Duty drawback accrual and compensatory interest deduction clarified for tax purposes under business income rules.

Income from duty drawback is taxable only when the right to receive it crystallises, not merely on the making of a claim; where the sanctioned amount was received only in the subsequent year, taxation in the earlier year was not justified. Interest paid on repayment of excess duty drawback was treated as compensatory, not penal, so it was allowable as a business deduction and was not barred by Explanation 1 to section 37(1).

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Issues: (i) Whether duty drawback received in the subsequent assessment year could be taxed in the impugned assessment year on the basis of accrual. (ii) Whether interest paid on excess duty drawback refunded was allowable as a business deduction.

Issue (i): Whether duty drawback received in the subsequent assessment year could be taxed in the impugned assessment year on the basis of accrual.

Analysis: The assessee accounted for duty drawback on the basis of the right to receive, and the revenue had accepted the treatment of other duty drawback receipts in the relevant year. The disputed amount was actually received only when sanctioned by the customs authorities in the subsequent year. Income can be brought to tax when it accrues and the right to receive becomes enforceable, not merely when a claim is made.

Conclusion: The addition on account of duty drawback of Rs. 1,50,215 was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether interest paid on excess duty drawback refunded was allowable as a business deduction.

Analysis: Rule 17 of the Customs drawback framework provides for repayment of excess drawback and interest thereon. The payment was held to be compensatory and not penal in nature. Since it was not a payment for any prohibited act or offence, the bar under Explanation 1 to section 37(1) did not apply, and the expenditure was deductible in computing business income.

Conclusion: The interest amount was allowed as a deduction and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded on the substantive tax issues, with relief granted on both the accrual dispute and the deductibility of interest, resulting in only a partial allowance of the appeal.

Ratio Decidendi: Income is taxable when the right to receive it crystallises, and interest paid on excess drawback repayment is allowable if it is compensatory rather than penal and is not hit by Explanation 1 to section 37(1).

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