2012 (12) TMI 169 - HC - Income Tax

Interest on Customs Duty Demand - held that - Amount paid was not penal in nature as much as it was as per the declared policy of the government and occasioned by the failure of the assessee to meet its obligations. The amount being interest was compensatory and not penal according to the Tribunal - Assessing Officer has not pointed out which provision of law was violated by the assessee. Even if in any adjudicatory proceedings under Customs Act the word penalty is used that cannot be determinative of the nature of the payment nor can the Assessing Officer conclude that the assessee did something that was an offence or was prohibited by law. There is nothing brought on record by the Revenue to show that the payment was hit by the Explanation below Section 37(1) of the Act - in favor of Assessee. Disallowance of Interest paid u/s 43B - whether the amount of Rs.12, 37, 206/- constituted only interest paid on the directions of the DRT towards the composite liability of the assessee or in respect of the bank guarantee liability - Held that - Assessing Officer s order should have been more specific after taking into consideration the question whether the sum of Rs.12, 37, 206/- or any part of it was to be paid towards guarantee fee or interest. It is only the guarantee fee which would not attract Section 43B of the Act; if it is interest then it would fall within its mischief. Consequently the matter is remitted to the Assessing Officer for a fresh determination in terms of the previous directions towards segregating the amount and ascertain the true nature and character of the sum of Rs.12, 37, 206/- in favour of the Revenue - appeal is partly allowed in the above terms.

Summary

Issues:
1. Disallowance of interest payment as penal nature.
2. Disallowance of interest under Section 43B(e).

Issue 1: Disallowance of interest payment as penal nature:
The Revenue challenged the ITAT's order disallowing Rs.1,04,00,000/- as interest payment, arguing it was penal in nature. The Assessing Officer disallowed the interest paid by the assessee on customs duty demand, considering it penal and falling under the Explanation below Section 37(1) of the Act. However, the CIT (A) ruled in favor of the assessee, stating that the interest paid was not penal but compensatory, as per the EPCG Scheme's terms. The Tribunal upheld the CIT (A)'s decision, emphasizing that the payment was compensatory and not penal, as it was a result of the assessee's failure to meet obligations, not a violation of law. The Court held that the Revenue failed to establish any offense or violation of law by the assessee, and the payment was not hit by the Explanation below Section 37(1) of the Act.

Issue 2: Disallowance of interest under Section 43B(e):
The second issue involved the disallowance of Rs.12,37,206/- claimed as interest provided in respect of payments made by SBI to M/s. Effibanca SPA Italy under DRT orders. The Assessing Officer invoked Section 43B(e) to disallow the deduction, noting a similar disallowance in a previous year. The CIT (A) deleted the disallowance, stating it was not interest payable to a scheduled bank but a guarantee fee payable by the assessee to SBI. The ITAT upheld the CIT (A)'s decision. However, the Court found ambiguity regarding whether the amount constituted interest or guarantee fee. The Court remitted the matter to the Assessing Officer for a fresh determination to segregate the amount and ascertain its true nature. Consequently, the first question of law was answered in favor of the assessee, and the second question was answered in favor of the Revenue, partially allowing the appeal.

In conclusion, the judgment addressed the issues of disallowance of interest payments and disallowance under Section 43B(e), emphasizing the distinction between penal and compensatory payments and the need for clarity in determining the nature of payments for tax purposes.