Interest paid on delay in paying customs duty is deductible

M/s M. J. Exports Pvt. Ltd. Vs DCIT (ITAT Mumbai)

The facts in brief are that the Collector of customs levied customs duty and penalty on the goods imported by the assessee in F.Y. 1988-89 vide order dated 28t^h January 1994 and subsequently, levied interest for not paying the customs duty and penalty in time. The assessee charged Rs.3,88,05,315/- as interest to profit and loss account by claiming that the liability crystallized in the year under appeal since the payment of interest was made on various dates between 12.12.2006 to 28.08.2007. The learned Assessing Officer disallowed the amount of Rs.3,88,05,315/-, which was paid to the customs authorities, on the ground that the interest liability crystallized in F.Y. 2001-02. The assessee disputed the levy of customs duty and penalty. Finally, the Hon’ble Apex Court upheld the levy of customs duty and penalty vide order dated 14.08.2001. In view of this factual matrix the learned Assessing Officer held that liability of paying interest also crystallized in F.Y. 2001-02 itself as payment of interest is mandatory u/s. 28AA of the Customs Act 1962. The assessee disputed the levy of interest before the Hon’ble High Court. It is noted that the assessee challenged the interest payment before various authorities and ultimately against the interest demand a Writ Petition was filed before the Hon’ble Bombay High Court (WP No. 338/2006) order dated 28th March 2006 (pages 9 to 23 of the Paper-book). The stand of the Revenue is that the levy of interest is applicable from the date when the Hon’ble Apex Court confirmed the liability of customs duty and penalty. The issue before us whether the interest on delayed payment is allowable expenditure or not. There is no dispute to the fact that the assessee made the payment of the interest also. In such a situation, we are of the view that the payment of interest is an allowable deduction u/s. 37(1) of the Income Tax Act. The Hon’ble Apex Court in Mahalaxmi Sugar Mills Co. vs. CIT (1980) 123 ITR 429 (SC), reversing (1972) 85 ITR 320 (Delhi) held that interest paid for delayed payment of such taxes is a deductible item of expenditure. The ratio laid down in Kamlapat Motilal vs. CIT (104 ITR 783) (Allahabad) and Russel Properties Pvt. Ltd. (1982) 137 ITR 358 (Cal). In view of the decision from Hon’ble Apex Court in Mahalaxmi Sugar Mills case (supra), the following decisions were impliedly overruled on the point:-

i) Vishnu Sugar Mills Ltd. vs. CIT 113 ITR 583 (Cal)

ii) Saraya Sugar Mills P. Ltd. vs. CIT 116 ITR 387 (Allahabad) (FB)

iii) CIT vs. L H Sugar Factories & Oil Mills Pvt. Ltd. (123 ITR 596) (Allahabad)

iv) CIT vs. Lachhmandas Mathuradas 124 ITR 411 (Allahabad)

7. On the issue of interest for delayed payments reference may be made to Triveni Engineering Works Ltd. vs. CIT (1983) 144 ITR 732 (Allahabad) (FB); CIT vs. Laxmidevi Sugar Mills Pvt. Ltd. (2000) 241 ITR 131, 132 (Allahabad); Raj Narayan Agarwal vs. CIT (2003) 259 ITR 720, 722 (Del); CIT vs. Delhi Automobiles (2005) 272 ITR 381, 382 (Del) wherein interest paid on delay in paying sales tax was held to be deductible. Admittedly, there are contrary decisions also wherein it was held that interest on delayed payments is not an allowable deduction. The ratio laid down in CIT vs. J K Synthetics Ltd. (2009) 309 ITR 371 (Del) further supports the case of the assessee.

If this issue is analyzed with respect to section 43B of the Act, the scope and effect of the amendment made in the first proviso to section 43B, by the Finance (No.2) Act 1998, have been elaborated in departmental Circular No. 772 dated 23^rd December 1998, wherein certain expenses were held to be allowable only on actual payment. There is no dispute, in the present appeal that interest was paid by the assessee. It is different matter that the assessee carried the matter in appeal before the Hon’ble High Court or before the Hon’ble Apex Court and contested a legal battle, though failed, but fact remains that the customs duty as well as interest on delayed payments was made by the assessee. Demand was raised by the department on 18.09.2006 therefore liability arose in the present assessment year. Thus, the deduction has to be allowed either u/s. 37 or u/s. 43B of the Act. Therefore, this ground of the assessee is allowed.

