1986 (2) TMI 128 - AT - Income Tax

Issues Involved:
1. Deductibility of Penalty for Breach of Contract
2. Relief under Section 80J of the Income-tax Act
3. Addition under Rule 6D of the Income-tax Rules
4. Deductibility of Sales Tax Liability

Issue-wise Detailed Analysis:

1. Deductibility of Penalty for Breach of Contract:
The primary issue in the revenue's appeal concerned the deductibility of Rs. 1,53,410 paid to the Andhra Pradesh State Electricity Board due to delayed supply of LT PVC cables. The Income Tax Officer (ITO) disallowed the deduction, arguing that the penalty was for an infraction of law and should have been accounted for in the year of default (1977). The Commissioner (Appeals) allowed the deduction, stating that the liability crystallized during the calendar year 1980 when the demand was raised. The Tribunal upheld the Commissioner's decision, emphasizing that the amount was a contractual liability for breach of contract, not a penalty for infraction of law. The Tribunal cited several cases, including CIT v. Reliable Water Supply Service of India (P.) Ltd. and CIT v. R. D. Sharma & Co., to support that such damages are deductible as they are incidental to the business. The Tribunal concluded that the demand arose in the year 1980, and the liability was rightly claimed in the assessment year 1981-82.

2. Relief under Section 80J of the Income-tax Act:
The second issue involved the relief under Section 80J. The assessee provided different figures before the Commissioner (Appeals) than those given to the ITO. The Tribunal decided to remand this issue to the Commissioner (Appeals) to allow the ITO to review the new statement provided by the assessee and decide the matter afresh, ensuring both parties are given an opportunity to be heard.

3. Addition under Rule 6D of the Income-tax Rules:
The third issue was the addition of Rs. 6,001 under Rule 6D, which the Commissioner (Appeals) had deleted. The assessee's counsel agreed that the addition should be restored. Consequently, the Tribunal restored the addition of Rs. 6,001.

4. Deductibility of Sales Tax Liability:
The final issue, common to both the departmental and assessee's appeals, involved the deductibility of sales tax liabilities. The assessee had taken over the business of a firm, including its assets and liabilities, and claimed deductions for sales tax liabilities of Rs. 2,33,588 for the period up to 9-3-1978 and Rs. 1,30,870 for the period from 10-3-1978 to 31-12-1980. The ITO disallowed these claims, arguing that the liabilities did not pertain to the current year. The Commissioner (Appeals) upheld the disallowance but directed that the liabilities should be allowed in the year of actual payment. The Tribunal, however, held that since the assessee had taken over the business with its liabilities, the sales tax liability of the former firm was allowable in the hands of the assessee. The Tribunal cited several cases, including Associated Printers (Madras) (P.) Ltd. v. CIT and CIT v. Amalgamated Development Ltd., to support its decision. The Tribunal concluded that the provisions made for sales tax liabilities were allowable as deductions in the assessment year 1981-82.

Conclusion:
The Tribunal allowed the assessee's appeal and dismissed the departmental appeal, affirming the deductibility of the penalty for breach of contract and sales tax liabilities while restoring the addition under Rule 6D and remanding the issue under Section 80J for fresh consideration.

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