Case Law Details
Parry Phytoremedies Private Limited Vs DCIT (ITAT Pune)
ITAT Pune held that customs duty drawback relating to preceding assessment years can be written-off ‘as prior period item’.
Facts- The grounds raised in the present appeal are in consonance with rule 8 of Income Tax Appellate Tribunal Rules, 1963 [for short “ITAT Rules”], however for the purpose of adjudication, it shall suffice to articulate that, the sole & substantive ground is directed against the disallowance of customs duty drawback written-off relating to preceding assessment years ‘as prior period item’.
Conclusion- In the case of Lord’s Dairy Farm Ltd. v. CIT, it was held that the Court was entitled to presume that the amount became irrecoverable when the assessee wrote it off in its books of account and that, therefore, the assessee was entitled to claim the amount. In our opinion, therefore, even if duty drawback was available for the previous assessment year, what will be relevant was when the same is treated as bad debt by the assessee in his books of account.
Held that we leaving no iota of doubt hold the orders of both the Ld. TAB as contra legem; ergo we set aside the order of Ld. FAA and quash the order of assessment.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal challenges the order of Commissioner of Income Tax (Appeals)-3, Pune [for short “CIT(A)”] dt. 01/02/2018 passed u/s 250 of the Income-tax Act, 1961 [for short “the Act”], which ascended out of order of assessment dt. 24/02/2016 passed u/s 143(3) by the Dy. Commissioner of Income Tax, Circle 4, Pune [for short “AO”] for assessment year [for short “AY”] 2013-14.
2. The appeal seeks to answer the allowability of duty drawback written-off post expiry of prescribed due date within which claim for refund can be made, pursuant to business decision vis-a-vis irrecoverability.
3. In advancing the matter, it is necessary to reproduce the grounds challenged by appeal memo are;
1. The Learned Commissioner of Income-tax (Appeals) – 3, Pune (hereinafter referred to as the “Hon’ble CIT(A)”), seriously erred in not appreciating the facts of the case and the records available, before concluding that, the Appellant is not entitled for a deduction of Rs.88,18,815 (Eighty Eight Lakhs, Eighteen Thousand, Eight Hundred and Fifteen) as per the provisions of the Income-tax Act, 1961 (hereinafter referred to as the “IT Act”) including but not limited to the provisions of Section 37 of the IT Act. Failure to appreciate the facts of the case and the legal provisions has vitiated the impugned Order, which deserves to be quashed and set aside on this ground alone.
2. The Hon’ble CIT(A) seriously erred in not appreciating the provisions of the Customs Act, 1962, the Customs Tariff Act, 1975, the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995 and all other related rules and regulations (hereinafter referred to the “Customs Regulations”) before concluding that, the expenditure of Rs.88,18,815 (Eighty Eight Lakhs, Eighteen Thousand, Eight Hundred and Fifteen) claimed as deduction by the Appellant, ought to be considered as prior period expenditure and hence should be disallowed as per the IT Act. Failure to appreciate the fundamental provisions of the Customs Regulations in view of the present facts of the case, deserves the impugned Order, to be quashed and set on this ground alone.
3. The Hon’ble CIT(A) failed to appreciate that, as per the provisions of the Customs Regulations, E.I.D Parry India Limited (the customer of Parry Phytoremedies Private Limited at that point of time), had applied for refund/drawback, as per the provisions of the Customs Regulations. The Hon’ble CIT(A) failed in appreciating that, the Customs Authorities after processing the applications so filed, allowed certain claim, but did not allow refund/drawback of certain other claims, as per the provisions of the Customs Regulations. Failure to consider these aspects has vitiated the impugned Order, which deserves to be quashed and set aside on this aground alone.
4. The Hon’ble CIT(A) failed in appreciating that, the Appellant undertook substantial efforts to avail the claim of refund/drawback as per the provisions of the Customs Regulations. The Appellant on being reasonably certain that, the amount of Rs.88,18,815 (Eighty Eight Lakhs, Eighteen Thousand, Eight Hundred and Fifteen) could not be recovered and accordingly claimed deduction of the said amount. Failure to appreciate the accounting principle and accounting policies adopted by the Appellant has vitiated the impugned Order, which deserves to be quashed and set aside on this ground alone.
