ITA No. 2223/Kol/2013 M/s. Ripley & Company Ltd., AY 1010-11 IN INCOME TAX APPELLATE TRIBUNAL C BENCH: KOLKATA [Before Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM] I.T.A No. 2223/Kol/2013 Assessment Year: 2010-11 Deputy Commissioner of Income-tax, Vs. M/s. Ripley & Company Ltd. Circle-7, Kolkata. (PAN: AABCR4633A) (Appellant) (Respondent) Date of hearing: 24.08.2016 Date of pronouncement: 23.09.2016 For Appellant: Shri Rajat Kumar Kureel, JCIT, Sr. DR For Respondent: Shri Somnath Ghosh, Advocate ORDER Per Shri M. Balaganesh, AM: This appeal by revenue is arising out of order of CIT(A)-VIII, Kolkata vide appeal No. 69/CIT(A)-VIII/Kol/12-13 dated 13.06.2013. Assessment was framed by DCIT, Circle- 7, Kolkata u/s. 143(3) of Income tax Act, 1961 (hereinafter referred to as Act ) for AY 2010-11 vide his order dated 28.09.2012. 2. only issue to be decided in this appeal is as to whether ld CITA is justified in deleting dis allowance made on account of demurrage charges and penalty charges imposed by Steel Authority of India Ltd and Central Coal Fields Ltd in facts and circumstances of case. 3. brief facts of this issue is that assessee company incorporated with main objects of carrying on activities of handling and stevedoring contractor. During previous year relevant to assessment year under dispute, respondent was acting in similar capacity for Steel Authority of India and Central Coalfields Limited. ld AO observed that assessee had made payment of Rs. 36,81,373/- and Rs. 1,43,27,044/- to Steel Authority of India Ltd (SAIL in short) and Central Coal Fields Ltd (CCFL in short) respectively on account of railway demurrage and punitive charges which were included in Handling & Stevedoring Expenses and accordingly not admissible as deduction in terms of Explanation to Section 37(1) of Act as same in opinion of ld AO are penal 2 ITA No. 2223/Kol/2013 M/s. Ripley & Company Ltd., AY 1010-11 in nature. ld AO observed that such expenses arose for breach of contractual terms entered with SAIL and CCFL. said addition was deleted by ld CITA. Aggrieved, revenue is in appeal before us on following ground:- That under facts and circumstances of case, Ld. CIT(A) has erred in law as well as in facts in deleting disallowance made by A.O. of Rs.1,80,08,417/- towards demurrage charge and penalty charge (imposed by Steel Authority of India Ltd. & Central Coal Fields Ltd.) respectively since these are penal in nature and under Income Tax Act, 1961, penalty of any sort is not allowable expense. 4. ld DR vehemently relied on order of ld AO. In response to this, ld AR argued that issue is squarely covered in favour of assessee in assessee s own case by order of co-ordinate bench of this tribunal in ITA No. 240/Kol/2012 dated 27.6.2014 for Asst Year 2008-09 ; covered by Hon ble Jurisdictional High Court in case of CIT vs Jiyajeerao Cotton Mills Ltd reported in (1992) 103 CTR (Cal) 426 ; Nanhoomal Jyoti Prasad vs CIT reported in (1980) 3 Taxman 60 (All) ; Mahalakshmi Sugar Mills Co. Ltd vs CIT reported in (1984) 19 Taxman 447 (Delhi) and accordingly argued that there interference need to be made in order of ld CITA. 5. We have heard rival submissions and perused materials available on record including paper book containing summary and evidences of demurrage and punitive charges deducted by SAIL and CCFL (pages 5 to 41of PB) ; copy of agreement with SAIL (pages 42 to 73 of PB) ; copy of ledger account of penalty and demurrage imposed by CCFL (pages 74 to 78 of PB) ; copy of agreement with CCFL (pages 79 to 200 of PB) ; copy of return together with financial statements (pages 239 to 247 of PB) ; copy of certification of incorporation together with memorandum and articles of association of assessee (vide pages 248 to 272 of PB). It is admitted fact that assessee is contractually bound by Steel Authority of India, and Central Coalfields Limited to act in various capacities. assessee could not execute their work within time allowed in contracts as required by Steel Authority of India and Central Coalfields Limited which resulted in delay in completing work beyond scheduled time. On failure to carry out work as per schedule, Steel Authority of India and Central Coalfields Limited imposed demurrage as well as punitive charges in accordance with terms of contract entered into with them by assessee. demurrage was charged by principal of contractees upon payments made to Steel Authority of India and Central Coalfields 3 ITA No. 2223/Kol/2013 M/s. Ripley & Company Ltd., AY 1010-11 Limited who in turn charged same on payments made to assessee. In other words, demurrage arose out