Sigma Research & Consulting Pvt. Ltd. vs ITO

R.K. Panda, Accountant Member

This appeal by the assessee is directed against the order dated 4th September, 2018 of the CIT(A)-8, New Delhi, relating to Assessment Year 2014-15.

Ground of appeal No.1 by the assessee reads as under:-

"The action of the ld.CIT(A) in confirming the action of the ld. Assessing Officer in disallowing the sum of Rs.75,449/- being the interest paid on late deposit of TDS, is illegal, arbitrary, unwarranted, uncalled for and against the facts and circumstances of the case."

Facts of the case, in brief, are that the assessee is a company engaged in the business of providing full-fledged research services in the social and development sector and all India data collection/field and tabulation services across all sectors. It filed its return of income on 6th October, 2014 declaring the total income at Rs.9,25,090/- under the normal provisions and Rs.5,50,105/- under MAT provisions. The Assessing Officer, during the course of assessment proceedings, observed that the assessee company has debited an amount of Rs.75,449/- on account of interest on TDS. Although the Assessing Officer gave an opportunity to the assessee to explain as to why this amount should not be disallowed as per section 37 of the IT Act, no reply was filed by the assessee on this issue to explain as to why the same is an allowable expenditure. The Assessing Officer, therefore, made addition of Rs.75,449/- to the total income of the assessee. In appeal, the ld.CIT(A) confirmed the action of the Assessing Officer on the ground that interest on late payment of deposit of TDS is not an allowable expense u/s 37(1) of the Act as it was in the nature of penal interest.

Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.

The ld. counsel for the assessee, referring to various decisions filed in the paper book, submitted that any delay in the payment of TDS by the assessee cannot be linked to the income-tax of the assessee and consequently the principles laid down by the Hon'ble Apex Court in the case of Bharat Commerce Industries Ltd. vs. CIT, 230 ITR 733 cannot be applied. He submitted that the Calcutta Bench of the Tribunal in the case of M/s Sai Products Pvt. Ltd. vs. DCIT, vide ITA No.1887/Kol/2016, order dated 6th April, 2018, has held that disallowance made by the Assessing Officer on account of interest on late deposit of TDS which has been confirmed by the CIT(A) is not correct. Accordingly, they have directed such addition to be deleted. Relying on various other decisions filed in the paper book, hesubmitted that similar view has been taken by the coordinate Benches of the Tribunal. He submitted that the lower authorities have not considered the various decisions relied on by the assessee before them and they have simply sustained the addition. He accordingly submitted that he has no objection if the matter is restored to the file of the Assessing Officer or the CIT(A), as the case may be.

The ld. DR, on the other hand, heavily relied on the order of the Assessing Officer and the CIT(A) and submitted that the interest on late deposit of TDS is penal in nature and, therefore, is not an allowable deduction. Further, the assessee has not given any reply before the Assessing Officer to justify the allowability of such claim. He accordingly submitted that the order of the CIT(A) be upheld on this issue.

I have considered the rival arguments made by both the sides and perused the orders of the authorities below. I have also considered the various decisions relied on by the assessee. I find the Assessing Officer made addition of Rs.75,449/- debited by the assessee in the P&L Account on account of interest on late deposit of TDS on the ground that despite being asked by him, the assessee did not file any reply to justify its claim. I find the ld.CIT(A) confirmed the disallowance made by the Assessing Officer on the ground that interest on late payment of TDS is not an allowable expenditure u/s 37(1) of the IT Act as it was in the nature of penal interest. It is the submission of the ld. counsel that in view of the various decisions of the coordinate Benches of the Tribunal on this very issue, such disallowance is uncalled for. It is also his alternate submission that the matter may be restored to the file of the Assessing Officer since various decisions relied on by the assessee have not been considered. Considering the totality of the facts of the case and in the interest of justice, I deem it proper to restore the issue to the file of the Assessing Officer with a direction to give one more opportunity to the assessee to substantiate its claim of allowability of interest paid on late deposit of TDS. The ground raised by the assessee is accordingly allowed for statistical purposes.

