2014 (2) TMI 458 - AT - Income Tax

Tax Tribunal Rules in Favor of Taxpayer on Excise Duty and Interest Disallowance

DEPUTY COMMISSIONER OF INCOME TAX Versus M/s SHIV RAJ TOBACCO PVT LTD

The Tribunal upheld the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision to delete the addition of Rs. 51,68,488/- on account of Excise Duty paid, ... Deletion of addition made on account of excise duty – Held that:- The Excise Duty was paid under protest - He was not required to pay the Excise Duty but when the excise authorities have demanded, the assessee had paid the same - the assessee has gone before the Commissioner, Central Excise (Appeals) and won the case but the Department has preferred an appeal before the CEGAT - since the assessee has paid the Excise Duty under protest, it is expenditure incidental to his business and should be allowed u/s 37 of the Act – Relying upon Kedarnath Jute Manufacture Co. vs. CIT [1971 (8) TMI 10 - SUPREME Court] - the liabilities of the Excise Duty accrues on the taxable event taking places viz. manufacture of excisable goods - The liability is on the manufacturer and not ultimately on sellers - It was an enforceable legal liability allowable irrespectively of whether subsequently, exemption granted or the same has been contested in the appeal – there is no specific infirmity has been pointed out in the order of CIT(A) except placing heavy reliance upon the assessment order, the order of CIT(A) confirmed – Decided against Revenue. Deletion of disallowance of payment – Interest on advances and loans – Held that:- The assessee has furnished the details of interest free funds available with it - the assessee was having general reserve besides share capital which was utilized for interest free advances - The Revenue has not placed any evidence on record to establish that the borrowed funds were utilized for interest free advances – thus, no corresponding disallowance can be made – there was no infirmity in the order of CIT(A) – Decided against Revenue. Issues Involved:1. Deletion of addition of Rs. 51,68,488/- on account of Excise Duty paid.2. Deletion of addition of Rs. 7,67,437/- on account of disallowance of payment of interest to other parties.Detailed Analysis:1. Deletion of addition of Rs. 51,68,488/- on account of Excise Duty paid:The first issue pertains to the deletion of an addition of Rs. 51,68,488/- made by the Assessing Officer (AO) on account of Excise Duty paid. The assessee, a company engaged in the manufacturing and trading of fruits, vegetable powder items, and Agarbatti, had debited purchases exclusive of Excise Duty in the purchase account and did not charge any excise on sales. However, the Excise Duty was debited in the profit & loss account. The AO disallowed the Excise Duty amount, adding it back to the assessee's income, arguing that since the matter was sub judice, it should not be regarded as revenue expenditure.The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the Excise Duty was paid under protest to run the business smoothly and without hurdles from the Excise Department. The CIT(A) found merit in the assessee's contention, noting that the Excise Duty was a revenue expenditure under Section 37 of the Act and deleted the addition, referencing the Supreme Court's decision in Bharat Earth Movers vs. CIT [2000] 245 ITR 428 (SC).The Revenue appealed to the Tribunal, but the Tribunal upheld the CIT(A)'s decision, noting that the Excise Duty was an enforceable legal liability and not a contingent one. The Tribunal cited the Supreme Court's ruling in Kedarnath Jute Manufacture Co. vs. CIT 52 ITR 363 (SC), which held that liabilities of Excise Duty accrue on the manufacture of excisable goods and are allowable irrespective of subsequent exemption or appeal.2. Deletion of addition of Rs. 7,67,437/- on account of disallowance of payment of interest to other parties:The second issue involves the deletion of an addition of Rs. 7,67,437/- made by the AO on account of interest on advances and loans. The AO observed that the assessee had given advances to others and staff members without charging interest, leading to the disallowance of corresponding interest paid on borrowed funds.The assessee contended before the CIT(A) that it had sufficient interest-free funds used for the interest-free advances, supporting this with judicial pronouncements and details of interest-free funds. The CIT(A) accepted the assessee's explanation, noting that the assessee had a share capital, reserves, and surplus, and that the advances were for genuine business purposes. The CIT(A) referenced the ITAT Lucknow Bench's decision in Meenakshi Synthetics Pvt. Ltd. vs. ACIT 84 ITD 563, which held that non-charging of interest on loans alone is insufficient for disallowing interest paid on borrowed funds without establishing a nexus between borrowed capital and interest-free advances.The Revenue's appeal to the Tribunal was dismissed, with the Tribunal confirming the CIT(A)'s order. The Tribunal found no evidence from the Revenue to establish that borrowed funds were used for interest-free advances and upheld the CIT(A)'s decision.Conclusion:The Tribunal dismissed the Revenue's appeal and the assessee's Cross Objection, confirming the CIT(A)'s orders on both issues. The Tribunal emphasized the need for proper application of mind and recording of reasons when challenging one's own orders in different capacities. The judgment underscores the importance of substantiating claims with evidence and adhering to judicial precedents in tax matters.