1985 (1) TMI 75 - AT - Income Tax

Summary

Issues:
- Whether the penalty paid to custom authorities for import of a machine can be added to the cost of machinery for claiming depreciation and investment allowance.

Analysis:

The appeal was filed by the assessee challenging the decision of the Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) [CIT (A)] regarding the treatment of a penalty paid to custom authorities for the import of a machine. The assessee, a Limited Company, imported a machine that was found to contravene certain provisions of the Custom Act by the custom authorities. The authorities issued a show-cause notice for possible confiscation of the machine, offering the assessee an option to pay a fine of Rs. 3,50,000 in lieu of confiscation, which was later reduced to Rs. 1,75,000 on appeal. The assessee claimed that this penalty amount should be added to the actual cost of the machine to claim depreciation and investment allowance.

The ITO rejected the claim, stating that the penalty payment was not a valid business expenditure and, therefore, not eligible for depreciation or investment allowance. The CIT (A) upheld the ITO's decision, leading to the appeal before the Appellate Tribunal. The assessee relied on the decision of the Supreme Court in the case of CIT vs. Kores India Ltd., where it was held that a penalty paid to customs authorities could be included in the actual cost of machinery for depreciation and development rebate purposes.

The Appellate Tribunal, considering the precedent set by the Supreme Court, allowed the appeal of the assessee. The Tribunal held that the penalty amount paid by the assessee should be treated as part of the actual cost of the machinery, making it eligible for depreciation and investment allowance. Therefore, the Tribunal concluded that the assessee was entitled to claim depreciation and investment allowance on the impugned penalty amount. As a result, the appeal was allowed in favor of the assessee.