2023 (1) TMI 263 - AT - Income Tax

Allowability of duty drawback written-off post expiry of prescribed due date within which claim for refund can be made, pursuant to business decision vis-a-vis irrecoverability - whether grounds raised in the present appeal are inconsonance with rule 8 of Income Tax Appellate Tribunal Rules, 1963 however for the purpose of adjudication, it shall suffice to articulate that, the sole & substantive ground is directed against the disallowance of customs duty drawback written-off relating to preceding assessment years ‘as prior period item’? - HELD THAT:- The term ‘prior period items’ expressed by clause 13(e) of the Accounting Standard [for short “AS”] refers only to material charges that is expenses or credits that is income which arise in the previous year as a result of errors or omissions in the preparation of the financial statements of one or more preceding previous years, however the expression does not include other adjustments necessitated by circumstances or contingencies, which though related to preceding previous years, and are determined in the previous year subsequently. Moreover, any such adjustments to P&L circumstanced by contingencies are carved out of the expression of ‘prior period items’ by a proviso appended thereto.

This by necessary means, any material charges or credits to P&L arising on the outcome of contingency falls out of the ambit of prior period item, consequently such material charges shall not be the subject matter of the disallowance within the purview of section 37(1) of the Act.

Returning to the extant appeal, it’s worthy to note first that, the balance of customs duty drawback written-off to P&L was never an item of expenditure but was a receivable asset held as recoverable from the revenue authorities which was denied by the customs authorities in the respective year when the refund claim was made.

The contingency over recovery of refund had not became conclusive on the aforesaid denial, but in the evince of written communication from its sister concern EID-Perry and pursuant to business decision arrived in the best judgement having exhausted all remedial boulevards available to it. Thus when all procedural vis-à-vis legal recourse available to the appellant came to an end in the best judgement or estimation, in the evince of communication received from its sister concern EID-Perry, the claim for allowance in the P&L was made by creating a charge in terms of section 37(1) of the Act in the impugned year being the year of crystalized of loss of refund.

It is germane to note that, the denial of claim of refund of customs duty drawback by the customs authorities was the first instance of contingency in recovery which was finally culminated in the impugned year in evince of written communication from sister concern EID-Perry, hence such being the right year of crystallisation of loss of refund, is eligible for claim of allowance in terms of section 37(1) of the Act and this view finds force in the decision of Hon'ble Gujarat High Court in the case of “Saurastra Cement & Chemical Industry Ltd. 1994 (10) TMI 30 - GUJARAT HIGH COURT

Further the present claim of allowance for loss when treated as irrecoverable in the books of accounts maintained by the appellant also finds force [though the decision was in context of bad debts] in the ratio laid by Hon’ble Apex Court in “CIT Vs Wackhardt International Ltd. 2009 (2) TMI 138 - BOMBAY HIGH COURT even if duty drawback was available for the previous assessment year, what will be relevant was when the same is treated as bad debt by the assessee in his books of account. Appeal of assessee allowed.