Commissioner of Income Tax vs India Pistons Ltd.

P.D. Dinakaran, J.—The above tax case appeals are directed against the common order of the Tribunal in ITA Nos. 1042 and

1044/Mad/1998, dt. 16th June, 2004.

The Revenue is the appellant. The assessee is a manufacturer of pistons for heavy commercial vehicles. During the relevant assessment years,

the assessee''s claim with regard to the excise duty and customs duty should not be added in the closing stock for computing the income was

disallowed by the AO. Further, the AO disallowed the interest on foreign bills. Hence, the assessee filed appeals before the CIT(A), who allowed

the appeals. On appeals, at the instance of Revenue, the Tribunal dismissed the appeals by following the decision of this Court in CIT v. Addison

Paints & Chemicals Ltd.

Aggrieved by the same, the Revenue has preferred the above appeals raising the following substantial questions of law:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that, excise duty and customs duty on closing

stock not to be included in the total turnover while computing the deduction u/s 80HHC of the IT Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting disallowance made u/s 40(a)(i) in respect of

interest on foreign bills is valid ?

4.1 In respect of question No. 1 viz., excise duty and customs duty on closing stock not to be included in the total turnover, this Court, in

Commissioner of Income Tax Vs. English Electric Co. of India Ltd., held that the liability for payment of excise duty was incurred when the

process of manufacture was complete in relation to an excisable item. All payments and liability incurred towards duty were exhibited separately.

The assessee''s liability for payment of duty could not be regarded as part of the assets held by the assessee in the form of higher value assigned to

the closing stock. A liability could not be converted into an asset in that manner. A liability was an item deductible for the purpose of arriving at the

profits for the year and only when such deduction was given, the amount could be added to the value of the closing stock.

4.2 In view of the ratio laid down by this Court in the decision cited supra, we hold that the excise duty and customs duty on closing stock are not

to be included in the total turnover, while computing the income u/s 80HHC of the Act.

5.1 As far as the second question is concerned, it is not in dispute that the assessee claimed deduction in respect of interest on foreign bills. The

AO made disallowance following the earlier assessment orders. The CIT(A) deleted the disallowance made by the AO. In appeals by the

Revenue, the Tribunal allowed the issue in favour of the assessee.

5.2 It could be found that the conditions for supply of goods by the non-resident to the assessee were that the payment of purchase price in

instalments was to be made with the condition that the assessee will compensate the supplier by means of interest on the unpaid instalments. The

unpaid instalment was not the same as loan and therefore, interest paid could not be treated as paid for the loan and hence, deduction of tax at

source was not attracted. Since it is not the case of the Revenue that interest was paid with reference to loan so that the requirement of tax

deduction at source would have been attracted, no disallowance u/s 40(a)(i) can be made. Section 40(a)(i) reads as follows:

Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable

under the head ''Profits and gains of business or profession,-

(a) in the case of any assessee-

(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or

other sum chargeable under this Act, which is payable-

(A) outside India; or

(B) in India to a non-resident, not being a company or to a foreign company,

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Section 40(a)(i) contemplates that interest, royalty, fees for technical services or other sum shall not be deducted in computing the income

chargeable under the head ''Profits and gains of business or profession''. That apart, even in the assessment order, the AO mentioned that this

interest pertains to foreign bills. If that be so, since the amount was not a loan and the amount of interest paid was not interest on loan, deduction of

tax at source is not attracted and as such, we find that the directions of the CIT (A) as well as the Tribunal are strictly in compliance with Section

40(a)(i) of the Act, which requires no interference.

In view of the foregoing conclusion, we find no error or illegality in the order of the Tribunal and the same requires no interference. Hence, no

substantial question of law would arise for consideration of this Court. Accordingly, the tax case appeals are dismissed.