Custom duty borne by purchaser would be deductible even if liability disputed by importer seller

Facts:

a) Assessee-firm purchased certain imported products under two agreements. The price as agreed in both the cases was the gross costs to the sellers with certain amount of net profit. The gross cost included all expenditure incurred by the sellers for supplying the goods to the assessee.

b) However, as there was uncertainty about the incidence of customs duties, the parties inserted a clause in the agreements, to make it clear that any liability with respect to duty of customs payable by the seller, would be a part of the costs and the buyer (assessee) would pay for the same. In terms of the contract the assessee was required to pay custom duty of Rs 1.78 crores to its seller as a part of the cost of the goods.

c) While completing assessment, the Assessing Officer accepted expenditure incurred on account of customs duty. There after, the CIT, in exercise of powers under section 263, reversed assessment order holding that the amount of custom duty was a contingent liability as the sellers of goods had challenged the same in the Supreme Court.

d) On appeal, the Tribunal held that liability on account of customs duty was to be allowed as the deduction on accrual basis. Aggrieved-revenue filed the instant appeal. The High Court held in favour of assessee as under:

No disallowance under sections 40(a)(ia) and 43B if assessee-trust was enjoying exemption under section 11

Issue

Whether disallowance under sections 40(a)(ia) and 43B could be made in a case of trust enjoying exemption under section 11 of the Income-tax Act (‘Act’)?

The tribunal held as under-

1)    Sections 11, 12 and13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled.

2)    Sections 40(a)(ia) and 43B fall under Chapter IV-D of the Act. The said Chapter deals with computation of profits and gains from business or profession. The profits and gains from business or profession are computed under section 28. Section 29 provides the manner of computation of income under the head "profits and gains of business or profession", which states that the income referred to in section 28 shall be computed in accordance with the provisions of sections28 to 43D.

Allotment of shares in lieu of interest liability as per BIFR scheme held as actual payment under sec. 43B

Facts:

a)  The assessee had borrowed loan from IDBI and there was outstanding interest on such loan. A rehabilitation scheme was sanctioned by the BIFR, wherein it was decided that the IDBI would be allotted equity shares by the assessee and the interest to the extent of shares would be taken as having been paid.

b)  The assessee allotted certain shares to the IDBI and claimed that the said allotment of shares should be taken to be against the interest amount 'actually paid' within the meaning of section 43B.

c)  The assessment was completed accordingly. Thereafter, the Assessing Officer reopened the case of assessee on the ground that mere allotment of equity shares in lieu of interest liability could not be construed as 'actually paid' as required under section 43B.

d)  On appeal, the Commissioner (Appeals) held that the reopening of the case was valid. However on merit, he deleted the addition. On second appeal, the Tribunal held that in the original assessment proceeding itself the Assessing Officer had raised a query on this issue which had been explained satisfactorily by the assessee and accepted by the Assessing Officer and, therefore, the instant case was a case of change of opinion. The Tribunal however upheld the decision of the Commissioner (Appeals) on merits.

The High Court held as under:

1)  This was indeed a case of mere change of opinion by the Assessing Officer. A specific query was raised by the Assessing Officer in the original assessment proceedings itself as regards the conversion of a portion of the interest into shares. 

2)  When pursuant to a settlement the creditor agrees to convert a portion of interest into shares, it must be treated as an extinguishment of liability to pay interest to that extent. In essence, there will be no further outstanding interest to that extent. Consequently, the situation where an interest payable on a loan is converted into shares in the name of the lender/creditor is different from the situation envisaged in Explanation 3C to section 43B, viz., conversion of interest into 'a loan or borrowing'. In the latter instance, the liability continues, although in a different form. However, where the interest or a part thereof is converted into equity shares, the said interest amount for which the conversion is taking place is no longer a liability. 

3)  The plea of the assessee, which was accepted by the Commissioner (Appeals) and the Tribunal that the said conversion of a portion of interest into shares should be taken to be 'actual payment' within the meaning of section 43B, merits acceptance. In that view of the matter, there is no legal infirmity in the impugned order of the Tribunal. - CIT v. Rathi Graphics Technologies Ltd [2015] 64 taxmann.com 65 (Delhi)

ITAT makes Sec. 43B disallowance even when assessee opts for presumptive taxation scheme

IT: Non-payment of statutory liability before due date of filing of return would attract disallowance under Section 43B even if assessee had offered his income on presumptive basis.

