Deduction u/s 43B is allowable in case of interest paid on customs duty

Enkei Wheels India Ltd. Vs DCIT (ITAT Pune)

ITAT Pune held that interest paid on customs duty is allowable as deduction under section 43B of the Income Tax Act, 1961.

Facts- During the assessment proceedings AO observed that assessee had paid Rs.3,37,96,354/- on account payment of interest on custom duty on various dates. The assessee claimed said amount as deduction allowable under section 43B of the Act as being paid on or before due date of filing of return of income for the relevant assessment year. The AO disallowed the said amount stating that it is not allowable deduction under section 43B of the Act. CIT(A) upheld the disallowance.

Conclusion- In the case of Shankar Trading Co Pvt Ltd, the assessee company had paid interest on Sale tax. The AO had not allowed the said interest as deduction u/s 43B of the Act. However, the Hon’ble Delhi High Court held that it is an allowable deduction u/s 43B of the Act.

The facts of the Shankar trading Co P. Ltd and that of the assessee are identical. In the case of the assessee, the assessee has paid Interest on Customs Duty. In the case of the assessee the Interest on Customs Duty is automatic. Hence, the decision of Hon’ble Delhi High Court is applicable in the case of the assessee.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the Assessee is directed against the order of ld.Commissioner of Income Tax(Appeals)-1, Pune, dated 25.03.2019for the A.Y. 2013-14 emanating from the order of Assessing Officer (AO) passed under section 143(3) of the Act, 1961 dated 23/12/2016. The assessee has raised the following grounds of appeal:

“1. The learned CIT(A) erred in confirming the disallowance of interest of Rs.3,37,96,354/- paid on account of delayed payment of custom duty on the ground that the same was disallowable in view of explanation (1) to section37(1) of the Act.

2. The learned CIT(A) failed to appreciate that the interest on delayed payment of custom duty was not a payment which was in the nature of any offence or prohibited by law and therefore, the provisions of explanation (1) to section 37(1) were not applicable and accordingly, there was no reason to disallow the claim of the assessee company.

3. The learned CIT(A) further erred in holding that interest on delayed payment on custom duty was not covered by the provisions of section 43 B and hence, the disallowance made by the A.O. was justified.

4. The learned CIT(A) erred in not appreciating that interest on delayed payment on custom duty was covered by the provisions of section 43B and therefore, the assessee was justified in claiming the said amount as a deduction in the year under consideration.

5. Without prejudice to Ground Nos. 3 and 4, the assessee submits that in case, it is held that the provisions of 43B are not applicable to the interest paid on account of delay in payment of custom duty, in that event, the total interest debited in the books of Rs.7,85,20,569/- may kindly be allowed as a deduction while computing the income of the assessee company.”

2. Brief facts of the case : In this case during the assessment proceedings the Assessing Officer(AO) observed that assessee had paid Rs.3,37,96,354/- on account payment of interest on custom duty on various dates. The assessee claimed said amount as deduction allowable under section 43B of the Act as being paid on or before due date of filing of return of income for the relevant assessment year. The AO disallowed the said amount stating that it is not allowable deduction under section 43B of the Act. The ld.CIT(A) upheld the disallowance. The facts mentioned in para 6.6.3 of the ld.CIT(A)’s order are as under:

“I find that Enkei Castalloy Ltd., which was carrying on business of manufacturing auto parts and aluminum alloy wheels had imported raw materials under the Advance Licensing Scheme issued by the Director General of Foreign Trade (DGFT) and as per the terms and conditions of the said advance licenses, Enkei Castalloy Ltd. had to fulfill certain export obligation within the stipulated time i.e. within 24 months from the date of issue of license. The said license was later on extended to 36 months by the DGFT. Later on, by the order of Hon’ble High Court of Bombay, dated 26.02.2010, Enkei Castalloy Ltd. got demerged and two companies were formed namely: Alicon Castloy Ltd. (Demerged Company) and Enkei Wheels India Ltd. (the appellant company). After demerged, 4 Advance Authorization Licenses were transferred by the DGFT to the appellant company on 03.02.2012 and the details of which is as under:-