5. The Hon’ble CIT(A) seriously erred in not appreciating the Debit Notes, raised by the E.I.D Parry India Limited before concluding that, the Appellant is not entitled for a deduction of Rs.930,815 (Rupees Nine Lakhs, Thirty Thousand, Eighty Hundred and Fifteen) as per the provisions of the IT Act. Failure in not appreciating the factual and business scenario, has vitiated the impugned Order, which deserves to be quashed on this ground alone.
6. The Hon’ble CIT(A) seriously erred in not appreciating the various judicial precedents and in not following the principle of judicial discipline, before concluding that the Appellant is not entitled for a deduction of Rs.88,18,815 (Eighty Eight Lakhs, Eighteen Thousand, Eight Hundred and Fifteen) as per the provisions of the IT Act. Failure in not considering and appreciating the judicial precedents has vitiated the impugned Order, which deserves to be quashed and set aside on this ground alone.
The Appellant further prays that all consequential and incidental relief may kindly be allowed.
The Appellant craves leave to add, alter or amend all or any of the submissions mentioned hereinabove and to lead such oral and documentary evidence as may be considered necessary.
4. Before coming to facts, its apt to voice that, the grounds raised in the present appeal are inconsonance with rule 8 of Income Tax Appellate Tribunal Rules, 1963 [for short “ITAT Rules”], however for the purpose of adjudication, it shall suffice to articulate that, the sole & substantive ground is directed against the disallowance of customs duty drawback written-off relating to preceding assessment years ‘as prior period item’.
5. The facts borne out of the case records tersely stated are;
5.1 The appellant is a private limited company engaged in the business of extraction of Lycopene from tomato paste & thereafter converting it into powder/granule/oil form etc., and selling them either in the domestic market or exporting through its sister concern E.I.D. Perry India Ltd [for short “EID-Perry”]. For AY 2013-14, the appellant filed its return of income [for short “ITR”] on 29/11/2013 declaring total income at ₹Nil with a carry forward loss of ₹3,75,18,453/-, which by service of notice u/s 143(2) of the Act, was subjected to scrutiny and the assessment was finally culminated by solitary disallowance of ₹88,18,815/- as prior period item / expenditure debited to profit and loss account [for short ”P&L”] representing the balance of unabsorbed customs duty drawback written-off pertaining to financial year [for short “FY”] 2008-09 to 2010-11 i.e. revenant to AY 2009-10 to 2011-12.
5.2 Being aggrieved by the aforesaid disallowance, the assessee company carried the matter before first appellate authority [for short “FAA”], wherein the Ld. CIT(A) echoing the views of Ld. AO upheld the disallowance ingeminating that, the information for writing-off of such unabsorbed customs duty drawback was crystallised when the order of denial of refund was passed by the customs authorities which was much before the impugned assessment year and for the reason same is ineligible for allowance as it amounts to prior period item/expense.
5.3 Disputing the views of both the tax authorities below [for short “TAB”], the appellant knocked the doors of Tribunal on the grounds of appeal as laid at para 3 and rearticulated in para 4 hereinbefore.
