2015 (6) TMI 180 - HC - Income Tax

Allowable business expenditure - excise duty levied by the Custom & Central Excise Settlement Commission - Held that - The additional excise duty were to be borne by the contract manufacturers, the contract manufacturers would have accounted for that amount in the purchase price of the goods, resulting in a higher price to be paid by the assessee. Therefore, this situation is, as per the ITAT s own explanation, revenue neutral as well. The AO s determination that the payment was made by the assessee on behalf of contract manufacturers as a part of a collusive attempt to evade tax, is thus, baseless. This sum of additional excise duty, was the differential amount which became payable only upon the passing of the said order and thus, became crystallized in the subject assessment year. Therefore, even though the excise duty was for manufacturing activity that occurred earlier, the liability to pay such additional duty did not exist in the previous years and as a result, could not have been claimed by the assessee as expenditure in the concerned previous years. In arriving at this conclusion, this Court relies upon its ruling in Rattan Chand Kapoor (1984 (2) TMI 60 - DELHI High Court)affirmed by this Court in Shri Ram Pistons & Rings Ltd 2008 (5) TMI 631 - DELHI HIGH COURT . Thus the sum of ₹ 4,94,09,120/- paid by the assessee towards additional excise duty on behalf of the contract manufacturers constitutes deductible expenditure under Section 37(1) of the Act - Decided in favour of the assessee

Issues Involved:
1. Whether the sum of Rs. 4,94,09,120/- incurred by the assessee towards additional excise duty can be termed as business expenditure under Section 37(1) of the Income Tax Act, 1961.
2. Whether the expenditure incurred by the assessee in the AY 2007-08 pertains to earlier years and hence cannot be claimed in the year under consideration.

Issue-wise Detailed Analysis:

1. Allowability of Expenditure as Business Expenditure under Section 37(1):

The primary issue revolves around whether the sum of Rs. 4,94,09,120/- incurred by the assessee towards additional excise duty levied on contract manufacturers can be considered as business expenditure under Section 37(1) of the Income Tax Act, 1961. The assessee argued that the expenditure was incurred wholly and exclusively for the purpose of business, which is the only pre-condition under Section 37(1). The assessee highlighted that the contract manufacturers were financially incapable of bearing the additional duty, and without their proper functioning, the assessee's business operations would be disrupted. The revenue contended that the liability of taxes and duties was contractually that of the contract manufacturers and not the assessee, and the expenditure was not for commercial expediency.

The court noted the prerequisites for allowability of deduction under Section 37(1) and emphasized that the term "for the purpose of business" is of wide import, including expenditure incurred for business and commercial expediency. The court cited previous judgments, including Sassoon J. David & Co. Pvt. Ltd. v. CIT, which clarified that even voluntary expenditure without necessity, if incurred for promoting business, is allowable. The court found that the payment was made in the interest of commercial expediency, as the moulds used for manufacturing were provided by the assessee, and it was in the assessee's business interest to ensure all tax liabilities were satisfied. The court held that the expenditure was deductible under Section 37(1).

2. Timing of Expenditure and Pertaining to Earlier Years:

The second issue addressed whether the expenditure incurred in AY 2007-08 pertained to earlier years and hence could not be claimed in the year under consideration. The revenue argued that the liability related to periods from April 2000 to December 2004 and August 2002 to December 2004 for Dart and ITL, respectively, and thus could not be claimed in AY 2007-08. The assessee countered that the liability crystallized only during AY 2007-08 due to the CESC's order dated 10.11.2006, and the payment led to an outflow in that year.

The court agreed with the assessee, stating that the liability to pay the additional excise duty arose only upon the passing of the CESC's order, and thus crystallized in the subject assessment year. The court relied on its ruling in Rattan Chand Kapoor, which allowed the deduction of sales tax liability in the year it was determined, even if it related to earlier periods. The court concluded that the expenditure could be claimed in AY 2007-08 as it crystallized in that year.

Conclusion:

The court held that the sum of Rs. 4,94,09,120/- paid by the assessee towards additional excise duty on behalf of the contract manufacturers constitutes deductible expenditure under Section 37(1) of the Income Tax Act. The court answered the question of law in favor of the assessee and allowed the appeal.

← Previous Next →