of failure of assessee to complete work within prescribed time allotted by principal of contractees and same was deducted from payments made to contractees of assessee who, in turn, deducted same from payments made to assessee. In this line of business, such imposition of demurrage charges is usual. There is no infringement of any law, failure of which has led to instant imposition of demurrage but merely due to inability to comply with certain terms of contract, levy was imposed. statutory prescription contained in Explanation along with provisions of sec. 37(1) Act prohibits deduction of expenditure incurred by assessee for any purpose which is offence or which is prohibited by law as being opposed to public policy. In instant case, incurring of expenditure on demurrage and claiming same as expense was not for offence nor prohibited by law as being opposed to public policy. Where demurrage charged by port authorities is in nature of compensation for delay in clearing goods from godowns of port authorities which includes amount chargeable for storage and safe custody of goods by port authorities beyond free period allowed under port rules, therefore, demurrage paid by assessee was not fine paid for any criminal act but compensation for use part facilities beyond permissible free period and impugned expenditure is permissible revenue deduction. It is further settled that payment of demurrage is not in nature of penalty and that it is merely charge made by railway administration to compensate itself for keeping goods of assessee in its custody beyond particular time and therefore, payment of demurrage is incidental to business and was allowable deduction. Further, contracts entered into by assessee had specific clause for imposition of penalty in case it failed to make progress as per their requirement mentioned in work rate chart. contractees, Steel Authority of India and Central Coalfields Limited imposed instant punitive charges on account of breach of contract which does not fall in category of payment of penalty for breach of any law of land but is simply compensation for breach of contractual obligations. In other words, punitive charges arose out of failure of assessee to complete work within time frame agreed with contractees, Steel Authority of India and Central Coalfields Limited. Such types of penalties are usual in this, line of business and contractees deduct such charges from payment disbursed by them. works undertaken as agreed in contracts entered into 4 ITA No. 2223/Kol/2013 M/s. Ripley & Company Ltd., AY 1010-11 were not completed in time and therefore punitive charges under default clause as laid down therein had to be paid. It is not penalty for breach of law. Such payment was perforce made to honour contractual obligation under agreements executed. This was done in course of carrying on of business by assessee. In instant case, there was specific requirement to complete work in time and clause for imposing punitive charges was included for any default. These rights and obligations arose in course of carrying on of business of respondent. Therefore, this payment made under contractual obligation is to be allowed u/s. 37(1) of Act. 6. We find that reliance placed by ld AR on decision of Hon ble Jurisdictional High Court in case of CIT vs Jiyajeerao Cotton Mills Ltd reported in (1992) 103 CTR (Cal) 426 is well founded. In said case, it was held that : 12. From facts noted by IT authorities and Tribunal, it appears that goods were not delivered in time and as because goods were not delivered in time penalty under default clause aforesaid sum of Rs. 47,393 had to be paid by way of penalty. It is not penalty for breach of any law. payment was made on account of contractual obligation under cl. 12 of agreement. When goods were not delivered within stipulated period, extra amount, designated 'penalty' had to be paid. This was done in course of carrying on business by assessee. Usually time is not of essence of contract but parties are entitled to make it so by inserting specific clause in contract. parties are entitled to fix time within which goods must be delivered and to stipulate that if there is any failure to deliver goods within contracted period, extra money will have to be paid to compensate buyer for non-delivery of goods in time. 13. In instant case, there was specific requirement to deliver goods in time and penalty clause for default. These rights and obligations arose in course of carrying on of business of buying and selling goods. I fail to see how this payment made under contractual obligations cannot be allowed as business expenditure. 