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Issues Involved: The judgment involves the question of whether certain deductions claimed by the assessee for recoveries made by military authorities were allowable as business expenditure under the Income-tax Act, 1961.
Assessment Year 1968-69: The assessee, a contractor supplying goods to army authorities, faced recoveries for delays and sub-standard quality. The Income-tax Officer estimated net profit at 10% due to lack of voucher receipts. The Appellate Assistant Commissioner reduced it to 7.5% and allowed recoveries as business expenditure. The Tribunal disallowed deductions, stating damages for breach of contract are not allowable. Assessment Year 1969-70: Similar to the previous year, recoveries were made by military authorities. The Tribunal held that recoveries for delays and sub-standard quality were not allowable deductions, as they were damages for breach of contract. Assessment Year 1970-71: The Income-tax Officer estimated net profit at 10% due to lack of voucher receipts. The Appellate Assistant Commissioner allowed recoveries as business expenditure. The Tribunal disallowed deductions, stating damages for breach of contract are not allowable. Legal Interpretation: The Tribunal held that recoveries were not allowable deductions as they were damages for breach of contract. However, the High Court disagreed, citing precedents where damages paid due to breach of contract were considered allowable business expenditure under section 37(1) of the Act. Conclusion: The High Court ruled in favor of the assessee, stating that the recoveries made by military authorities for delays and sub-standard quality were allowable as business expenditure. The Tribunal's decision to disallow the deductions for the assessment years 1968-69, 1969-70, and 1970-71 was deemed incorrect. The parties were directed to bear their own costs.
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