6. During the course of physical hearing, the learned senior representative for the assessee [for short “AR”] at the outset referring to affidavit and application filed for condonation of delay in instituting the present appeal, reiterated its contents and prayed for condonation, which the learned departmental representative [for short “DR”] objected for unconvincing reasons. Insofar as the substantive ground is concerned, the Ld. AR patiently briefed the bench with applicable provisions of refund under respective Indirect Tax Laws and submitted that, the decision to write-off the balance of unabsorbed customs duty drawback is a business decision and the refund of which does not always coincide with the time-limit prescribed under the applicable laws, and further there exist a provision to make a claim for refund even after the expiry of prescribed time limit on paying fees or penalties. To drive home the contention, Ld. AR adverting to the decision of Hon’ble Bombay High Court in “CIT Vs Wackhardt International Ltd.”, reported in 314 ITR 11 submitted that, the decision as regards its irrecoverability was crystallised in the impugned year after it was communicated by the exporter sister concern EID Perry and pursuant to business decision the said amount is charged to P&L when all the legal recourse in en-cashing it has been exhausted by the appellant, for the reason claim is bonafied as well as justified with respect to year of its claim. Au contraire, the Ld. DR vehemently opposing the appellant’s contention submitted that, the assesse being a corporate entity is subjected to follow mercantile system of accounting in terms of section 145(1) of the Act, and so much is obligated to account for expense on a periodic basis, since the unabsorbed customs duty drawback of preceding three assessment years is written-off & claimed as expenditure in the impugned assessment year amounts to prior period expenditure, is not eligible to deduction as it falls out of expenditure incurred during the previous year relevant to assessment year under consideration, and placing reliance of order the Ld. TAB prayed for dismissal.
7. After hearing to rival contentions of both the parties; and subject to the provisions of rule 18 of ITAT, Rules perused the material placed on record, case laws relied upon by the appellant as well the respondent and duly considered the facts of the case in the light of settled legal position forewarned to parties present.
8. First thing first, in so far as the delay of 238 days in instituting the present appeal is concerned, we having regards to facts & circumstance, find force in the submission of the appellant in establishing the sufficiency of reasons in belated filing, consequently in the light of decision of Hon’ble Apex Court in “Collector Land Acquisition Vs MST Katiji and Others” reported at 167 ITR 5 (SC) and Hon’ble Bombay High Court in “CIT Vs Velingkar Brothers” reported at 289 ITR 382 (Bom), the delay stands condoned in the larger interest of justice.
9. In coming to sole and substantive ground, it evidently transpired that;
9.1 The appellant undisputedly is engaged in the business of extraction of lycopene from the imported tomato paste as its raw material, and such extraction is either sold in domestic market as such or exported through its sister concern EID Parry. Since the import / customs duty paid on material used in manufacture or processing of export product is given back or refunded to the exporter of finished goods in the form of an export promotion incentive, hence such amount of Duty drawback entitlement is adjusted from cost of materials imported and accounted as receivables. In other words, the portion of import / customs duty paid on input raw material relating to re-exported good is entitled for refund in the form of customs duty drawback, and till such exercise of refund is carried out, the balance is accounted as receivables under the head “balance with revenue authorities” and shown as current asset in the financial statement i.e. Balance-sheet by the appellant.
9.2 The appellant was holding impugned amount of disallowance as balance receivables from revenue authorities (i.e. refund due) however, after the expiry of statutory period of one year within which claim for refund of duty drawback can be made, the appellant was communicated ineligibility of refund claim of ₹78,88,000/- by its sister concern EID Parry, and further issued two debit notes dt. 31/12/2012 for ₹5,14,248/- & ₹4,16,567/- in relation to loss of claim of refund of duty drawback, pursuant to the said communication the impugned amount was written-off to P&L on its being crystallised in the impugned assessment.
9.3 The Ld. TAB without disputing the charge to P&L and its entitlement as bonafied claim disallowed the same as prior period expense holding that the loss was crystallised in the year of denial by the customs authorities upon the expiry of statutory period within which claim could be made and entertained.
10. Since the matter revolving around ‘prior period item’, before we ride the bi-cycle of adjudication to decide the allowability or otherwise upheld the disallowance, it is apropos to quote first “as to what constitutes a prior period item” from CBDT NOTIFICATION NO.9949 [F.NO.132/7/95-TPL]/SO 69(E), DATED 25-1-1996 issued in context of Section 145 Of The Income-Tax Act, 1961 and applicable for the impugned assessment year & read as;
In exercise of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies the following accounting standards to be followed by all assessee following the mercantile system of accounting, namely;
A. Accounting Standard I relating to disclosure of accounting policies:
B. Accounting standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies:
(7) Prior period items shall be separately disclosed in the profit and loss account in the previous year together with their nature and amount in a manner so that their impact on profit or loss in the previous year can be perceived.