7. We find that payments in form of punitive charges made by assessee could under no circumstances be regarded as illegal payments or payments which were opposed to public policy. We find that as long as payment made is not by way of default on account of infraction of any law and / or opposed to public policy, same would be allowable as deduction. We hold that in instant case, punitive charges paid are only compensatory in nature pursuant to contractual obligation which is directly 5 ITA No. 2223/Kol/2013 M/s. Ripley & Company Ltd., AY 1010-11 connected or intrinsically related with carrying on of its business which unequivocally qualifies as allowable deduction u/s 37(1) of Act. It is well settled that nomenclature used in any provision of law to describe any payment, to be made by any person, as interest, compensation, penalty , etc is not conclusive. It is incumbent on part of authorities to construe provisions as whole to find out true nature of impost sought to be levied. In certain cases, impost may be composite comprising of element of compensatory nature as well as penalty nature. Reliance in this regard is placed on decision of Hon ble Andhrapradesh High Court in case of CIT vs Bharat Television P Ltd reported in (1996) 218 ITR 173 (AP). 8. It is not in dispute that demurrage and / or punitive charges were deducted from bill raised by assessee in its ordinary course of its business. We find that Ld AO had misconstrued nature of demurrage and / or punitive chages as being paid for infraction of law and opposed to public policy thereby disallowing same by invoking Explanation to Section 37(1) of Act. We find that Co-ordinate Bench of this Tribunal in assessee s own case in ITA No. 240/Kol/2012 dated 27.6.2014 for Asst Year 2008-09 reported in (2014) 40 CCH 401 Kol, Trib observed that assessee during year derived income from execution of jobs of handling contractors under CCFL (Govt. Undertaking). That in execution of such jobs, assesese had not always been given adequate time and delay in completion of job resulted in imposition of penalty. That demurrage charges are usual in line of business. It was held that :- 6.1. Thus we find that when amounts are paid on contractual obligation same have to be allowed as business expenditure. amount paid for non-delivery of goods in time is allowable as deduction even though such amount is designated as Penalty in supply contract, time being essence of contract. In view of above discussions and precedent we do not find any infirmity in order of ld CIT(A) and accordingly we uphold same. 9. We find that decision relied on Hon ble Allahabad High Court in case of Nanhoomal Jyoti Prasad vs CIT reported in (1980) 3 Taxman 60 (All) wherein it was held demurrage charged by port authorities is in nature of compensation for delay in clearing goods from godowns of port authorities and it includes amount chargeable for storage and safe custody of goods by port authorities beyond free period allowed under port rules. It was further held that demurrage paid by assessee was not fine 6 ITA No. 2223/Kol/2013 M/s. Ripley & Company Ltd., AY 1010-11 paid for any criminal act but compensation for use of port facilities beyond permissible free period. 10. We also find that decision of Hon ble Delhi High Court in case of Mahalakshmi Sugar Mills Co. Ltd vs CIT reported in (1984) 19 Taxman 447 (Delhi) it was held that payment of demurrage is not in nature of damage or penalty and it is merely charge made by railway administration to compensate itself for keeping goods of assessee in its custody beyond particular time. Payment of demurrage is incidental to business and its impact is to increase cost to assessee of goods transported. Therefore, expenditure on this account can be said to be laid out wholly and exclusively for assessee s business. 11. In view of aforesaid findings, in facts and circumstances of case and respectfully following judicial precedents relied upon hereinabove, we find no infirmity in order of ld CITA. Accordingly, ground raised by revenue is dismissed. 12. In result, appeal of revenue is dismissed. Order pronounced in open court on 23.09.2016 Sd/- Sd/- (S. S. Viswanethra Ravi) (M. Balaganesh) Judicial Member Accountant Member Dated : 23rd September, 2016 Jd.(Sr.P.S.) Copy of order forwarded to: 1. APPELLANT DCIT, Circle-7, Kolkata. 2 Respondent M/s. Ripley & Company Ltd., Bhagyakul Mansion, Block- C, 1st Floor, 22, Lee Road, Kolkata-700020. 3. CIT(A), Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar. Deputy Commissioner of Income-tax, Circle-7, Kolkata v. M/s. Ripley & Company Ltd