of land but in doing so it cannot be said that he had infringed any law as such. He has paid damages and these damages are nothing else but payment wholly and exclusively for purposes of business. The judgment in P.N. Sikand v. CIT (supra) supports the assessee because in that case the payment of additional rent for regularising the change of purposes of the use of property was held to be an allowable deduction. We, thus, do not find wrong with the order of the AAC. The sum of Rs. 20, 194 is, in any case, admissible as it has been incurred by way of expenditure.
The payment now under consideration before me is akin to the ad hoc payment made by the assessee to the DDA in the case before the Delhi Tribunal cited above. In the case before the Delhi Tribunal, the ad hoc payment was made in order to keep the business premises under the possession of the assessee whereas in this case, the payment was made in order to keep the electricity connection to the business premises of the assessee. Since the assessee is a manufacturing unit, no manufacturing activity is possible without electric connection. In this connection I have come across a Delhi High Court decision in CIT v. Loke Nath & Co.(Construction) [1984] 147 ITR 624. The assessee in that case was a firm constructing multistoreyed buildings in New Delhi and selling the major portions thereof in the form of flats to various customers. It had applied for a sanction of plan to the New Delhi Municipal Corporation for sanction of a plan for construction of a building of thirteen storeys. Sanction was accorded in April 1967. While granting sanction, the NDMC laid down that the second floor could cover up only 35 per cent in accordance with its bye-laws. However, the assessee built the second floor covering 50 per cent thereby exceeding the permissible limits under the bye-laws. The building was commenced in July 1967 and construction was completed in July 1969 with only finishing touches remaining. Time for revalidating the plan having expired, the assessee applied for the sanction of the revised plan of the building. It is only 12 storeys in the place of 13 storeys in view of the fact that there was excess construction in the second floor. The revised plan was sanctioned in April 1970 condoning the additional coverage in the second floor and other irregularities on condition that the assessee paid an ad hoc penalty of Rs. 4 lakhs. The question was whether the sum of Rs. 4 lakhs was allowable as a deduction in computing the assessee's business profits. The Delhi High Court confirmed the Tribunal's decision, and held that the sum of Rs. 4 lakhs was permissible deduction in arriving at the profits of the business of the assessee. As part of the head-note at page 626, the following is found:--
The compensation was for the breach of a regulatory procedure in the matter of ex post facto sanction of a building constructed in deviation of a sanctioned plan or where the sanction had lapsed. The ex post facto sanction obtained showed that there was no breach of a provision against public policy and the acceptance of the compensation could not be for any illegal act against public policy. On the acceptance of the compensation there was condonation of disobedience of a procedural requirement, the compensation was not a penalty payment to save the assessee from criminal liability or prosecution or to compound any offence committed by the assessee. The payment of Rs. 4 lakhs was made in the course of the assessee's business of construction of the building which was ultimately to be sold as a business of the assessee, inasmuch as without paying this amount the assessee could not complete the building according to the plans lawfully. The payment was vital for the business of the assessee which consisted in the construction of the building and its sale flat-wise.
In this case also, the payment of sum of Rs. 8,625 was essential to save the business of the assessee. Had it not been paid, the electricity connection would have been cut off and the assessee's business would have been stopped. Therefore in order to overcome the said major difficulty the payment was made and according to me the amount is lawfully deductible as business expenditure. The order of the CIT (Appeal) is perfectly justified and it does not call for any interference from me.
4. to 6. [These paras are not reproduced here as they involve minor issues.]