FULL TEXT OF THE ITAT JUDGEMENT

Both appeals are by the assessee against the impugned order both dated 23/05/2012 for A.Y. 2007-08 and 2008-09 of the First Appellate Authority, Mumbai.

2 First we shall take up the appeal in ITA No. 4874/Mum/2012 for A.Y. 2007-08, wherein first ground raised by the assessee pertains to confirming rental income of Rs.30,29,390/- from M/s. Choradia Fashions Pvt. Ltd., in respect of Shiv Sagar Estate particularly when that income was taxed in the hands of Shri J M Shah as the property was already transferred by the assessee to him on 1^st Jan. 2005 in pursuance of permission of the appropriate authority under section 269UL(3) of the Act dated 4^th March 1995.

3. During hearing our attention was invited by the learned counsel for the assessee to an declaration under section 158A(1) of the Income Tax Act, 1961 (hereinafter the Act) (form No.8) claiming that identical question of law is pending before the Hon’ble High Court. The learned DR contended that this issue has already been decided against the assessee by the Tribunal. The claim of the learned DR was contended to be corrected by the learned counsel for the assessee by adding that whatever will be the decision from the Hon’ble High Court will be binding on both sides.

4. We have considered the rival submissions and perused the material available on record. In view of the admission of substantial question of law on the issue in hand, by the Hon’ble High Court we allow the declaration of the assessee filed u/s. 158A(1) of the Act and direct that whatever will be the decision from the Hon’ble Jurisdictional High Court will be binding upon the respective parties. However, since the issue has been decided against the assessee, for the time being (till the outcome from the Hon’ble High Court) the issue is decided against the assessee.

5. Ground nos. 2 to 4 raised by the assessee pertains to confirming in respect of disallowance of interest on customs duty amounting to Rs.3,88,04,315/- without appreciating various decisions. More specifically when the Assessing Officer admitted that payment of interest on custom duty was for delayed payment of custom duty therefore, the same forms part and parcel of liability of customs duty. The learned counsel for the assessee advanced identical arguments by placing reliance upon the decision from Hon’ble Apex court in Mahalaxmi Sugar Mills Co. vs. CIT (123 ITR 429) (SC). It was also pleaded that the decision from Hon’ble Calcutta High Court in Hindustan Motors Ltd. vs. CIT (1996)(218 ITR 450) (Cal) is not applicable being on different facts by explaining that liability crystallized in A Y 2007-08 and demand was raised on 18.09.2006. Our attention was invited to a certificate from Canara Bank dated 20.09.1997 by claiming that either the same can be allowed u/s. 37 of the Act for which reliance was placed upon the decision in 250 ITR 279 (Madras) or alternatively u/s. 43B for which reliance was placed in 203 ITR 375 (Cal.); 77 Taxman 628 (Cal). On the other hand, the learned DR defended the conclusion arrived at in the impugned order.

6. We have considered the rival submissions and perused the material available on record. The facts in brief are that the Collector of customs levied customs duty and penalty on the goods imported by the assessee in F.Y. 1988-89 vide order dated 28t^h January 1994 and subsequently, levied interest for not paying the customs duty and penalty in time. The assessee charged Rs.3,88,05,315/- as interest to profit and loss account by claiming that the liability crystallized in the year under appeal since the payment of interest was made on various dates between 12.12.2006 to 28.08.2007. The learned Assessing Officer disallowed the amount of Rs.3,88,05,315/-, which was paid to the customs authorities, on the ground that the interest liability crystallized in F.Y. 2001-02. The assessee disputed the levy of customs duty and penalty. Finally, the Hon’ble Apex Court upheld the levy of customs duty and penalty vide order dated 14.08.2001. In view of this factual matrix the learned Assessing Officer held that liability of paying interest also crystallized in F.Y. 2001-02 itself as payment of interest is mandatory u/s. 28AA of the Customs Act 1962. The assessee disputed the levy of interest before the Hon’ble High Court. It is noted that the assessee challenged the interest payment before various authorities and ultimately against the interest demand a Writ Petition was filed before the Hon’ble Bombay High Court (WP No. 338/2006) order dated 28t^h March 2006 (pages 9 to 23 of the Paper-book). The stand of the Revenue is that the levy of interest is applicable from the date when the Hon’ble Apex Court confirmed the liability of customs duty and penalty. The issue before us whether the interest on delayed payment is allowable expenditure or not. There is no dispute to the fact that the assessee made the payment of the interest also. In such a situation, we are of the view that the payment of interest is an allowable deduction u/s. 37(1) of the Income Tax Act. The Hon’ble Apex Court in Mahalaxmi Sugar Mills Co. vs. CIT (1980) 123 ITR 429 (SC), reversing (1972) 85 ITR 320 (Delhi) held that interest paid for delayed payment of such taxes is a deductible item of expenditure. The ratio laid down in Kamlapat Motilal vs. CIT (104 ITR 783) (Allahabad) and Russel Properties Pvt. Ltd. (1982) 137 ITR 358 (Cal). In view of the decision from Hon’ble Apex Court in Mahalaxmi Sugar Mills case (supra), the following decisions were impliedly overruled on the point:-

