The Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that interest on delayed customs duty was deductible under Section 37 of the Income Tax Act,1961.
Mangalore chemicals & Fertilizers Ltd.,the appellant-assessee, engaged in manufacturing and selling fertilizers.It filed its return of income (ROI) for the assessment year (AY) 2013-14 on November 27, 2023, reporting a loss of ₹1,25,37,85,663. After processing under Section 143(1), the case underwent scrutiny, resulting in an assessment order on March 30, 2016, which included an addition of ₹2,52,84,40,251, leading to an assessed income of ₹34,46,80,874.
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Following this, a notice under Section 148 was issued on March 25, 2019, based on information about customs duty evasion of ₹1,40,87,305. The assessee submitted a revised ROI on April 2, 2019, reiterating the same loss. During reassessment, it was found that the assessee had misclassified imported raw materials, causing an underpayment of customs duty. The Customs and Central Excise Settlement Commission concluded that the appellant’s misclassification was intentional and ordered payment of additional customs duty, interest, and a penalty.
While the Assessing Officer (AO) permitted the additional customs duty as a business expense, they disallowed the interest payment of ₹4,26,569, categorizing it as a penalty due to the misclassification. The assessee contested this disallowance, asserting that the interest was compensatory and should qualify as revenue expenditure. The Departmental Representative (DR) argued that such penalties were non-deductible.
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The Commissioner of Income Tax (Appeals) [CIT(A)] dismissed the assessee’s appeal, referencing case law that deemed penalties and fines related to customs violations as non-allowable deductions. Subsequently, the assessee appealed to the tribunal.
The tribunal heard submissions and reviewed the materials on record. It established that the assessee imported raw materials, including bright yellow sulphur crude, for which customs duty was initially paid. Subsequently, the customs department raised classification issues, leading to a differential customs duty of Rs. 1,40,87,305 and interest of Rs. 1,25,73,583 for late payment.
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The assessee claimed Rs. 4,26,569 of this interest as an expense for the assessment year 2013-14, while it had already disallowed a penalty of Rs. 9 lakhs in its computation for the assessment year 2016-17.
The appellate tribunal noted that the interest payment was compensatory and not a penalty, aligning with Section 37(1) of the Act, which permits deductions for business expenses. It distinguished between interest and penalties, stating that the interest was incurred wholly for business purposes. The tribunal referenced various court rulings that supported the claim for deductibility of interest as a compensatory expense rather than a penalty.
The two member bench comprising Keshav Dubey (Judicial Member) and Laxmi Prasad Sahu (Accountant Member) concluded that the interest on the delayed customs duty was deductible under Section 37 of the Act and allowed the appeal filed by the assessee.
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