Even after the transfer of licenses, the appellant could not fulfill export obligation and therefore the Director General of Central Excise Investigation (DGCEI) conducted raid to the office of the appellant company and the appellant company admitted that the export obligation could not be fulfilled and there was violation of conditions as per Notification No. 93/2004-CUS dated 10.09.2004. The said letter of the DGCEI dated 18.02.2013 is extracted below, for ready reference:

Accordingly, the DGFT directed the appellant company to make payment of duty with interest and thereafter during the F.Y. 2013­14, the assessee has made payment of Rs.3.37 Crores with interest, for which the claim has been made u/s.43B.”

3. Aggrieved by the order of the ld.CIT(A) assessee filed the appeal before this Tribunal.

4. Submission of Ld.AR:

The ld.Authorised Representative for the appellant assessee submitted that the appellant assessee was required to pay Customs Duty as per the order of Director General of Central Excise Intelligence (DGCEI) dated 18/2/2013. He filed copy of the said order at paper book page number 72-73. The total interest debited was Rs.7,85,20,569/- out of which the assessee paid an amount of Rs. 3,37,96,354/- before the due date of filling the return of income. Accordingly, the amount of Rs.3,37,96,354/- was claimed as deduction u/s 43B.The Ld.AR submitted that it is an allowable deduction u/s 43B of the Act. He relied on following case laws :

CIT v/s Andhra Sugars Ltd 367 ITR 195

CIT Vs. UP Distillary 160 ITR 0444

5. The ld.DR relied on the orders of the Lower Authorities.

Findings and Discussions:

6. We have heard both the parties and perused the records. It is a fact that assessee had paid interest of Rs.3,37,96,354/- on custom duty and the same has been claimed by the assessee as deduction allowable under section 43B of the Act. The assessee company has paid the custom duty and interest as per the order of Director General of Central Excise Intelligence order date 18.02.2013, which is enclosed at page 72, 73 of the Paper book. The para 2 of the said order is reproduced here as under :

Quote, “ 2. During the course of investigation your company officials have admitted the fact of violation of the conditions of the notification No. 93/2004-Cus dated 10.09.2004 and the duty liabilities arising thereon. In this connections, the total Duty Liability in respect of the raw material imported under the said Advance Authorisation works out to Rs. 16,72,50,954/-(including duty of Rs.9,15,31,972/- and Interest of Rs.7,57,18,982/- as on 14.02.2013) out of which Rs. 2.78 Crores has been paid by you till date….You are hereby directed to make payment of the remaining amount of Duty along with interest.” Unquote.

7. The DGCEI has enclosed calculation of Duty along with the said order vis-à-vis Raw material giving quantity of raw material, Duty liability, Additional Duty and Interest at the rate of 15% Per Annum.

7.1 Thus, in the Order of DGCEI the amount of Duty and Interest has been specifically mentioned.

8. The relevant part of the notification No. 93/2004-Cus dated 10.09.2004 is reproduced here as under :

Quote, “(iii) that the importer at the time of clearance of the imported materials executes a bond with such surety or security and in such form and for such sum as may be specified by the Deputy Commissioner of Customs or Assistant Commissioner of Customs, as the case may be, binding himself to pay on demand an amount equal to the duty leviable, but for the exemption contained herein, on the imported materials in respect of which the conditions specified in this notification have not been complied with, together with interest at the rate of fifteen per cent. per annum from the date of clearance of the said materials :” Unquote.

9. The plain reading of the notification No. 93/2004-Cus dated 10.09.2004 explains that Government had exempted payment of Duty, Additional Duty for Import against Advance licenses provided the importer fulfills the export obligation within the specified time.