i) Vishnu Sugar Mills Ltd. vs. CIT 113 ITR 583 (Cal)

ii) Saraya Sugar Mills P. Ltd. vs. CIT 116 ITR 387 (Allahabad) (FB)

iii) CIT vs. L H Sugar Factories & Oil Mills Pvt. Ltd. (123 ITR 596) (Allahabad)

iv) CIT vs. Lachhmandas Mathuradas 124 ITR 411 (Allahabad)

7. On the issue of interest for delayed payments reference may be made to Triveni Engineering Works Ltd. vs. CIT (1983) 144 ITR 732 (Allahabad) (FB); CIT vs. Laxmidevi Sugar Mills Pvt. Ltd. (2000) 241 ITR 131, 132 (Allahabad); Raj Narayan Agarwal vs. CIT (2003) 259 ITR 720, 722 (Del); CIT vs. Delhi Automobiles (2005) 272 ITR 381, 382 (Del) wherein interest paid on delay in paying sales tax was held to be deductible. Admittedly, there are contrary decisions also wherein it was held that interest on delayed payments is not an allowable deduction. The ratio laid down in CIT vs. J K Synthetics Ltd. (2009) 309 ITR 371 (Del) further supports the case of the assessee.

8. If this issue is analyzed with respect to section 43B of the Act, the scope and effect of the amendment made in the first proviso to section 43B, by the Finance (No.2) Act 1998, have been elaborated in departmental Circular No. 772 dated 23^rd December 1998, wherein certain expenses were held to be allowable only on actual payment. There is no dispute, in the present appeal that interest was paid by the assessee. It is different matter that the assessee carried the matter in appeal before the Hon’ble High Court or before the Hon’ble Apex Court and contested a legal battle, though failed, but fact remains that the customs duty as well as interest on delayed payments was made by the assessee. Demand was raised by the department on 18.09.2006 therefore liability arose in the present assessment year. Thus, the deduction has to be allowed either u/s. 37 or u/s. 43B of the Act. Therefore, this ground of the assessee is allowed.

9. Thus, the appeal of the assessee is partly allowed and disposed off in terms indicated here in above.

10. Now we shall take up the appeal for A.Y. 2008-09 (ITA No. 4937/Mum/2012), wherein, the only ground raised pertains to confirming the rental income of Rs.33,93,939/- from M/s Choradia Fashions Pvt. Ltd, in respect of Shiv Sagar Estate was taxed in the hands of the assessee as the property had already transferred. The ld. counsel for the assessee advanced arguments, which is identical to the ground raised. On the other hand, the ld. DR defended the conclusion arrived at in the impugned order. However, it was also pointed out that the assessee has filed declaration u/s 158A(1) of the Act, by claiming that identical question of law is pending before the Hon’ble High Court.

10.1. Considering the totality of facts and the order of the Tribunal (ground no.4)(ITA No.6618/Mum/2009)(para-13), we find that an elaborate discussion has been made by the Tribunal and finally the order of the Commissioner of Income Tax (Appeal) was affirmed, confirming the rental receipts by the assessee as its income. Thus, this ground of the assessee is dismissed. However, in view of the application/declaration, filed by the assessee, u/s 158A(1) of the Act, the outcome from the Hon’ble High Court will be applicable on both the parties.

Finally, the appeal of the assessee (ITA No.4874/Mum/2012) is partly allowed, whereas, appeal in (ITA No.4937/Mum/2013) is dismissed.

This order was pronounced in the open court in the presence of ld. representative from both sides at the conclusion of the hearing on 28/04/2016