2013 (7) TMI 114 - HC - Income Tax

Deduction u/s 37(1) - penalty paid to the Apparel Export Promotion Council - Forfeiture of gurantee - failure to fulfil the obligation to export - ITAT allowed the deduction - Held that - respondent took a business decision not to honour its commitment of fulfilling the export entitlement in view of loss being suffered by it. The Assessing Officer does not dispute this fact nor does he doubt the genuineness of the claim of the expenditure being for business purpose. In these facts the Tribunal held that respondent assessee has not contravened any provisions of law and thus the forfeiture of the bank guarantee was compensatory in nature under section 37(1) of the Act - Decided in favour of revenue.

Summary

Issues:
1. Allowability of deduction under section 37 of the Income-tax Act for penalty paid to Apparel Export Promotion Council.

Analysis:
The case involved an appeal by the Revenue for the assessment year 2004-05 regarding the deletion of an addition made by the Assessing Officer of Rs. 40,10,437 on account of penalty paid by the assessee to the Apparel Export Promotion Council. The respondent-assessee, a manufacturer of garments, received export entitlements from APEC, for which a bank guarantee was furnished. Due to incurring losses, the respondent decided not to utilize the export entitlement, leading to the encashment of the bank guarantee by APEC. The respondent recorded this payment as penalty in its books of account and claimed deduction under section 37(1) of the Income-tax Act. The Assessing Officer disallowed the expenses, considering the forfeiture as a penalty. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that the forfeiture was compensatory in nature, allowing the deduction under section 37(1) of the Act.

The main contention of the Revenue was that the encashment of the bank guarantee should be considered penal in nature and thus not allowed as an expense under section 37(1) of the Act. However, the Commissioner of Income-tax (Appeals) and the Tribunal found that the respondent's decision not to fulfill the export entitlement commitment was a business decision due to incurred losses. The Tribunal concluded that the forfeiture of the bank guarantee was compensatory in nature under section 37(1) of the Act, as it was a genuine business expenditure.

The High Court, upon reviewing the facts, upheld the findings of the Tribunal and the Commissioner of Income-tax (Appeals). It noted that the respondent had not contravened any provisions of the law and that the forfeiture of the bank guarantee was compensatory in nature under section 37(1) of the Act. Therefore, the proposed question of law was not entertained, and the appeal by the Revenue was dismissed with no order as to costs.