2008 (2) TMI 190 - HC - Income Tax

Assessee was required to pay interest to the Excise Department (in relation to refund of Excise Duty) if necessary - the liability to pay interest was a contractual liability and hence, it should not be considered to be a statutory liability hence it can t be said that it would be allowable only on fulfillment of requirements under Section 43B no question of the said amount having the characteristic of duty, so, section 43B not applicable interest is deductible

Summary

Issues:
1. Whether the Appellate Tribunal was right in quashing the order passed by the Commissioner of Income-tax under Section 263 of the Income Tax Act regarding the disallowance of interest payable on excise refund?

Analysis:
1. The Commissioner of Income-tax issued a show cause notice under Section 263 of the Income Tax Act, questioning the allowance of interest payable on an excise refund as a deductible item under Section 43B. The Commissioner held that the interest should not have been allowed as a deduction, deeming the assessment prejudicial to the Revenue's interests. The Tribunal, in its order, found that the interest accrued in the relevant year and was rightly deducted by the Assessing Officer as per the assessee's accounting method. Therefore, the Tribunal quashed the Commissioner's order under Section 263.

2. The Revenue challenged the Tribunal's decision, arguing that the interest payable was a statutory liability falling under Section 43B and should not have been allowed as a deduction. The Revenue relied on a previous court decision to support its stance. On the other hand, the assessee contended that the interest payment was not due to a statutory provision but based on a High Court order in related proceedings concerning an excise duty refund claim. The assessee referred to a Supreme Court decision to support its position.

3. The facts revealed that the assessee, a manufacturing company, had paid excise duty on blended yarn until 1972, claiming a refund later. Following litigation, the High Court directed the assessee to refund the excise duty withdrawn with 12% interest. The Supreme Court stayed the recovery subject to certain conditions. The disputed interest amount was paid by the assessee based on the High Court order.

4. Considering the circumstances, the interest payment could not be categorized as a statutory liability since the principal amount was decreed by the High Court and did not have the character of duty under the Excise Act. The provisions of Section 43B apply when taxes or duties are collected but not paid to the government account. As none of these conditions were met in this case, the Tribunal rightfully held that the Commissioner erred in disallowing the interest amount under Section 263.

5. Consequently, the High Court answered the referred question in favor of the assessee and against the Revenue, disposing of the reference without costs.