2010 (12) TMI 617 - AT - Income Tax

Addition - Undisclosed source - Income escaping assessment - Custom duty on high seas sale - 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 - Prior to 1.4.1999, as per the settled law, when the expenditure is not unlawful or illegal the same was allowable - 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 - Decided in favour of the assessee

Summary

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

Analysis:

Issue 1: Addition of payment 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 the Income Tax Officer had made an addition of Rs.61,74,263 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 had not been reflected in the cash book of the assessee, and the burden was on the assessee to offer a satisfactory explanation regarding the nature and source of the payment. As the assessee failed to do so, the Tribunal set aside the order of the Ld. CIT (A) and restored the matter to the file of the Assessing Officer. The A.O. made the addition again, as the assessee failed to prove the genuineness of the high seas sale and the nature and source of the customs duty paid.

Issue 2: Allowance of deduction under section 69C
The assessee challenged the assessment order before the Ld. CIT (A) regarding the addition made in respect of the alleged payment of custom duty. The Ld. CIT (A) confirmed the addition, stating that as per the directions of the Tribunal, it was the duty of the assessee to prove the genuineness of the 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 it was presumed that the assessee paid the custom duty, it should be allowed as a deduction under section 69C of the Income Tax Act 1961. The Tribunal agreed with the assessee's argument, noting that the proviso to section 69C was inserted w.e.f. 1.4.1998, and if any addition is made on account of unexplained expenditure, it shall not be allowed as a deduction. However, prior to 1.4.1999, when the expenditure is not unlawful or illegal, it was allowable. Therefore, the Tribunal accepted the alternate plea of the assessee and directed the A.O. to delete the addition, allowing it as a business expenditure.

In conclusion, the Tribunal allowed the appeal of the assessee, directing the Assessing Officer to delete the addition made on account of the payment of custom duty from undisclosed sources, considering it as a business expenditure allowable under section 69C of the Income Tax Act 1961.