CENVAT Penalty Paid Cannot Be Claimed as Business Expense for Income Tax

Anupam Industries Ltd., a manufacturer of industrial cranes, faced scrutiny assessments for AYs 2014-15, 2017-18 and 2022-23. In AY 2022-23, the Assessing Officer made an ad-hoc disallowance of 10% of total expenditure, Rs. 5.59 crore, on the ground that the assessee did not furnish bills, vouchers or supporting documents. The books were audited and not rejected. In earlier years, the assessee also faced additions relating to land sale value differences, alleged non-genuine brokerage, warranty provision of Rs. 12 lakh, several statutory liabilities under section 43B, interest under MSMED Act, delayed employees’ PF contribution, and a large CENVAT-related disallowance of Rs. 9.90 crore, which included reversal of ineligible credit and penalty following search proceedings by DGCEI. The CIT(A) sustained some additions, deleted others, and partially allowed relief across the years.

In AY 2014-15, while additions relating to land sale and brokerage were not pressed before the Tribunal, the warranty provision remained in dispute. For AY 2017-18, the assessee challenged disallowances under section 43B and delayed PF contribution, while the Revenue challenged the CIT(A)’s deletion of the CENVAT duty component. Overlapping issues required a consolidated review. The appeals thus involved recurring questions, the validity of ad-hoc disallowances, factual verification of warranty provisions, the statutory framework for employees’ PF deposits, the interplay of MSMED Act interest with section 37(1), and the permissible scope of deduction for CENVAT reversals involving penal components.

Main Issue: Whether the ad hoc expenditure disallowance, warranty provision, statutory dues under section 43B, delayed PF contribution, MSMED interest, and the CENVAT duty reversal—were legally sustainable based on the evidence and statutory framework.

Tribunal’s Decision: For AY 2022-23, the Tribunal held that a flat 10% expense disallowance without rejecting books or pointing out specific defects was unsustainable. Comparative financials demonstrated that expenditure growth was in line with revenue expansion. Applying settled law prohibiting estimated disallowance in the absence of identified defects, the Tribunal deleted the entire Rs. 5.59-crore addition. For AY 2014-15, grounds relating to land sale and brokerage were not pressed. On the warranty provision, the Tribunal noted that the assessee’s contention, that warranty liability was routinely reversed in the succeeding year, had never been examined by the AO or CIT(A). As proper adjudication required factual verification of reversals, patterns, and consistency, the issue was remanded for de novo consideration.

For AY 2017-18, the assessee’s challenges to disallowances under sections 43B and MSMED Act interest were partly remitted and partly rejected. The Tribunal directed verification of payments claimed to have been made by 30-11-2017 but upheld the disallowance for delayed employees’ PF contribution, relying on the Supreme Court’s ruling in Checkmate Services, which mandates strict adherence to due dates under labour laws. In the revenue’s appeal on the CENVAT issue, the Tribunal upheld the CIT(A)’s bifurcation between duty and penalty, holding that only the penal element of Rs. 38.91 lakh was inadmissible under section 37(1). The balance of Rs. 9.31 crore represented compensatory duty, allowable as business expenditure under the Supreme Court’s principles in Prakash Cotton Mills. Accordingly, the Revenue’s appeal was dismissed.

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