2017 (8) TMI 561 - AT - Income Tax

Addition on account of penal excise duty debited in P&L account - allowable business expenditure - Held that - The assessee executed a contractual bond to make good the losses to the government, thus the assessee indemnify the excise duty to the government exchequer. The duty paid is exactly the same as per the rates notified by the government, therefore, the said payment in discharging the contractual obligation to indemnify the excise department for the payment of the excise duty to the government exchequer, cannot be held in penal nature. Therefore, whatever nomenclature given by the Excise Department for the demand notice cannot be held as penalty. In view of these facts and circumstances, we find no merit in the appeal of the revenue. SEE CIT Vs. Hyderabad Allwyn Metal Works Limited (1987 (11) TMI 32 - ANDHRA PRADESH High Court), Prakash Cotton Mills Pvt. Ltd. Vs. CIT (1993 (4) TMI 3 - SUPREME Court) and CIT, Gujarat Vs. Tarun Commercial Mills Co. Ltd. (1976 (4) TMI 35 - GUJARAT High Court). In view of the above facts and circumstances and the case laws, we uphold the order of the ld. CIT(A). - Decided against revenue.

Summary

Issues Involved:
1. Deletion of disallowance of ?3,16,32,000/- on account of penal excise duty debited in the Profit and Loss (P&L) account.

Issue-wise Detailed Analysis:

Deletion of Disallowance of ?3,16,32,000/- on Account of Penal Excise Duty:
The core issue in this appeal revolves around the deletion of the disallowance of ?3,16,32,000/- made by the Assessing Officer (A.O.) on account of penal excise duty debited in the P&L account. The facts of the case reveal that the assessee, engaged in the manufacturing and sale of Extra Neutral Alcohol (ENA), Country liquor, and Indian Made Foreign Liquor (IMFL), filed an e-return for the financial year 2011-12 declaring a total income of ?1,32,46,790/-. The case was selected for scrutiny, and the assessment was completed under Section 143(3) of the Income Tax Act, 1961.

The dispute arose when the Rajasthan State Excise Department raised a demand of ?1770.72 lacs due to non-verification of some export permits issued by the Excise Authority of importing states. The demand was challenged by the assessee, and the Supreme Court stayed the demand. However, the assessee had deposited ?630.56 lacs with the State Government under protest. The assessee debited ?3,16,32,000/- in the P&L account for the demand raised by the State Excise of Rajasthan due to non-verification of export permits.

The A.O. disallowed this amount, considering it a penal nature. The assessee contended that the amount was excise duty paid during the ordinary course of business and not a penalty. The CIT(A) deleted the disallowance, stating that the amount demanded was excise duty and not a penalty, as the maximum penalty under the Rajasthan Excise Act, 1950, is ?20,000/-. The CIT(A) observed that the amount was demanded for violating the conditions of a bond executed by the assessee, which required the submission of excise verification within 90 days of exporting ENA. The CIT(A) concluded that the amount paid was excise duty allowable as a deduction under Section 37(1) of the Income Tax Act, 1961.

The revenue appealed against this decision, arguing that the CIT(A) was not justified in deleting the disallowance. The assessee reiterated that the payment was not a penalty but excise duty paid as per the Rajasthan Distillery Rules. The assessee explained the procedural steps involved in obtaining export permits and the execution of a bond with the excise department to indemnify the government for any loss of duty due to non-receipt of delivery receipts from the importing state.

The Tribunal examined the facts and found that the payment was made in discharging a contractual obligation to indemnify the excise department for the excise duty payable to the government exchequer. The Tribunal held that the payment was not penal in nature, and the nomenclature used by the Excise Department in the demand notice could not alter the nature of the transaction. The Tribunal upheld the CIT(A)'s order, referencing decisions from the Supreme Court and the Gujarat High Court, which supported the view that such payments are allowable as business expenditures under Section 37(1) of the Income Tax Act.

Conclusion:
The Tribunal dismissed the revenue's appeal, confirming that the payment of ?3,16,32,000/- was excise duty and not a penalty, thus allowable as a deduction under Section 37(1) of the Income Tax Act. The order was pronounced in the open court on 31/07/2017.