COMMISSIONER OF INCOME TAX Vs. ENCHANTE JEWELLERY LTD

JUDGEMENT

(1.) THE Revenue in this appeal, challenges the order of Income Tax Appellate Tribunal (,,ITAT, for short) dated 25.11.2010 in ITA No.2642/Del/2005, urges that the following questions of law arise for consideration: -

(2.) THE facts are that the assessee used to manufacture and trade in gold jewellery. Its return for the assessment year 2001-02 was selected for scrutiny and notice under Section 143(2) was issued and served upon the assessee. During the assessment proceedings the Assessing Officer disallowed Rs.1,04,000.00 paid by the assessee as interest on customs duty demand. The assessee contended that he used to import jewellery manufacturing machinery under Export Promotion Capital Goods Scheme (EPCG Scheme) at a concessional rate with an export obligation which it could not fulfill and was required to pay interest @ 24% per annum to DGFT. The Assessing Officer after considering the contentions of the assessee held that the interest paid by the assessee cannot be allowed as deduction as it was penal in nature and, therefore, fell within the mischief of Explanation below Section 37(1) of the Act. The assessee appealed to the Commissioner (A) who ruled in favour of the assessee in the following terms: -

(3.) THE counsel for the Revenue attacked the reasoning of the Tribunal contending that since the assessee availed the facility without having fulfilled the obligations, there was a violation of the terms of the scheme, doing something that is prohibited by law.