2015 (6) TMI 643 - AT - Income Tax

Order passed under section 154 by the AO annulled by CIT(A) - AO disallowed to the assessee excess duty, penal interest and central excise and interest - whether the rectification order passed by the AO is valid or not? - Held that - Mistakes are of two types, mistake of fact or mistake of law. So far the fact is concerned, there is no mistake. The facts submitted before us are undisputed. In respect of mistake of law, the ld. DR, even though vehemently contended but could not bring to our knowledge how there is a mistake in respect of allowing the deduction was for excise duty. We, therefore, confirm the order of the CIT(A) annulling the rectification order, so far it relates to deduction of excise duty amounting to ₹ 29.17 crores as well as 2.54 crores. Whether the interest paid by the assessee during the year in respect of excise duty accrued during the impugned assessment year so that it can be said whether there is a mistake apparent on record ? - Held that - It is not disputed that the assessee was following the mercantile system of accounting. In the mercantile system of accounting, a liability is deductible when it accrues. In the case of the assessee, we noted that the Central Excise Settlement Commission passed the order on 29.02.2008 with corrigendum dated 28.03.2008. Therefore, so far the interest is concerned, the liability accrues when the order was passed by Central Excise Settlement Commission. But the assessee filed a writ petition before the Hon ble Delhi High Court and the Delhi High Court allowed time to the assessee for making the payment of dues including the central excise as well as interest thereon. The interest no doubt paid during the year but there is no provision under the Income Tax Act para 2 section 43B, which allows the deduction of the interest on payment basis, in case the assessee follows the mercantile system of accounting. The interest, in our opinion, was allowable as deduction only in the assessment year 2008-09 and in case the assessee disapproves the assessee could have argued that the accrual of the liability got postponed and it will accrue only when the High Court passed the order. In our opinion, there cannot be two views possible. So far the deduction of the interest in respect of excise duty is concerned, to that extent, we are of the view that there was a mistake apparent in the order of the AO passed under section 143(3) and therefore, the AO has rightly taken the action under section 154, as non-deductibility of the interest during the impugned assessment year was not debatable and there cannot be two conceivable views in this regard. To that extent, we set aside the order of the CIT(A) and restore the order of the AO, so far it relates to the deductibility of interest in respect of central excise is concerned. We may, however, observe that the assessee be allowed deduction of the interest in the assessment year 2008-09 or in the year when the liability finally is determined by the order of the Hon ble Delhi High Court, if the assessee proves that the liability accrues during that assessment year. - Decided partly in favour of revenue.

Summary

Issues involved:
- Whether the CIT(A) erred in annulling the order passed under section 154 by the AO disallowing excess duty, penal interest, and central excise amounting to specific figures.

Analysis:

Issue 1: Rectification Order by AO
- The AO initiated rectification proceedings under section 154 disallowing certain payments made by the assessee, claiming they did not form part of regular sales.
- The AO rectified the assessment order disallowing the payments, citing reasons related to falsification of accounts and evasion of taxes.
- The CIT(A) noted the settlement applications made by the assessee to various Settlement Commissions and allowed the deductions of excise duty and interest, holding them as deductible expenses under section 43B.

Issue 2: Validity of Rectification Order
- The AO disallowed payments made by the assessee based on the rectification order issued under section 154.
- The Tribunal observed that the excise duty payments were allowable deductions as per section 43B, irrespective of the year in which the liability was incurred.
- The Tribunal upheld the CIT(A)'s decision to annul the rectification order, stating that the mistake of law was not apparent on record, as the deduction for excise duty was valid.

Issue 3: Deductibility of Interest on Excise Duty
- The Tribunal deliberated on the deductibility of interest paid by the assessee in relation to excise duty accrued during the assessment year.
- While the AO disallowed the interest deduction, the Tribunal found that the interest was allowable as a deduction only in the year when the liability accrued, not on a payment basis.
- The Tribunal set aside the CIT(A)'s decision regarding interest deductibility, restoring the AO's order on this specific aspect.

Conclusion:
- The appeal filed by the Revenue was partly allowed, with the Tribunal upholding the deduction of excise duty but disallowing the deduction of interest on excise duty for the relevant assessment year.
- The Tribunal emphasized the importance of adhering to the provisions of section 43B for determining the deductibility of specific expenses, ensuring compliance with the legal framework governing tax deductions.