Ground No.2 by the assessee reads as under:-

"The action of the ld.CIT(A) in confirming the action of the ld. Assessing Officer in disallowing the sum of Rs.37,654/- being the amount of demurrage charges deducted by the customers for not completing the project in time is illegal, arbitrary, unwarranted, uncalled for and against the facts and circumstances of the case."

Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings noted that the assessee company has debited Rs.37,654/- on account of penalty charges. On being asked by him, the assessee submitted that this amount is in the nature of demurrage charges for not completing the project in time. The Assessing Officer did not accept the above contention of the assessee in absence of evidence to show that the actual expenses related to the corresponding earning has increased and it is a loss to the company. He accordingly made addition of Rs.37,654/-to the total income. Before CIT(A) the assessee reiterated the same submissions as made before the Assessing Officer and submitted that the said amount was in the nature of demurrage charges for not completing the project in time. Referring to the dictionary meaning of demurrage charges, it was submitted that the same being compensatory in nature for such detention the same should be allowed as a deduction. However, the ld.CIT(A) was not satisfied with the arguments advanced by the assessee. He held that charges for not completing a project in time was not in the nature of demurrage charges and, hence, the contention of the assessee that the Assessing Officer had erred in making the above mentioned disallowance is not tenable. He accordingly dismissed the claim of the assessee.

Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.

The ld. counsel for the assessee, referring to page 83 of the paper book, drew the attention of the Bench to the description of the job to be undertaken for National Institute of Electronics and Information Technology (NIELIT), Gangtok. Referring to clause 2 of the same, he drew the attention of the Bench to the conditions laid down therein according to which in the case of non-completion of job in time, penalty @ 0.10% of the quoted rate per day will be recovered for the extra days required for completion of the job. Referring to the decision of the Pune Bench of the Tribunal in ITO vs. Shanti Commodities, 156 ITD 34, he submitted that the Tribunal in the said decision has held that penalties paid for violations of rules laid down by the Forward Market Commission being in the nature of civil liability similar to compounding fees and not for any serious violation of law was to be allowed u/s 37(1). He submitted that since the penalty so paid was not for violation or infraction of any law and the same was paid for non-completion of the job on time, therefore, the same was compensatory in nature and, therefore, has to be allowed as a deduction.

The ld. DR, on the other hand, heavily relied on the order of the Assessing Officer and the CIT(A).

I have considered the rival arguments made by both the sides and perused the orders of the authorities below. I have also considered the various decisions cited before me. I find the Assessing Officer, in the instant case, disallowed an amount of Rs.37,654/- claimed by the assessee on account of penalty charges on the ground that demurrage charges for not completing the project in time is not an allowable expenditure. I find the ld.CIT(A) upheld the action of the Assessing Officer. It is the submission of the ld. counsel for the assessee that the same is not for violation or infraction of any statutory provisions and the same is compensatory in nature for not completing the project in time. I find merit in the above argument of the ld. counsel. A perusal of the paper book page 83 shows that as per the terms and conditions for undertaking the work awarded by National Institute of Electronics and Information Technology, Gangtok, the assessee is liable to pay penalty @ 0.10% of the quoted rate per day for non-completion of the project within six weeks from the date of receiving the work order. The same, in my opinion, is not for violation of any statutory law, but, will amount to compensatory in nature. I find the Pune bench of the Tribunal in the case of Shanti Commodities (supra) has held that penalties paid for violation of rules laid by Forward Market Commission being in the nature of civil liability similar to compounding fees and not fee for any serious violation of provisions of law was to be allowed u/s 37(1) of the Act. In view of the above discussion, I am of the considered opinion that the ld.CIT(A) is not justified in sustaining the addition made by the Assessing Officer amounting to Rs.37,654/-. Accordingly, the order of the CIT(A) on this issue is set aside and the ground raised by the assessee is allowed.

