PARRY PHYTOREMEDIES PRIVATE LIMITED, (E.I.D. PARRY INDIA LIMITED),,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 4,, PUNE

The Hon'ble CIT(A) seriously erred in not appreciating the Debit Notes, raised by the E.I.D Parry India Limited before concluding that, the Appellant is not entitled for a deduction of Rs.930,815 (Rupees Nine Lakhs, Thirty Thousand, Eighty Hundred and Fifteen) as per the provisions of the IT Act. Failure in not ITAT-Pune Page 3 of 17 Parry Phytoremedies Pvt. Ltd. Order, which deserves to be quashed on this ground alone.

Before coming to facts, its apt to voice that, the grounds raised in the present appeal are inconsonance with rule 8 of Income Tax Appellate Tribunal Rules, 1963 [for short “ITAT Rules”], 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’. ITAT-Pune Page 4 of 17

During the course of physical hearing, the learned senior representative for the assessee [for short “AR”] at the outset referring to affidavit and application filed for ITAT-Pune Page 6 of 17 Parry Phytoremedies Pvt. Ltd. condonation of delay in instituting the present appeal, reiterated its contents and prayed for condonation, which the learned departmental representative [for short “DR”] objected for unconvincing reasons. Insofar as the substantive ground is concerned, the Ld. AR patiently briefed the bench with applicable provisions of refund under respective Indirect Tax Laws and submitted that, the decision to write-off the balance of unabsorbed customs duty drawback is a business decision and the refund of which does not always coincide with the time-limit prescribed under the applicable laws, and further there exist a provision to make a claim for refund even after the expiry of prescribed time limit on paying fees or penalties. To drive home the contention, Ld. AR adverting to the decision of Hon’ble Bombay High Court in “CIT Vs Wackhardt International Ltd.”, reported in 314 ITR 11 submitted that, the decision as regards its irrecoverability was crystallised in the impugned year after it was communicated by the exporter sister concern EID Perry and pursuant to business decision the said amount is charged to P&L when all the legal recourse in en-cashing it ITAT-Pune Page 7 of 17 Parry Phytoremedies Pvt. Ltd. has been exhausted by the appellant, for the reason claim is bonafied as well as justified with respect to year of its claim. Au contraire, the Ld. DR vehemently opposing the appellant’s contention submitted that, the assesse being a corporate entity is subjected to follow mercantile system of accounting in terms of section 145(1) of the Act, and so much is obligated to account for expense on a periodic basis, since the unabsorbed customs duty drawback of preceding three assessment years is written-off & claimed as expenditure in the impugned assessment year amounts to prior period expenditure, is not eligible to deduction as it falls out of expenditure incurred during the previous year relevant to assessment year under consideration, and placing reliance of order the Ld. TAB prayed for dismissal.

After hearing to rival contentions of both the parties; and subject to the provisions of rule 18 of ITAT, Rules perused the material placed on record, case laws relied upon by the appellant as well the respondent and duly considered the facts of the case in the light of settled legal position forewarned to parties present.

First thing first, in so far as the delay of 238 days in instituting the present appeal is concerned, we having regards to facts & circumstance, find force in the submission of the appellant in establishing the sufficiency of reasons in belated filing, consequently in the light of decision of Hon’ble Apex Court in “Collector Land Acquisition Vs MST Katiji and Others” reported at 167 ITR 5 (SC) and Hon’ble Bombay High Court in “CIT Vs Velingkar Brothers” reported at 289 ITR 382 (Bom), the delay stands condoned in the larger interest of justice.

In coming to sole and substantive ground, it evidently transpired that; 9.1 The appellant undisputedly is engaged in the business of extraction of lycopene from the imported tomato paste as its raw material, and such extraction is either sold in domestic market as such or exported through its sister concern EID Parry. Since the import / customs duty paid on material used in manufacture or processing of export product is given back or refunded to the ITAT-Pune Page 9 of 17 Parry Phytoremedies Pvt. Ltd. Duty drawback entitlement is adjusted from cost of materials imported and accounted as receivables. In other words, the portion of import / customs duty paid on input raw material relating to re-exported good is entitled for refund in the form of customs duty drawback, and till such exercise of refund is carried out, the balance is accounted as receivables under the head “balance with revenue authorities” and shown as current asset in the financial statement i.e. Balance-sheet by the appellant.

Since the matter revolving around ‘prior period item’, before we ride the bi-cycle of adjudication to decide the allowability or otherwise upheld the disallowance, it is apropos to quote first “as to what constitutes a prior period item” from CBDT NOTIFICATION NO.9949 [F.NO.132/7/95-TPL]/SO 69(E), DATED 25-1-1996 issued in ITAT-Pune Page 11 of 17 Parry Phytoremedies Pvt. Ltd. Section 145 Of The Income-Tax Act, 1961 and applicable for the impugned assessment year & read as; In exercise of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies the following accounting standards to be followed by all assessee following the mercantile system of accounting, namely; A. Accounting Standard I relating to disclosure of accounting policies:

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 ITAT-Pune Page 13 of 17 Parry Phytoremedies Pvt. Ltd. 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. Vs CIT” reported in 213 ITR 523 whereby their Lordship vide para 16 have held that; "Having considered the materials on record, we do not find any justification for the disallowance of the claim of the assessee on such an abstract proposition. Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and ITAT-Pune Page 15 of 17 Parry Phytoremedies Pvt. Ltd. quantified during there previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it relates to a transaction of the previous year." (Emphasis supplied) 14. 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” (Supra) wherein their lordships placing reliance on “Lord's Dairy Farm Ltd. v. CIT” reported 27 ITR 700, vide para 3 have held that; “As the assessee wrote of this amount in the year of account, the court was entitled to presume that the amount became irrecoverable when the assessee wrote it off in its books of account and that, therefore, the assessee was entitled to claim the amount. In our opinion, therefore, even if duty drawback ITAT-Pune Page 16 of 17 Parry Phytoremedies Pvt. Ltd. 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. Considering the ratio of that judgment, in our opinion, there is no infirmity in the view taken by the Commissioner of Income-tax (Appeals) and the Income- tax Appellate Tribunal.”

In the light of aforesaid discussion, we leaving no iota of doubt hold the orders of both the Ld. TAB as contra legem; ergo we set aside the order of Ld. FAA and quash the order of assessment.