2019 (12) TMI 1156 - AT - Income Tax

Disallowance of liquidated damages claimed by assessee - AR submitted that assessee entered into joint development agreement with M/s.Century Golflinks who were landowners - DR submitted that liability to make the said sum was not on assessee as per the agreement, and therefore, the said sum cannot be said to be an expenditure incurred for purposes of assessee s business - HELD THAT - On perusal of agreement, it is observed that 45% of owners share were to be distributed between owner No.1 being S.Shivashankarappa and owner No. 2 being M/s Century Golflinks. In written submission placed at page 1-5 of paper book, assessee at page 2 of written submission gave details of expenditure incurred for power and water charges which in total amounted to ₹ 10,96,33,163/-. It has been submitted that proportionate cost from Mr. Shivashankarappa has been received whereas, M/s Century Golflinks refused to pay their share amounting to ₹ 1,08,11,537/-, which was claimed by assessee as liquidated damages in its P L account. Liquidated damages are compensation paid for breach of contract. We are therefore, unable to understand how the sum paid by assessee on behalf of M/s Century Golflinks being its proportionate share towards incurring of expenses would amount to liquidated damages. Assessee has also not brought on record to show that amount payable by M/s Century Golflinks is by way of compensation. Further, all decisions relied upon by Ld.AR in paper book filed before us emphasises circumstances and tests that has been laid down by various courts to consider any amount received, to be in the nature of compensation, and therefore an allowable deduction. On one breath assessee is arguing commercial expediency to spend such amount on behalf of M/s Century Golflinks, on the other hand, assessee is claiming it as liquidated damages. Assessee relied upon certain decisions wherein reasonableness of certain payments made has to be established by assessee. Also that assessee admitted for the said disallowance before Ld.AO during assessment proceedings, as per the order sheet entry dated 28/12/11 produced by Ld.Sr.DR before us. Ld.AR could not rebut aforestated noting, which is part of assessment records - Decided against assessee.

Summary

Issues:
- Disallowance of power and water charges incurred for Joint Development Project
- Recovery of amount from landowners
- Claiming expenses as deduction
- Excessive and unreasonable addition
- Disallowance of liquidated damages

Analysis:
- The appeal was filed against the order passed by Ld.CIT (A)-3, Bangalore for assessment year 2009-10. The appellant challenged the addition of power and water charges incurred for a Joint Development Project, arguing that the expenses were necessary for ongoing development and claimed as liquidated damages in the profit and loss account.
- The appellant, a private limited company engaged in real estate development, revised its return of income, declaring a loss. The Ld.AO made additions on account of disallowance of liquidated damages and penal interest, resulting in the computation of total income in the hands of the assessee.
- The Ld.CIT (A) upheld the additions made by the Ld.AO, leading the appellant to file an appeal before the ITAT Bangalore.
- The main issue in contention was the disallowance of liquidated damages claimed by the assessee. The appellant argued that the expenses were incurred for commercial expediency and were essential for its business, while the Revenue contended that the liability to make the payment was not on the assessee as per the agreement.
- The agreement between the assessee and M/s Century Golflinks required the latter to share expenses related to power, water, and other charges. The appellant claimed that M/s Century Golflinks refused to pay their share, resulting in the appellant bearing the entire cost and claiming it as liquidated damages.
- The ITAT observed that the sum paid by the assessee on behalf of M/s Century Golflinks could not be categorized as liquidated damages, as it was not compensation for breach of contract. The appellant failed to establish that the amount payable by M/s Century Golflinks was by way of compensation.
- The ITAT noted that the appellant had admitted to the disallowance during the assessment proceedings, and the arguments presented did not sufficiently justify the claim of liquidated damages. Consequently, the ITAT dismissed the appeal, upholding the disallowance of the claimed amount.
- The ITAT's decision was based on a thorough analysis of the agreement, the nature of expenses, and the lack of evidence supporting the characterization of the payment as liquidated damages. The dismissal of the appeal was grounded in the failure to establish the claim of compensation and the acknowledgment of the disallowance during the assessment proceedings.