Deduction for Penal excise was allowed u/s 37 as it was paid in discharging contractual obligation to indemnify department for violating terms of affidavit
ABCAUS Case Law Citation:
ABCAUS 2222 (2018) (02) HC
The respondent assessee was engaged in the business of manufacturing and its sale.
An intending buyer wishing to make purchases from the assessee was required to get Excise/Import Permit from excise department of their State. In order to deliver the goods the assessee needed to obtain Export Permit from the State Excise Department. In order to receive the Export Permit, the import permits received from the Assistant Excise Officer of the State of the purchaser was a precondition for permission. As per the procedure laid down in the State Excise law, it was the Assistant Excise Officer who would process the permits and forward the same to District Excise officer for his permission and the District Excise Officer would forward the same to Additional Commissioner, Excise, to obtain permission to export the goods. On the receipt of the goods by the buyer State, the Excise Department of the buyer State would issue a receipt to the Excise Department of the assessee.
In the instant case, after following the said procedure, the Excise Commissioner issued the permission for export and returned the same to the District Excise Officer, who further returned the same to the Assistant Excise Officer posted at the assessee’s company factory.
Thus, after getting the necessary permissions from the Excise Departments, the consignment was dispatched to a buyer under the supervision of Assistant Excise Officer. The assessee also executed a bond with the Excise Department to make good the losses incurred to the department on account of loss of duty in case the goods delivery receipts are not received by the excise department of the assessee’s state from the excise department of the buyer’s state.
However, later the State Excise Authority issued a notice to the assessee alleging that the import permit of the buyer was forged and was not issued by the excise office of the buyer’s State. The notice also demanded a penalty for violation of the terms of affidavit submitted by the assessee in this regard.
The AO disallowed the payment made in response to the said demand notice on the ground that the amount paid by the appellant to the Excise Authority was in the nature of penalty, hence, the same was not allowable as deduction under section 37(1).
The CIT(A) observed that the amount demanded by the Excise Authority though mentioned as ‘penalty’ was raised for violating the conditions of the affidavit filed by the appellant before the Excise Authority at the time of export of goods outside the State. He also noted that the demand notice had no mention of any section of the State Excise Act or the Rule of State Excise Rules for the violation of which, the penalty was levied.
The CIT(A) noted that as laid down by the Supreme Court, whenever any statutory impost paid by the assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Act, the AO is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost, notwithstanding the nomenclature of the impost as given by the statute to find whether it is compensatory or penal in nature.
The CIT(A) noted the Hon’ble Supreme Court had laid down that despite that a payment is called penalty what is to be seen is whether the law or scheme under which the amount was paid required such payment to be made as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the
act that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, then one has to regard such payment as business expenditure of the assessee, allowable under section 37.
The CIT(A), after going through the contents of the demand notice, contents of the affidavit, State Excise Act, State Excise Rules and the notifications issued by the State Finance Department Excise Division, opined that the amount demanded was not panel in nature. The amount was demanded by the State Excise Officer for violation of the conditions of the affidavit in which the assessee had undertaken to pay the excise duty extra, leivable if it failed to submit within 90 days of exporting goods from its distillery the excise verification issued by the Excise Authority of the importing State. The amount paid by the appellant in response to the demand notice was excise duty paid by it during the ordinary course of the business carried on by it, wholly and exclusively for the purpose of the business of manufacturing which was allowable as deduction under section 37(1) of the Act. As a result the CIT(A) deleted the disallowance made by the AO.
The Tribunal observed that the assessee indemnified the excise duty to the government exchequer. The duty paid was 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.
The ITAT opined that whatever nomenclature was given by the Excise Department for the demand notice cannot be held as penalty.
Before the High Court, the Revenue contended that the assessee was penalised
pursuant to his illegal activities and this will not amount to business expenses as per Section 37 and explanation thereto which provides that any expenditure incurred for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
The Hon’ble High Court held that in view of the concurrent findings of both the appellate authorities, the explanation of Section 37 will not come into play.
