Penalty for late filing VAT return-balance sheet held non compensatory and disallowed u/s 37 by ITAT

Penalty for late filing VAT return-balance sheet held non compensatory and disallowed as per Explanation -1 to section 37 as penalty for infraction of law

ABCAUS Case Law Citation:
ABCAUS 2113 (2017) (11) ITAT

Important Case Laws Cited/relied upon by the parties:
Swadeshi Cotton Mills Ltd. vs. CIT, (1967) ITR 57 (SC)
CIT Vs. Bharat Steel Tubes Limited (1997) 226 ITR 750 (Del.).

Brief Facts of the Case:
The assessee company was a joint-venture of two Public Sector Undertakings and was engaged in generation of power. The assessee filed return of income for the year under consideration declaring total income of Rs.85,05,74,950/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (‘the Act’) was issued and complied with.

During the year under consideration the assessee had paid sales tax demand and penalty amounting to Rs.1,22,18,792/-, which was related to assessment year 2006-07. The assessee provided break-up of the amount as tax amount of Rs.35,45,033/- and penalty amount of Rs.86,72,759/-. The Assessing Officer was of the view that the amount paid being related to financial year 2006-07, it was a prior period expenditure and could not be allowed in the year under consideration. The assessee contended that sales six demand of Rs.1,22,18,792/- was raised by the service tax authorities in the year under consideration, therefore, the expenditure crystallized in the year under consideration. The assessee further submitted that being a statutory dues, it was allowable in the year of payment in terms of section 43B of the Act, irrespective of the method of accounting followed by the assessee. Regarding the amount of Rs. 86,72,759/- out of total demand, the assessee contended that though it was termed as ‘penalty’, it was in the nature of interest for compensating the Commercial Tax Department for delay in the paying taxes due beyond the stipulated period and, thus, it was allowable in terms of Explanation -1 below section 37 of the Act. The Assessing Officer did not accept the contention of the assessee and disallowed the amount of Rs. 1,22,18,792/- as expenditure not related to the year under consideration. The amount of Rs.86,72,759/- was also held as disallowable on the ground that penalty for delayed payment of sales tax was not deductible expenditure in view of the decision of the Hon’ble Supreme Court.

The AO accordingly completed the assessment u/s 143(3).

On appeal, the CIT-(A), allowed the payment of tax amounting to Rs. 35,45,033/- on paid basis in terms of section 43B of the Act, however, upheld the finding of the Assessing Officer in respect of the amount of Rs.86,72,759/- as penalty for infraction of law.

Aggrieved with the finding of the CIT-(A), both the assessee as well as the Revenue were in appeal before the Tribunal.

Observations made by the Tribunal:

The tribunal noted the detailed breakup of disallowance made by the AO as under:

The observation of the Tribunal with respect to each of the amount were as under:

Penalty of Rs. 5000 paid for delay in filing of revised/amended VAT return

After going through the relevant sections of Jharkhand VAT Act, 2005, the ITAT, opined that the penalty was for default of failure to furnish return under the VAT Act. Therefore, the clear language of the relevant section made it evident that the penalty levied was not compensatory in the nature Accordingly, contention in respect of amount of penalty of Rs. 5000 was rejected.

Penalty of Rs. 35,07,407.40 for delayed filing of form i.e. G-VAT 409

The ITAT noted that as per the section 63(3) of the Jharkhand VAT Act, 2005, the penalty was imposed for not getting the accounts audited and furnishing a true copy of the audit report within the time specified. Thus, the penalty was not compensatory in the nature and accordingly, not allowable in terms of Explanation -1 to section 37 of the Act.

Penalty of Rs. 35,13,907.06/- for delayed payment of VAT

The ITAT observed that as per clear language of the section 30(3) of the Jharkhand VAT Act, 2005 , the penalty was in addition to the tax and interest payable by the taxpayer, though it was computed at the rate of 2% per month on the tax and interest payable. The penal amount being in addition to the interest payable for delay in deposit of the tax, it could not be said as compensatory in the nature. Hence the ITAT rejected the contention of the assessee in this regard and held the amount of Rs. 35,13,907.06 as disallowable in terms of Explanation -1 to section 37 of the Act.

Payment of Rs. 16,46,444.96 as interest

The ITAT observed that as per section 30(1) of the Jharkhand VAT Act, 2005, it was evident that amount paid was toward interest at the rate of 1% per month, for the period from the tax payable has become due to the date of payment or to the date of order of assessment whichever is earlier. Thus, the interest amount paid was towards delay in payment of tax, was compensatory in nature. Accordingly, the ITAT held that the amount of Rs. 16,46,444.96 being compensatory in the nature, was allowable in terms of the decision of the Hon’ble Supreme Court.