2015 (2) TMI 352 - AT - Income Tax

Allowable expenditure - Debit in P&L A/c as interest on custom duty - Disallowance of penalty on Government duties - Held that - there is no dispute that the payment debited by the assessee in its P & L account relates to interest on custom duty and not related to any penalty amount as is evident form copy of settlement order. This fact is also establishes from paper book page 13 which specifically mentions the amount as interest - interest on indirect taxes takes the shape of taxes and are allowable under the provisions of the Act - Delhi High Court in the case of CIT vs Enchante Jewellery Ltd. in 2012 (12) TMI 169 - DELHI HIGH COURT has clearly held that payment of interest on custom duty is not hit by explanation below section 37(1) of the Act and had decided the issue in favour of assessee. - interest payment on custom duty are expenses allowable under the provisions of the Act - Decided in favour of assesse.

Summary

Issues:
- Disallowance of interest on custom duty as an allowable expense under the Income Tax Act.

Analysis:
The appeal was filed against the order of the Ld. CIT(A) sustaining the disallowance of interest on custom duty amounting to Rs. 55,92,254. The Assessing Officer (A.O.) disallowed the amount as it was considered a penalty on government duties not allowed under the Act. The Ld. CIT(A) upheld this decision, citing various judicial precedents. The appellant argued that the payment was interest, not a penalty, and thus allowable under the Act. The Ld. A.R. provided evidence supporting this claim, including a settlement order granting immunity from penalty. The case laws relied upon included Mahalaxmi Sugar Mills Co. and others.

The Tribunal found that the payment debited by the assessee was indeed interest on custom duty, not a penalty, as evidenced by the settlement order and other documents. The case laws cited by the Ld. A.R. supported the position that interest on indirect taxes is akin to taxes and allowable under the Act. The Tribunal referred to the decision in Mahalaxmi Sugar Mills Co., emphasizing that interest on a liability is part of the obligation to pay and not a penalty. Additionally, the Delhi High Court decision in CIT vs. Enchante Jewellery Ltd. held that interest on custom duty is not prohibited under Section 37(1) of the Act.

Based on the evidence and legal precedents, the Tribunal allowed the appeal, concluding that interest payment on custom duty is an allowable expense under the Act. The decision was in favor of the assessee, overturning the disallowance made by the lower authorities. The order was pronounced in open court on 12.11.2014.