Brief fact of the case
The respondent assessee was a hospital and diagnostic centre earning income under the head ‘Business & Profession’. During 1988-89 and 1992-93, it imported hospital equipment valued at Rs.27511988/- without payment of custom duty on the basis of a custom duty exemption certificate (CDEC) issued by the Director General of Health Service (DGHS). This imported equipment was capitalized on the actual value of the equipment paid and depreciation was claimed thereon from year to year at the prescribed rate. Later the exemption certificate granted to the assessee was withdrawn by DGHS on being failure of the assessee to fulfill the essential condition for retaining CDECs for import of hospital equipment resulting in demand of custom duty of Rs.37866864/- for import of equipment in the aforementioned years which by the order of Commissioner of Custom dated 28th October 2004 reduced to Rs.11004795/- along with fine of Rs.10000 and Rs.5000. Thereafter during October, November and December 2008, the assessee remitted the entire custom duty of Rs.11004795/- together with interest of Rs.952161/- after the appeal and subsequent SLP filed by the assessee were dismissed by Central Excise and Service Tax Appellate Tribunal and by the Supreme Court respectively. This amount of custom duty paid by the assessee was shown as addition to new plant & machinery and claimed 100% depreciation on the basis of reasoning as given by the assessee in reply to the letter to notice issued u/s 143(2) and 142(1) that ‘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 written down value (‘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’.
Held by the A.O.
The A.O. 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 Act.The entire amount of customs duty was therefore added back to the Assessee’s returned income. Alternatively, the AO held that since the Assessee had paid the customs duty in the financial year 2008-09, it had to be capitalized relevant to the AY 2009-10. Depreciation of 15% could be allowed in the current year. However,ultimately the AO added back the entire amount of customs duty to the returned income.
Held by CIT(A)
In an appeal preferred by the assessee, CIT(A) held that the enhanced cost of equipment would be taken into consideration from the AY 2005-06 when the CC passed an order dated 29th October 2004 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.
Held by ITAT
Aggrieved by an order of the CIT(A), the Revenue preferred an appeal before the ITAT and the Assessee preferred a cross-objection.In the impugned order dated 31st January 2014 the ITAT confirmed the order of CIT(A). The Revenue’s appeal as well as cross-objections of the Assesseeon this aspect was rejected.
Being aggrieved the Revenue preferred an appeal before the Hon’ble High Court against the order of ITAT. The question urged for consideration by the Revenue in this appeal was in which A.Y. can the Assessee capitalize the customs duty levied on import of hospital equipment and claim depreciation?
Contention of Revenue
It was urged by the Ld. Senior Counsel appearing for the Revenue, that the liability to pay customs duty crystallized only in the AY 2008-09 afterthe Assessee had exhausted all legal remedies. It could have beencapitalized only in the AY 2009-10 by allowing normal rate of 15%depreciation as against 100% claimed by the Assessee.
Contention of Assessee
Learned counsel for the Respondent-Assessee, referred to the decision of the Madras High Court in the CIT v. Funskool (India) Limited (2007) 294 ITR 642 (Mad) which according to him covered the issue in favour of the Assessee.
Held by Court
In Funskool (India) Limited the question was whether depreciation could be claimed on the additional customs duty paid in the previous year relevant to the AY in question although such customs duty was in respect of machinery that was imported and installed in an earlier year. That question was answered in the affirmative by the Madras High Court by following the judgment of the Gujarat High Court in Atlas Radioand Electronics P. Limited v. Commissioner of Income Tax (1994) 207 ITR329 (Guj) in which it was held that even though the sales tax was paid in a subsequent year, the liability to pay sales tax arose in the accounting period relevant to the assessment year in which the machinery was purchased. It was held on the facts of that case that the development rebate had to be claimed in the AY in which the machinery was purchased.
Following the above decision, it was held that in the instant case, the AO erred in disallowing the capitalization of the additional customs duty in the manner claimed by the Assessee and adding the entire customs duty paid in the relevant AY to the income of the Assessee. The impugned order of the ITAT affirming the decision of the CIT(A) that the enhanced cost of equipment should be taken into consideration from AY 2005-06 onwards and that the WDV should be reworked for the AY in question does not call for interference. The appeal of the Revenue was accordingly dismissed.