2018 (5) TMI 353 - HC - Income Tax

High Court rules excise duty as business expense, not penalty, under Income Tax Act. Appeal dismissed.

The High Court upheld the deletion of disallowance under Section 37(1) of the Income Tax Act, amounting to Rs. 31,632,000, as a business expense rather ... Disallowance made u/s. 37(1) on account of penal excise duty debited in P & L Account - whether ITAT was justified in holding that alleged excise demand notice are not penal in nature without appreciating the fact that the same are for penalty demand levied by the Excise Department raised on account of fake export permit? - Held that:- Apart from penal expenses which has been done for the business activity, while considering the matter, CIT (A) has gone into the observations made by the competent authority and has come to the conclusion that it was not penal in nature. In that view of the matter explanation of Section 37 will not come into play. In that view of the matter that was business expenses and has been rightly upheld by both the authorities. Issues Involved:1. Justification of deletion of disallowance made under Section 37(1) of the Income Tax Act for penal excise duty.2. Nature of excise demand notice and its classification as penalty or business expense.Issue-wise Detailed Analysis:1. Justification of Deletion of Disallowance under Section 37(1):The appellant challenged the Tribunal's decision upholding the deletion of disallowance amounting to Rs. 31,632,000/- under Section 37(1) of the Income Tax Act, arguing that penal excise duty debited in the Profit & Loss Account should not be considered a business expense. Section 37(1) allows for deductions of expenses incurred wholly and exclusively for business purposes, excluding those prohibited by law. The appellant contended that the expenditure fell within this prohibition.The CIT (A) observed that the assessee, engaged in manufacturing ENA and Rectified Spirit, paid the amount to the State Excise Authority due to a violation of conditions in an affidavit filed with the Excise Authority. The affidavit stipulated that the assessee would be liable for additional excise duty if they failed to submit verification from the importing state's Excise Authority within 90 days. The CIT (A) concluded that the payment was not penal but compensatory, as it was excise duty paid during ordinary business operations, thus allowable under Section 37(1).The Tribunal confirmed this view, noting that the duty paid matched the rates notified by the government and was part of a contractual obligation to indemnify the excise department, not a penalty. The Tribunal referenced the Supreme Court's decision in Prakash Cotton Mills Pvt. Ltd. vs. CIT, which distinguished between penalties and compensatory payments, supporting the deduction under Section 37(1).2. Nature of Excise Demand Notice:The appellant argued that the excise demand notice was penal, related to a penalty for using fake export permits. However, the CIT (A) found no specific section of the Rajasthan Excise Act, 1950, or Rules under which the penalty was levied. The demand was based on the affidavit's conditions, not a statutory penalty. The CIT (A) and Tribunal both determined that the demand was for excise duty, not a penalty, as it compensated for the failure to submit required verification, aligning with the Supreme Court's guidelines in Prakash Cotton Mills Pvt. Ltd. vs. CIT and CIT vs. Ahmedabad Cotton Manufacturing Company Ltd.The Tribunal upheld the CIT (A)'s decision, emphasizing that the payment was compensatory and necessary for business operations, thus deductible under Section 37(1). The Tribunal cited relevant case law, including CIT vs. Hyderabad Allwyn Metal Works Limited and CIT, Gujarat vs. Tarun Commercial Mills Co. Ltd., supporting the view that the payment was not penal.Conclusion:The High Court found no substantial question of law, agreeing with the concurrent findings of the CIT (A) and Tribunal that the payment was a business expense, not penal in nature. The appeal was dismissed, affirming the deletion of disallowance under Section 37(1).