(8) . . . . . (12) . . . . . . .
(13) For the purposes of paragraphs (7) to (12), the expressions: (a) . . . . . (d) . . . . . . .
(e) “Prior period items” means material charges or credits which arise in the previous year as a result of errors or omissions in the preparation of the financial statements of one or more previous years:
Provided that the charge or credit arising on the outcome of a contingency, which at the time of occurrence could not be estimated accurately shall not constitute the correction of an error but a change in estimate and such an item shall not be treated as a prior period item.
This notification shall come into force with effect from 1st day of April, 1996, and shall accordingly apply to the assessment year 1997-98 and subsequent assessment years.
11. The term ‘prior period items’ expressed by clause 13(e) of the Accounting Standard [for short “AS”] refers only to material charges that is expenses or credits that is income which arise in the previous year as a result of errors or omissions in the preparation of the financial statements of one or more preceding previous years, however the expression does not include other adjustments necessitated by circumstances or contingencies, which though related to preceding previous years, and are determined in the previous year subsequently. Moreover, any such adjustments to P&L circumstanced by contingencies are carved out of the expression of ‘prior period items’ by a proviso appended thereto. This by necessary means, any material charges or credits to P&L arising on the outcome of contingency falls out of the ambit of prior period item, consequently such material charges shall not be the subject matter of the disallowance within the purview of section 37(1) of the Act.
12. Returning to the extant appeal, it’s worthy to note first that, the balance of customs duty drawback written-off to P&L was never an item of expenditure but was a receivable asset held as recoverable from the revenue authorities which was denied by the customs authorities in the respective year when the refund claim was made. The contingency over recovery of refund had not became conclusive on the aforesaid denial, but in the evince of written communication from its sister concern EID-Perry and pursuant to business decision arrived in the best judgement having exhausted all remedial boulevards available to it. Thus when all procedural vis-à-vis legal recourse available to the appellant came to an end in the best judgement or estimation, in the evince of communication received from its sister concern EID-Perry, the claim for allowance in the P&L was made by creating a charge in terms of section 37(1) of the Act in the impugned year being the year of crystalized of loss of refund.
13. It is germane to note that, the denial of claim of refund of customs duty drawback by the customs authorities was the first instance of contingency in recovery which was finally culminated in the impugned year in evince of written communication from sister concern EID-Perry, hence such being the right year of crystallisation of loss of refund, is eligible for claim of allowance in terms of section 37(1) of the Act and this view finds force in the decision of Hon’ble Gujarat High Court in the case of “Saurastra Cement & Chemical Industry Ltd. Vs CIT” reported in 213 ITR 523 whereby their Lordship vide para 16 have held that;
“Having considered the materials on record, we do not find any justification for the disallowance of the claim of the assessee on such an abstract proposition. Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during there previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it relates to a transaction of the previous year.”
(Emphasis supplied)
14. Further the present claim of allowance for loss when treated as irrecoverable in the books of accounts maintained by the appellant also finds force [though the decision was in context of bad debts] in the ratio laid by Hon’ble Apex Court in “CIT Vs Wackhardt International Ltd” (Supra) wherein their lordships placing reliance on “Lord’s Dairy Farm Ltd. v. CIT” reported 27 ITR 700, vide para 3 have held that;
“As the assessee wrote of this amount in the year of account, the court was entitled to presume that the amount became irrecoverable when the assessee wrote it off in its books of account and that, therefore, the assessee was entitled to claim the amount. In our opinion, therefore, even if duty drawback was available for the previous assessment year, what will be relevant was when the same is treated as bad debt by the assessee in his books of account. Considering the ratio of that judgment, in our opinion, there is no infirmity in the view taken by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.”
15. In the light of aforesaid discussion, we leaving no iota of doubt hold the orders of both the Ld. TAB as contra legem; ergo we set aside the order of Ld. FAA and quash the order of assessment.
16. Resultantly, the appeal of the assessee is ALLOWED in aforestated terms.
In terms of rule 34 of ITAT Rules, the order pronounced in the open court on this Thursday 10th day of November, 2022.
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