Ground of appeal No.3 raised by the assessee reads as under:-

"The action of the ld.CIT(A) in confirming the action of the ld. Assessing Officer in disallowing the sum of Rs.69,741/- being the amount of Pooja Expenses is illegal, arbitrary, unwarranted, uncalled for and against the facts and circumstances of the case."

Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee company has claimed Pooja expenses of Rs.69,741/- which are related with the business and cannot be said to be incurred wholly and exclusively for the business. Relying on various decisions, the Assessing Officer disallowed an amount of Rs.69,741/- and added the same to the total income.

Before the CIT(A), it was submitted that the above mentioned expenses brought harmony in the business and was incurred on day-to-day Pooja in the office, expenses of Pooja on 5th temples for the growth of anniversary of the company and pooja performed in the the company. The decision in the case of CIT vs. Dalmia Cement was brought to the notice of the CIT(A) wherein the Hon'ble High Court allowed such expenses.

The ld.CIT(A) was not satisfied with the arguments advanced by the assessee. He observed that in the case of Dalmia Cement (supra), the Pooja was held at the temple near to the factory premises and was frequented by the workers who lived near the temple and worked in the factory. However, no such fact was brought out in the instant case either by the Assessing Officer or by the assessee. He, therefore, rejected the contention of the assessee and dismissed the grounds raised before him.

Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.

The ld. counsel for the assessee, referring to the decision of the Hon'ble Supreme Court in the case of SA Builders reported in 288 ITR 1, submitted that this expenditure should be allowed on account of commercial expediency. Referring to the decision of the Hon'ble Gujarat High Court in the case of Commercial Ahmedabad Mills Co. Ltd. vs. CIT, 204 ITR 505, he submitted that under identical circumstances the Hon'ble High Court has allowed the claim of the assessee on account of Pooja expenses. He accordingly submitted that the order of the CIT(A) should be set aside and the ground raised by the assessee should be allowed.

The ld. DR, on the other hand, heavily relied on the orders of the Assessing Officer and the CIT(A).

I have considered the rival arguments made by both the sides and perused the orders of the authorities below. I find the Assessing Officer in the instant case, disallowed an amount of Rs.69,741/- claimed by the assessee on account of Pooja expenses on the ground that it is not a welfare measure and in no way connected with the business of the assessee and, therefore, cannot be said to be wholly and exclusively for the business of the assessee. I find the ld.CIT(A) upheld the action of the Assessing Officer. It is the submission of the ld. counsel that such expenses bring harmony between the management and the employees and are for commercial expediency. Therefore, it should be allowed as a deduction. It is also his submission that in view of the decision of Hon'ble Gujarat High Court in the case of Commercial Ahmedabad Mills Co. Ltd. (supra) wherein it has been held that the expenditure incurred being neither personal nor purely religious in nature and the expenses were incurred in the interest of business of the assessee, the same should be allowed as a deduction. A perusal of the order of the Hon'ble Gujrat High Court shows that the Hon'ble High Court in the said decision has held that it is for the assessee to decide as to what is in the interest of the business and, therefore, if the nexus between the expenditure and business of the assessee or welfare of a class of its workers is established, then, it cannot be said that the expenditure incurred by it is not for the purpose of business. However, the assessee, in the instant case, has failed to prove the nexus. While the expenses incurred on the occasion of its fifth anniversary day is an allowable expenditure, however, the day-to-day pooja expenses in the office of the company, in my opinion, cannot be allowed as an allowable expenditure. However, the nature of bifurcation is not available. Considering the totality of the facts of the case and in the interest of justice, I deem it proper to restore the issue to the file of the Assessing Officer with a direction to give an opportunity to the assessee to give a bifurcation and the puja expenses incurred on the fifth anniversary day of the company may be allowed as an expenditure whereas the day-to-day pooja expenses cannot be allowed as an expenditure. The Assessing Officer shall decide the issue as per fact and law, after giving due opportunity of being heard to the assessee. I hold and direct accordingly. This ground raised by the assessee is accordingly allowed for statistical purposes.

The other grounds in the grounds of appeal being general in nature, are being dismissed.

In the result, the appeal filed by the assessee is allowed for statistical purposes.