Issue

Whether disallowance of Section 43B could be made even when assessee opted for presumptive taxation Scheme?

The Tribunal held in favour of revenue as under:

a)Under the presumptive taxation scheme, income of an assessee is computed at a fixed percentage of turnover and it would be deemed that that all deductions allowable under the head business or profession have already been allowed to assessee. In other words deductions allowable under Sections 28 to 43C are deemed to have been granted to assessee.

b)Perusal of provisions of Section 43B shows that said provision is a restriction on allowance of particular expenditure, inter-alia, statutory liability, as it allows deduction of such liability on actual payment basis, i.e., expenditure shall not be allowed to be deducted unless same has been paid before the due date of filing the return.

c)Section 44AF starts with the words “notwithstanding anything to the contrary contained in Sec. 28 to 43C”, whereas section 43B starts with the words “notwithstanding anything contained in any other provisions of this Act”.

d)The non-obstante clause in Sec. 43B has a far wider amplitude because it uses the words “notwithstanding anything contained in any other provisions of this Act”. Therefore, even assuming that the deduction is permissible or the deduction is deemed to have been allowed under any other provisions of this Act, still the control placed by the provisions of Sec. 43B in respect of the statutory liabilities still holds precedence over such allowance.

e)Hence, disallowance could be made by invoking the provisions of Sec. 43B in respect of the statutory liabilities, even though the assessee offered his income to tax on presumptive basis.

Editor’s Note:

In the instant case, assessee has offered his income to tax on presumptive basis under Section 44AF. Provisions of Section 44AF are not applicable from assessment year beginning on or after the April 1, 2011. Thus, it can be inferred that the principal laid down by the ITAT would squarely apply when taxpayer has opted for presumptive taxation scheme under Section 44AD or Section 44AE.

ITAT follows AS-10 to include one-time vehicle tax in cost of vehicle treating it as capital expenditure

Facts:

The issue that arose in the instant appeal was:

Whether one time vehicle tax paid by the assessee was includible in cost of vehicles, (eligible to depreciation) or, was in nature of revenue expenditure, deductible under Section 37(1)?

The Tribunal held in favour of revenue as under:

1)Section 43(1) defines the term 'actual cost' as under: "Actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.

2)The definition emphasizes on the elements, which would not form a part thereof, so that the principles of commercial accounting would apply in determining the actual cost. Even otherwise, it was a trite law that in the absence of a statutory definition or mandate, the accounting prescription would prevail.

3)It is only where the law specifically provides for a particular course of action, inconsistent with the accounting mandate, that the same shall prevail and override the latter, viz., section 43B.

4)Para 20 of ‘Accounting Standard-10 - Accounting for Fixed Assets’ required that the cost of a fixed asset would comprise of its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.

5)One-time tax for the lifetime of "all motor cars and omnibuses used or kept for use" in the State of Maharashtra was a tax for user, active or passive, of the motor vehicle in the territory of Maharashtra. Therefore, payment of tax, only enabled the vehicle being put to its intended use; in fact, represented a condition thereof, and would form part of its cost. - M. DINSHAW & CO. (P.) LTD. V. DY. CIT [2014] 48 taxmann.com 190 (Mumbai - Trib.)

Contractual liability to pay custom duty on importer’s behalf won’t be hit by sec. 43B, it’s not statutory liability

The High Court held as under:

1)  Section 43B applies only in cases of statutory liability. By virtue of the said section a statutory liability is not deductable in the year in which it accrues, if the same remains unpaid. A deduction with respect to a statutory liability is allowed only on payment of the same;

2)  The liability to pay the amount of additional customs duty on behalf of the importers as and when they were called upon to discharge the same was clearly a contractual liability and not a statutory liability;

3)  Therefore, in the instant case, the question as to whether the said liability would be considered as deductible under Section43B would not arise;

4)  Even assuming that section 43B would apply to such contractual liability, the furnishing of a bank guarantee to importers would not be considered as actual payment under section 43B so as qualify for deduction under that section - Oswal Agro Mills Ltd. v. CIT [2014] 42 taxmann.com 100 (Delhi)