Detention/Demurrage Charges disallowance us 37(1) deleted as it represented contractual charges

Detention and Demurrage Charges disallowance us 37(1) deleted as they represented contractual charges paid for delay in loading/unloading of material and are part of normal business activities-ITAT

ABCAUS Case Law Citation:
1042 (2016) (10) ITAT

Brief Facts of the Case:
The appellant Revenue in the present case, among other things was aggrieved by CIT Appeals order in deleting the addition under the head ‘Detention and Demurrage Charges’ treating the expense as normal business expenditure as per section 37 of the Income Tax Act, 1961.

The respondent assessee was a partnership firm, was engaged in business of manufacturing of Colour TVs. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 was issued and the assessment was completed u/s 143(3) by the Assessing Officer (AO),  making various additions/disallowances.

One of the disallowances was related to expenses debited under the head ‘Detention and Demurrage Charges’ in the profit and loss account by the assessee. The AO held that the same was penal in the nature and the assessee did not offer any explanation in this regard.

Before the CIT(Appeals), the assessee filed details of expenses and submitted that same were contractual payment made to various parties Transporters/Carriersfor delay in loading/unloading of material. The CIT(A) forwarded the additional evidences submitted with assessee, to the Assessing Officer, who after going through the additional evidences and submission of the assessee did not offer any adverse comments. The CIT(A) after considering the submission of the assessee, remand report and rejoinder of the assessee, deleted the disallowance

Aggrieved, the Revenue was in appeal before the Tribunal

Contentions of the Revenue before ITAT:
Before the Tribunal, the Revenue contended that the detention and demurrage charges were paid over and above the normal loading and unloading charges and these penal charges never fall within the ambit of section 37.

Observations made by the Tribunal:
The Tribunal observed that various transporters/Carrier agencies had raised bills on the assessee in respect of ‘Detention and Demurrage Charges’.

The ITAT noted that the complete detail of the expenditure under reference including invoices raised by the parties were forwarded to the Assessing Officer, who did not dispute the expenses were in violation of the statutory acts or laws and therefore not allowable under section 37.

The Tribunal further noted the findings of the CIT(A) that the assessee had brought on record copy of invoices raised in respect of “Detention and demurrage charges”. The same had been verified by the AO who had not made any adverse comments in the remand report.

The ITAT also concurred with the CIT(A) in holding that the “Detention and demurrage charges” represented contractual charges paid for delay in loading/unloading of material and are part of normal business activities. There was no element of any violation of statutory Acts or Laws. Rather these payments were in the nature of compensation for breach of contractual obligations.

Held:
ITAT upheld the order of CIT(A) on this ground and this ground of the Revenue was dismissed.