2010 (12) TMI 104 - AT - Income Tax

Undisclosed sources - payment of custom duty from undisclosed sources - The assessee has only filed confirmation letters but could not produce the parties to prove that custom duty in respect of high seas sales was paid by the buyers. Presuming that the assessee could not prove the payment of the custom duty but as rightly argued by the Ld. Counsel, proviso to section 69C is inserts w.e.f. the A.Y. 1999-2000 and as per the said proviso if any addition is Made on account to unexplained expenditure then same is treated as deemed income of the assessee and no deduction is allowable under any head of the income. Prior to 1.4.1999, as per the settled law, when the expenditure is not unlawful or illegal the same was allowable. We, therefore, accept the alternate plea of the assessee that custom duty being a statutory duty payable by the assessee and it is a business expenditure to the extent of the addition, the same is to be allowed as business expenditure.

Summary

Issues:
1. Addition of custom duty from undisclosed sources.
2. Allowability of custom duty as deduction under section 69C of the Income Tax Act 1961.

Issue 1: Addition of Custom Duty from Undisclosed Sources
The appeal was filed by the assessee challenging the order of the Ld. CIT (A) for the A.Y. 1986-87, where an addition of Rs. 61,74,263/- was made on account of payment of custom duty from undisclosed sources. The Tribunal observed that the Assessing Officer had found that the payment of customs duty was not reflected in the cash book of the assessee. The burden was on the assessee to provide a satisfactory explanation regarding the nature and source of the customs duty payment, which the assessee failed to do. The Tribunal set aside the order of the Ld. CIT (A) and restored the matter to the file of the Assessing Officer, emphasizing that it was the duty of the assessee to prove the genuineness of high seas sales and explain the nature and source of the customs duty paid.

Issue 2: Allowability of Custom Duty as Deduction under Section 69C
The assessee challenged the assessment order before the Ld. CIT (A) regarding the addition made in respect of alleged payment of custom duty. The Ld. CIT (A) confirmed the addition, stating that as per the directions of the ITAT, it was the duty of the assessee to prove the genuineness of high seas sales and explain the nature and source of the customs duty paid. In the appeal before the Tribunal, the assessee argued that even if the custom duty was paid, it should be allowed as a deduction under section 69C of the Income Tax Act. The Tribunal accepted the alternate plea of the assessee, noting that prior to 1.4.1999, when the expenditure was not unlawful or illegal, it was allowable. Considering custom duty as a statutory duty payable by the assessee and a business expenditure, the Tribunal directed the Assessing Officer to delete the addition, allowing the appeal of the assessee.

In conclusion, the Tribunal allowed the appeal of the assessee, directing the Assessing Officer to delete the addition of custom duty from undisclosed sources and allowing the custom duty as a deduction under section 69C of the Income Tax Act 1961.