The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has recently held that expenses incurred for import of rubber process oil is eligible for deduction under Section 37(1) of the Income Tax Act, 1961.
Assessee Indian Synthetic Rubber Pvt. Ltd. is a Joint Venture (JV) Company co-owned by Indian Oil Corporation Ltd and Marubeni Corporation of Japan and Trimurti Holding Corporation of Taiwan.
During the year the company started commercial production of Styrene Butadiene Rubber on 4th February, 2014.
After completing the assessment proceedings AO computed the income of the assessee determining the loss at Rs.2,04,71,50,661/-
In the course of the assessment proceeding the Assessing Officer noticed that the assessee has debited Rs.195.77 lakhs in the profit and loss account under the head inventory losses/damages. AO seeked explanation about the debited amount.
Assessee furnished its reply stating that the company imported the Rubber Process Oil which is free of import without any restrictions as notified under Trade and Regulation Act, 1992 read with para 4.1 of Foreign Trade Policy for 2013-14.
On arrival of the goods the customs authorities have tested it and have found that some of the aromatic’s contents were higher than stipulated in the internal circulars till placing of the order under the import of Hazardous Wastage Rule 2008 refused to clear import.
However, not convinced with the explanation of the assessee the Assessing Officer disallowed Rs.195.77 lakhs as not allowable under Section 37(1) of the Income Tax Act on the ground that assessee had imported the product which is prohibited by law.
Aggrieved assessee filed an appeal before CIT(A). The CIT(A) dismissed the appeal of the assessee. Then the assessee filed a second appeal before the tribunal.
Before the tribunal M. P. Rastogi, counsel for the assessee submitted that Rubber Process Oil (RPO) is an essential ingredient for the manufacturing of synthetic rubber.
Rubber Process Oil imported by the assessee is virgin oil and not a waste material -more so a hazardous waste material as alerted in Circular Number 12/2013 issued by Addl. Director- Cl.
In case the imported goods were examined/ tested immediately on arrival there would have been no question of looking and relying on the internal Circular No. 12/2013 issued by the Custom Authorities.
Further, losses incurred by the assessee in the transaction are during the course of carrying out lawful business activities.
Expenses incurred by the assessee on the import of rubber process oil is allowable under Section 37(1) of the Act and these expenses cannot be treated as expenses incurred for infraction of law, the assessee representative further submitted.
Sanjay Tripathi counsel for the revenue strongly supported the decision of the lower authorities.
It was observed by the tribunal that an internal circular issued by Addl. Director, Customs & Excise in alert circular No. 12/2013 was issued only on 3.09.2013 in respect of the hazardous nature of goods declared as rubber process oil and petroleum-based greece.
Rubber process oil imported by the assessee was freely importable as on the date of placing the order and also as on the date of the cargo reaching the seaport in India.
Since the customs authorities were not releasing the rubber process oil imported by the assessee and further required for verifying for testing the samples by Central Research Chemical Laboratory.
But the assessee avoided contesting the matter and chose to re-export the rubber process oil without incurring further demurrage charges and to avoid any further litigation the consignment was re-exported and also incurred huge loss on such re-export.
These cause huge expenses to the business of assessee. These expenses were incurred in the course of carrying on business of the assessee and they are allowable as a deduction under Section 37(1) of the Income Tax Act.
Therefore the two-member bench of G. S. Pannu, (President) and Challa Nagendra Prasad, (Judicial Member) allowed the appeal filed by the assessee.
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