10. In the case of the assessee, it was observed by the DGCEI, that the assessee failed to fulfill export obligation. Hence, DGCEI, directed the assessee to pay the Duty and interest. Thus, the interest paid is not a penal interest. The assessee was supposed to pay the duty on import of raw material but had not paid the duty because of exemption provided under notification No.93/2004-Cus dated 10.09.2004, however, due to violation of the conditions mentioned in the notification, the DGCEI directed the assessee to pay Duty along with the interest at the rate of 15% PA. Therefore, the Ld.CIT(A)’s findings that the interest paid was penal in nature is erroneous. The Ld.CIT(A) had not referred to the said notification of the Customs Department. We find support from the order of Hon’ble SC in the case of Mahalakshmi Sugar Mills Co Ltd Vs. CIT [1980] 123 ITR 429 (SC) , in which the Hon’ble SC has held as under :

Quote, “In our opinion, the interest paid under s. 3(3) of the Cess Act cannot be described as a penalty paid for an infringement of the law.” Unquote.

11. Section 43B is reproduced here as under : Certain deductions to be only on actual payment.

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

[(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or]

(b), (c), (d), (e) and (f)……                            * *         * *

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :”

7.1 From the plain reading of the above, it is evident that deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess, or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him, irrespective of the previous year in which the liability to pay was incurred on the payment of such sum as per method of accounting”

11.2 The Hon’ble High Court of Delhi in the case of Shankar Trading Co P Ltd Vs CIT 342 ITR 81(Del) has held as under :

Quote, “7. Having considered the arguments advanced by the learned counsel for the parties, we find that the Income-tax Appellate Tribunal has rejected the claim of the assessee only on the ground that the amount of interest of Rs.10,04,408 did not fall within the expression “any sum payable” used in section 43B of the said Act. However, we find that section 17A(2) of the Himachal Pradesh General Sales Tax Act, 1968, specifically provides that if the amount of tax or penalty due from a dealer is not paid by him within the period specified in the notice of demand or, if no period is specified within thirty days from the service of such notice, the dealer shall, in addition to the amount of tax or penalty, as the case may be, be liable to pay simple interest on such amount at the rate of one percentum per month for the first thirty days and for the period subsequent thereto at the rate of one and a half percentum per month. It is, therefore, clear that when there is a demand of the tax and that is not paid within the period specified in the demand or within thirty days if no period is specified in the said demand notice, interest is automatically payable by the dealer. The present case is clearly covered by the said provision. It is clear that once there is a notice of demand for the tax and the same is not paid, as indicated above, the interest becomes automatically payable. In this regard, we find that the Tribunal, not having considered the provisions of section 17A(2) of the Himachal Pradesh General Sales Tax Act, 1968, has committed an error in law. We also note that the computation of 18 per cent. of sales tax is based on the provisions of section 17A(2) which requires the rate of interest to be one and a half percentum per month. 8. Consequently, we answer the question in the negative, that is, in favour of the assessee and against the Revenue” Unquote.

12. In the case of Shankar Trading Co Pvt Ltd (supra) the assessee company had paid interest on Sale tax. The AO had not allowed the said interest as deduction u/s43B of the Act. However, the Hon’ble Delhi High Court held that it is an allowable deduction u/s43B of the Act.

12.1 The facts of the Shankar trading Co P. Ltd (supra) and that of the assessee are identical. In the case of the assessee, the assessee has paid Interest on Customs Duty. In the case of the assessee the Interest on Customs Duty is automatic. Hence, the decision of Hon’ble Delhi High Court is applicable in the case of the assessee.

12.2 The Hon’ble High Court of Telangana and Andhra Pradesh has held in the case of CIT Vs. Andhra Sugar Ltd that provisions of section 43B are applicable on Interest paid on Purchase duty.

12.3 Similarly, the ratio laid down by Hon’ble High Court of Telangana and Andhra Pradesh is applicable in the case of the assessee.

12.4 Therefore, for all the reasons discussed above, we are of the considered opinion that the Interest paid by the assessee of Rs.3,37396,354/- on Customs Duty is allowable as deduction u/s 43B of the Act .

In the result, appeal of the assessee is allowed.

Order pronounced in the open Court on 11^th January, 2023.