2023 (7) TMI 796 - AT - Income Tax

Income Tax Appeal: Assessee wins on key issues, interest on excess Duty Drawback deductible

The Tribunal partly allowed the appeal by the assessee, ruling in favor of the assessee on the primary issues. The addition of Rs. 1,50,265 made by the AO ... Accrual of income in current AY - duty drawback and service tax refund - HELD THAT:- For the refund of duty drawback the assessee accounts the same when it gets the right to receive the duty drawback which is nothing but mercantile system of accounting. This fact has not been disputed by the revenue authorities in any of the previous years as submitted by the ld. AR. In the present case, we conclude that the income would be receivable only when the income accrues to the assessee and income would accrue to the assessee only when the assessee gets such a right to receive the income. The assessee would get a right to receive only when it is sanctioned to the assessee by the custom authorities and not when the assessee makes a claim of the same. This view is supported by the judgment of CIT v. Asea Brown Boveri Ltd [2020 (7) TMI 20 - KARNATAKA HIGH COURT] and CIT v. Sriyansh Knitters (P) Ltd. [2010 (10) TMI 638 - PUNJAB AND HARYANA HIGH COURT] - Ground No.2 raised by the assessee on this issue is allowed. Interest payment on excess claim of refund - addition u/s 37(1) - adjustment against the duty drawback for the period for which the assessee benefitted on the excess amount of duty drawback @ 1% instead of 0.15 - HELD THAT:- Rule provides refund of excess claim and interest thereon, but it is not in the nature of penalty or fine where the Rule itself provides for payment of principal as well as interest. Hence, in our considered opinion, it should not be considered as penalty or fine. Therefore, the assessee has not violated the provisions of Explanation 1 to section 37(1) of the I.T. Act. As relying n Attire Designers (P.) Ltd [2022 (9) TMI 1102 - DELHI HIGH COURT] we hold that the interest paid by the assessee towards excess claim of refund of duty drawback is not penal in nature. Therefore, Explanation 1 to section 37 will not apply and assessee is eligible for claiming it as expenditure. Since the assessee has adjusted the interest paid from the refund of export benefit, it will not affect the profitability of the company. Accordingly, this issue raised by the assessee is allowed. Issues Involved:1. Legality of the addition of Rs. 1,50,265/- by the AO.2. Validity of the addition of Rs. 3,30,674/- as interest paid on excess Duty Drawback claimed.3. Reduction of Rs. 8,200/- from income declared for FY 2018-19 relevant to AY 2019-20.Summary:Issue 1: Addition of Rs. 1,50,265/- by AOThe assessee contested the addition of Rs. 1,50,265/- made by the AO, asserting that this amount was taxed in the subsequent assessment year 2019-20. The AO observed that the assessee followed a cash system of accounting for receipt of duty drawback instead of a mercantile system, leading to the addition of Rs. 1,50,215 for FY 2017-18. The CIT(A) upheld this addition. However, the Tribunal concluded that the income would accrue only when the right to receive the duty drawback is sanctioned by the customs authorities, not when the claim is made. This view was supported by the judgments in CIT v. Asea Brown Boveri Ltd. and CIT v. Sriyansh Knitters (P) Ltd. Thus, the Tribunal allowed ground No. 2 raised by the assessee, making the alternative ground No. 4 redundant.Issue 2: Interest Paid on Excess Duty Drawback ClaimedThe assessee claimed that the interest paid on the excess refund of Rs. 3,30,674/- should be deductible under section 37 of the Act as it was compensatory in nature. The AO and CIT(A) disagreed, stating that the interest was not part of the duty drawback and was penal in nature. The Tribunal, referencing Rule 17 and various judgments, including Principal Commissioner of Income-tax v. Attire Designers (P.) Ltd., concluded that the interest paid was compensatory and not penal. Thus, it should not be considered a penalty or fine, and the assessee was eligible to claim it as an expenditure.Issue 3: Reduction of Rs. 8,200/-The assessee sought to reduce Rs. 8,200/- from the income declared for FY 2018-19, which was re-credited as excess Duty Drawback claimed. The AO added this amount back to the total income, which was upheld by the CIT(A). The Tribunal did not specifically address this issue in the final judgment, implying that it was subsumed under the broader discussions of the other issues.Conclusion:The appeal by the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the primary issues of the addition of Rs. 1,50,215 and the deductibility of the interest paid on the excess Duty Drawback claimed.