2023 (5) TMI 223 - AT - Income Tax

Disallowance on account of freight and exchange variation etc. on import and export of consignment of Rubber Process Oil by treating it as fine and penalty - Addition u/s 37(1) on the ground that assessee had imported the product which is prohibited by law, hence such expenses claimed by the assessee are not allowable - HELD THAT - Rubber process oil imported by the assessee was freely importable as on the date of placing the order and also as on the date of the cargo reaching the sea-port in India. Since the customs authorities were not releasing the rubber process oil imported by the assessee and was further required for testing the samples by Central Research Chemical Laboratory as the samples under test does not match with aromatic oil mentioned in IS 15078 2001 and to avoid contesting the matter further the assessee chose to re-export the rubber process oil without incurring further demurrage charges and to avoid any further litigation the consignment was re-exported and also incurred huge loss on such re-export. All these goes to show that the expenses incurred by the assessee, for import of rubber process oil, loss on price fluctuation, freight and retention charges cannot be said that these expenses were incurred for infraction of law. These expenses were incurred in the course of carrying on business of the assessee and they are allowable as deduction u/s 37(1). We direct the AO to delete the following expenses Loss on price fluctuation, Freight and Detention charges. Expenses incurred towards customs joining fee and customs penalty it is evident from the computation of income for the assessment year 2014-15 furnished by the assessee That the assessee itself has disallowed while computing the loss from business and, therefore, the said expenses cannot be disallowed once again. Thus we direct the AO to delete the disallowance u/s 37(1) while computing the income of the assessee. Ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of Rs.1,38,97,606/- on account of freight and exchange variation etc. on import and export of consignment of Rubber Process Oil.
2. Legality of expenses claimed under section 37(1) of the Income Tax Act, 1961.

Summary:

Issue 1: Disallowance of Rs.1,38,97,606/- on account of freight and exchange variation etc.

The assessee, a Joint Venture Company, filed an appeal against the order of the Commissioner of Income Tax (Appeals)-22, New Delhi, which sustained the disallowance of Rs.1,38,97,606/-. The disallowance was made on the grounds that the expenses were treated as a fine and penalty. The assessee had imported Rubber Process Oil, which was later found to have higher aromatic contents than stipulated. Consequently, the customs authorities refused to clear the import, leading the assessee to re-export the goods to avoid further litigation and additional monetary burdens.

Issue 2: Legality of expenses claimed under section 37(1) of the Income Tax Act, 1961

The Assessing Officer disallowed Rs.195.77 lakhs, claiming the expenses were not allowable under section 37(1) as the product was prohibited by law. However, the CIT (Appeals) provided partial relief, sustaining disallowance of Rs.138.98 lakhs. The assessee argued that the expenses were incurred during lawful business activities and were necessary to mitigate losses. The internal alert circular that led to the disallowance was issued after the goods had been ordered and arrived, making its application retrospective and debatable.

The Tribunal observed that the Rubber Process Oil was freely importable at the time of order and arrival at the port. The expenses incurred, including those for price fluctuation, freight, and detention charges, were deemed necessary for the business and not for infraction of law. The Tribunal directed the Assessing Officer to delete the disallowed expenses of Rs.1,23,97,606/-. Additionally, the penalty and compounding fees of Rs.15,00,000/- had already been disallowed by the assessee in their computation of income, and thus, could not be disallowed again.

Conclusion:

The appeal of the assessee was allowed, and the disallowance of Rs.1,38,97,606/- made under section 37(1) of the Act was directed to be deleted. The order was pronounced in the open court on 04/05/2023.