Case Law Details
Facts of the Case: The Assessee was a hospital and diagnostic centre. It earned income under the head ‘Business and Profession’. The Assessee imported hospital equipments valued at Rs. 2,75,11,988 during the years 1988-89 and 1992-93, without payment of custom duty, on the basis of a customs duty exemption certificate (‘CDEC’) issued by the Director General of Health Services (‘DGHS’). The equipment thus imported was capitalized by the Assessee on the actual value of the equipment paid by it. Depreciation was being claimed on the said equipment from year to year at the prescribed rate as per the IT Act. Due to non-fulfillment of the essential condition stipulated in the relevant notification of the Customs Department dated 1st March 1968 for retaining CDECs for import of hospital equipments, the CDEC granted to the Assessee stood withdrawn. Therefore, the Customs authorities raised a demand of Rs.3,78,66,864 as custom duty on the Assessee for the import of equipment in the aforementioned years. Later, the Commissioner of Customs (CC) reduced the duty to Rs.1,10,04,795 along with fine of Rs. 10,000 and Rs. 5,000. The appeals filed by the Assessee against the order of the CC were dismissed by the Customs, Excise and Service Tax Appellate Tribunal (‘CESTAT’) and the Supreme Court. Thereafter during October, November and December 2008, the Assessee remitted the entire customs duty of Rs. 1,10,04,795 together with interest of Rs. 9,52,161.
The Assessee filed its return of income for the AY 2009-10 inter alia declaring a total income of Rs. 65,16,324. In the fixed schedule in the balance sheet the Assessee included ‘new’ plant and machinery worth Rs.1,10,04,795 and claimed 100% depreciation on it. The case was selected for scrutiny and notices were issued under Sections 143 (2) and 142 (1) of the IT Act. The Assessee explained that even though the customs duty was paid during the previous year relevant to the AY 2009-10, the liability to pay the customs duty related back to the accounting period 1989-90 and 1992-93 when the equipment was actually imported. Thus there was an increase in the cost of the imported machinery to the extent of customs duty paid during the year. The Assessee accordingly claimed depreciation on the enhanced cost of machinery from year to year basis since the date of actual import. Since the WDV had become negligible, the whole amount of depreciation was written off in the AY 2009-10 on the customs duty paid during the year.
The AO rejected the above explanation and held that since the levy of customs duty was penal in nature it was not allowable expenditure in terms of the Explanation to Section 37 of the IT Act. The entire amount of customs duty was therefore added back to the Assessee’s returned income.
The Assessee preferred appeal before the CIT (Appeals), who held that the enhanced cost of equipment would be taken into consideration from the AY 2005-06 when the CC passed an order, requiring the Assessee to remit the customs duty of Rs.1,10,04,795. The AO was directed to rework and allow the depreciation on that basis.
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