Customs duty paid under protest deductible u/s 43B; s.143(1)(a)(iv) adjustment removed to prevent double taxation

The ITAT Delhi allowed the assessee's appeal, holding that customs duty paid under protest is deductible u/s 43B in the year of actual payment, irrespective of the year in which the liability was incurred. It held that once the customs authority permits clearance of goods, the statutory liability crystallizes in the year of payment for purposes of s. 43B. The Tribunal rejected the AO's adjustment u/s 143(1)(a)(iv), noting that the assessee had already offered any subsequent refund to tax in AY 2020-21, and sustaining the disallowance would result in impermissible double taxation.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether customs duty/Extra Duty Deposit (EDD) paid under protest, pursuant to a quantified demand of customs authorities, is allowable as deduction under section 43B of the Income-tax Act, 1961 in the year of payment, notwithstanding provisional character, pendency of proceedings, or accounting treatment.

1.2 Whether sustaining disallowance of such customs duty/EDD, when the subsequent refund has been offered to tax in later assessment years, would result in impermissible double taxation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deductibility under section 43B of customs duty/EDD paid under protest

Legal framework

2.1 The judgment considers section 43B of the Income-tax Act, 1961, which permits deduction of specified statutory liabilities only on actual payment, "notwithstanding anything contained in any other provision of this Act" and irrespective of the method of accounting followed by the assessee.

2.2 The Court refers to principles laid down by the Supreme Court in decisions holding that once statutory liability is quantified and accrued, payment made in discharge of such liability is allowable, even if the matter is pending in appeal or further adjudication.

Interpretation and reasoning

2.3 The assessee imported goods from a related party and, as per CBEC/SVB instructions and Circular No. 5/2016 dated 09.02.2016, was required to pay 1% Extra Duty Deposit (EDD) on a provisional basis until completion of valuation investigation. This was paid as customs duty "under protest".

2.4 The Court finds that the assessee's liability to pay customs duty arose on raising of demand by customs authorities in the year of import and on passing of the order for clearance of goods. Once the customs authority orders clearance, the statutory liability to pay customs duty is deemed to have been incurred in that year.

2.5 The Court observes that the amount paid, though under protest and subject to final determination, was in discharge of a quantified statutory demand and therefore constitutes "payment" of a statutory liability within the meaning of section 43B.

2.6 It is held that section 43B creates a clear departure from the assessee's method of accounting and allows deduction in the year of actual payment, even if the liability was incurred in a different year and irrespective of whether the amount has been debited to the profit and loss account.

2.7 Applying these principles and relying on binding Supreme Court precedents, the Court holds that once the customs duty/EDD has been actually paid pursuant to a statutory demand, deduction under section 43B cannot be denied merely because the payment is provisional, made under protest, or subject to a possible future refund.

Conclusions

2.8 Customs duty/EDD paid under protest, in compliance with quantified demands raised by customs authorities and CBEC/SVB instructions, is an allowable deduction under section 43B in the year of payment.

2.9 The disallowance made by the assessing authority under section 43B in respect of such payment is unsustainable on merits and is deleted.

Issue 2: Effect of subsequent refund and avoidance of double taxation

Interpretation and reasoning

2.10 The Court notes that the assessee subsequently received a favourable order from the SVB accepting the declared import price, resulting in refund becoming payable of the customs duty/EDD earlier paid under protest.

2.11 The assessee has offered the refunded amount to tax in assessment year 2020-21 and undertaken to offer any further refund in the year of actual receipt.

2.12 The Court observes that if the deduction for the customs duty/EDD paid is denied in the year of payment, while the refunded amount is taxed in a subsequent year, it would lead to double taxation of the same amount, which is impermissible.

Conclusions

2.13 In view of the fact that refunds of the customs duty/EDD are or will be brought to tax in subsequent years, the deduction of the amount paid must be allowed in the year of payment to avoid double taxation.

2.14 The grounds raised by the assessee in both years are allowed, and the additions/disallowances on account of customs duty/EDD under section 43B are deleted.

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