2023 (1) TMI 263 - AT - Income Tax

Customs Duty Drawback Write-off Allowed as Deduction in Appeal Decision

The Tribunal allowed the appeal, concluding that the write-off of customs duty drawback by the appellant was eligible for deduction in the impugned ... Allowability of duty drawback written-off post expiry of prescribed due date within which claim for refund can be made, pursuant to business decision vis-a-vis irrecoverability - whether grounds raised in the present appeal are inconsonance with rule 8 of Income Tax Appellate Tribunal Rules, 1963 however for the purpose of adjudication, it shall suffice to articulate that, the sole & substantive ground is directed against the disallowance of customs duty drawback written-off relating to preceding assessment years ‘as prior period item’? - HELD THAT:- The term ‘prior period items’ expressed by clause 13(e) of the Accounting Standard [for short “AS”] refers only to material charges that is expenses or credits that is income which arise in the previous year as a result of errors or omissions in the preparation of the financial statements of one or more preceding previous years, however the expression does not include other adjustments necessitated by circumstances or contingencies, which though related to preceding previous years, and are determined in the previous year subsequently. Moreover, any such adjustments to P&L circumstanced by contingencies are carved out of the expression of ‘prior period items’ by a proviso appended thereto. This by necessary means, any material charges or credits to P&L arising on the outcome of contingency falls out of the ambit of prior period item, consequently such material charges shall not be the subject matter of the disallowance within the purview of section 37(1) of the Act. Returning to the extant appeal, it’s worthy to note first that, the balance of customs duty drawback written-off to P&L was never an item of expenditure but was a receivable asset held as recoverable from the revenue authorities which was denied by the customs authorities in the respective year when the refund claim was made. The contingency over recovery of refund had not became conclusive on the aforesaid denial, but in the evince of written communication from its sister concern EID-Perry and pursuant to business decision arrived in the best judgement having exhausted all remedial boulevards available to it. Thus when all procedural vis-à-vis legal recourse available to the appellant came to an end in the best judgement or estimation, in the evince of communication received from its sister concern EID-Perry, the claim for allowance in the P&L was made by creating a charge in terms of section 37(1) of the Act in the impugned year being the year of crystalized of loss of refund. It is germane to note that, the denial of claim of refund of customs duty drawback by the customs authorities was the first instance of contingency in recovery which was finally culminated in the impugned year in evince of written communication from sister concern EID-Perry, hence such being the right year of crystallisation of loss of refund, is eligible for claim of allowance in terms of section 37(1) of the Act and this view finds force in the decision of Hon'ble Gujarat High Court in the case of “Saurastra Cement & Chemical Industry Ltd. 1994 (10) TMI 30 - GUJARAT HIGH COURT Further the present claim of allowance for loss when treated as irrecoverable in the books of accounts maintained by the appellant also finds force [though the decision was in context of bad debts] in the ratio laid by Hon’ble Apex Court in “CIT Vs Wackhardt International Ltd. 2009 (2) TMI 138 - BOMBAY HIGH COURT even if duty drawback was available for the previous assessment year, what will be relevant was when the same is treated as bad debt by the assessee in his books of account. Appeal of assessee allowed. Issues Involved:1. Allowability of duty drawback written-off post expiry of prescribed due date.2. Determination of whether the written-off amount constitutes a prior period expense.3. Evaluation of the appellant's accounting practices and timing of the write-off.4. Consideration of judicial precedents and principles of judicial discipline.5. Condonation of delay in filing the appeal.Detailed Analysis:1. Allowability of Duty Drawback Written-Off Post Expiry of Prescribed Due Date:The appellant, a private limited company engaged in the extraction of Lycopene, claimed a deduction for customs duty drawback written-off amounting to Rs. 88,18,815. The appellant argued that the decision to write-off the balance of unabsorbed customs duty drawback was a business decision, and the refund does not always coincide with the prescribed time limit. The Tribunal acknowledged that the appellant was communicated ineligibility of the refund claim by its sister concern EID Parry, leading to the write-off in the impugned assessment year. The Tribunal found the claim bonafide and justified with respect to the year of its claim.2. Determination of Whether the Written-Off Amount Constitutes a Prior Period Expense:The Tribunal examined whether the written-off amount should be considered a prior period expense. According to the CBDT Notification No.9949 [F.NO.132/7/95-TPL]/SO 69(E), prior period items refer to material charges or credits arising from errors or omissions in previous years' financial statements. The Tribunal noted that the denial of the refund claim by customs authorities was the first instance of contingency, and the loss was crystallized in the impugned year based on the written communication from EID Parry. Therefore, the Tribunal concluded that the write-off did not constitute a prior period item.3. Evaluation of the Appellant's Accounting Practices and Timing of the Write-Off:The Tribunal considered the appellant's accounting practices, noting that the balance of customs duty drawback was held as a receivable asset. The Tribunal found that the contingency over recovery of the refund became conclusive in the impugned year, and the write-off was made pursuant to a business decision after exhausting all legal recourse. The Tribunal held that the loss of refund was crystallized in the impugned year, making it eligible for deduction under section 37(1) of the Income-tax Act.4. Consideration of Judicial Precedents and Principles of Judicial Discipline:The Tribunal referred to judicial precedents, including the Hon'ble Gujarat High Court's decision in 'Saurastra Cement & Chemical Industry Ltd. Vs CIT' and the Hon'ble Apex Court's decision in 'CIT Vs Wackhardt International Ltd.' The Tribunal emphasized that a liability should be considered crystallized and quantified during the relevant previous year for it to be adjusted in the books of account. The Tribunal found that the appellant's claim aligned with these judicial precedents, supporting the allowance of the write-off in the impugned year.5. Condonation of Delay in Filing the Appeal:The Tribunal addressed the delay of 238 days in filing the appeal. The appellant provided sufficient reasons for the delay, and the Tribunal, in the interest of justice, condoned the delay based on the decisions of the Hon'ble Apex Court in 'Collector Land Acquisition Vs MST Katiji and Others' and the Hon'ble Bombay High Court in 'CIT Vs Velingkar Brothers.'Conclusion:The Tribunal concluded that the orders of the lower authorities were contrary to law and set them aside. The appeal was allowed, and the write-off of the customs duty drawback was deemed eligible for deduction in the impugned assessment year. The order was pronounced in the open court on November 10, 2022.