2014 (7) TMI 860 - AT - Income Tax

Quantum appeal set aside - Penalty u/s 271(1)(c) - Liquidated damages not declared Held that - The Tribunal in earlier assessment year held that liquidated damages had not accrued to the assessee - assessee contended that the addition no longer subsists, thus, the penalty proceedings have no legs to stand - It is not a fit case for levy of penalty u/s 271(1)(c) of the Act since the addition made in the quantum proceedings has been deleted by the Tribunal decided in favour of Assessee. Interest on liquidated damages accrual of income - Held that - The Tribunal in earlier assessment year, it has been held that on account of the letters exchanged between the parties there is an explicit agreement for not charging liquidated damages and interest which amounts to changing the terms of agreement in which event the interest component on the assumed liquidated damages cannot be added - the interest component of liquidated damages did not accrue to the assessee in the year and the AO is directed to delete the addition Decided in favour of Assessee.

Summary

Issues:
- Penalty levied for not declaring liquidated damages for A.Y. 2003-04.
- Addition made for "interest on liquidated damages" for A.Y. 2006-07.

Analysis:
- Issue 1: Penalty for A.Y. 2003-04
The Commissioner noted that the assessee had advanced a loan to a company subject to an agreement where failure to repay debts would result in liquidated damages. The assessee argued that no income accrued as the interest was not received, and recovery was doubtful. The AO, however, insisted on booking liquidated damages as per the mercantile system, leading to a penalty. The Tribunal, considering the detailed examination in quantum proceedings, ruled that no penalty was justified as the addition was deleted based on the previous decision.

- Issue 2: Addition for A.Y. 2006-07
In this case, an addition was made for interest on liquidated damages accrued to the assessee. The Tribunal referred to the previous year's decision where it was established that there was an explicit agreement not to charge liquidated damages and interest. Following the same reasoning, the Tribunal directed the AO to delete the addition for the current year as well.

In both instances, the Tribunal relied on previous decisions and agreements between the parties to conclude that no penalty or addition for interest on liquidated damages was justified. The Tribunal emphasized the importance of considering specific agreements and circumstances to determine the accrual of income accurately, ultimately ruling in favor of the assessee in both appeals.