2012 (2) TMI 404 - AT - Income Tax

Penal Charges paid to Sister Concern towards cost of storage - AO penal charges not a liability related to business of assessee - Held That - If expenditure relates to commercial expediency its allowable. As far as penal rent is concerned it should be governed by the agreement entered between two parties. In the instant case, it was not shown by the assessee that the impugned liability was fastened upon it. Decided against assessee.

Summary

Issues:
1. Addition of Rs.23,19,547 as expenditure not related to business.
2. Existence of binding liability on the assessee for the impugned expenditure.

Analysis:
1. The appeal was against the CIT(A)'s decision to sustain the addition of Rs.23,19,547 as expenditure not related to the business of the assessee for the assessment year 2006-07. The assessee, a company formed for manufacturing wheat products, had not commenced production but engaged in trading wheat. The disputed expenditure was towards penal charges paid to a sister concern, which the assessing officer disallowed, a decision upheld by the CIT(A).

2. The key issue was whether the impugned expenditure of Rs.23,19,547 was a liability on the assessee. The assessing officer found no agreement between the assessee and the sister concern regarding the transaction. The tribunal analyzed the contractual obligations between the sister concern and the wheat supplier, concluding that the penal charges were not a liability of the assessee. The tribunal emphasized the necessity of a binding liability for claiming expenditure, which was absent in this case.

3. The tribunal considered case laws supporting expenditure incurred on commercial expediency grounds but focused on the absence of a binding liability in this case. The assessee's argument that it was obligated to honor the debit note for penal charges was countered by the lack of a contractual agreement between the sister concern and the assessee. The tribunal upheld the Revenue's contention that no contractual obligation existed for the assessee to pay the penal charges.

4. Despite the assessee's claim and reference to a similar allowance in another case, the tribunal found no evidence of a binding contractual obligation on the assessee for the penal charges. The tribunal dismissed the appeal, emphasizing the need for a liability to be fastened upon the assessee before claiming such expenditure. The decision was in line with the CIT(A)'s ruling, and the appeal was consequently dismissed on January 6, 2012.