Facts of the Case

The assessee, Maruti Udyog Ltd., for Assessment Year 2006–07, claimed deductions and accounting treatment relating to customs duty paid on imported components meant for export purposes and customs duty included in inventory valuation.

The Assessing Officer made additions on account of:

  1. Customs duty paid on imported components for export obligations not fulfilled by the year-end amounting to ₹8,65,07,635 and ₹1,47,142.
  2. Customs duty attributable to inventory in closing stock amounting to ₹22,52,46,693.
  3. Sales tax exemption amounting to ₹32,25,70,213 received from the Government of Haryana, treating it as revenue receipt.

The ITAT deleted these additions. Aggrieved by the ITAT order, the Revenue filed an appeal before the Delhi High Court.

Issues Involved

  1. Whether the ITAT erred in deleting additions relating to customs duty on imported components meant for exports where exports had not been completed by the end of the financial year?
  2. Whether customs duty on inventory forming part of closing stock was liable to be added back?
  3. Whether sales tax exemption received from the Government of Haryana constituted a revenue receipt or capital receipt?

Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue contended that customs duty paid on imported components should not have been allowed as deduction unless corresponding export obligations were fulfilled.
  • It argued that customs duty attributable to inventory in closing stock should form part of taxable income adjustment.
  • The Revenue further argued that sales tax exemption received by the assessee was revenue in nature and taxable, relying upon the Supreme Court judgment in Sahney Steel & Press Works Ltd. v. CIT (1997) 228 ITR 253.

Respondent’s Arguments (Assessee’s Contentions)

  • The assessee supported the ITAT’s order and contended that customs duty treatment was in accordance with settled accounting and tax principles.
  • It argued that inventory valuation and duty treatment were already settled in earlier judicial decisions.
  • Regarding sales tax exemption, the assessee submitted that the subsidy was capital in nature as it was linked to industrial development objectives and not operational profits.

Court Findings / Observations

The Delhi High Court observed that the issues involved in the present appeal were already covered by its earlier decisions in ITA No. 250 of 2005 and ITA No. 171 of 2012.

The Court held that:

  • The ITAT had correctly deleted the additions relating to customs duty.
  • The treatment of customs duty in respect of imported components and closing stock was legally sustainable.
  • The sales tax exemption received by the assessee was correctly held to be capital in nature.

Accordingly, the Court found no error in the order passed by the Tribunal.

 

Court Order / Final Decision

The Delhi High Court answered all the questions of law against the Revenue and in favour of the Assessee.

The appeal filed by the Revenue was dismissed.

 

Important Clarification

This judgment reinforces the principle that:

  • Customs duty accounting treatment must be examined in light of established inventory valuation principles.
  • Sales tax subsidies/exemptions granted for industrial promotion or capital expansion may qualify as capital receipts and remain outside the tax net.
  • The purpose test remains central in determining whether a subsidy is capital or revenue in nature.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:7618-DB/SMD07122017ITA3812016.pdf


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