2014 (6) TMI 251 - AT - Income Tax

Nature of expenses Amount being compensatory in nature and not penal Payment made for delay in handing over of possession of properties Held that - The payment made to its customers was in the form of compensation which was paid to its customers for delay in handing over the possession of properties - The liability to pay such compensation arose in the course of business of assessee - This type of compensation is generally prevalent in the industries and builders generally offer some amount as compensation against delay in handing over the properties - CIT(A) has very rightly held the nature of payment as compensatory and not penal - Relying upon CIT v. Jaya Ram Metal Industries 2006 (7) TMI 135 - KARNATAKA High Court the order of the CIT(A) is upheld Decided against Revenue.

Summary

Issues:
1. Whether the amount paid by the assessee as compensation to customers for delay in handing over properties constitutes a penalty or compensation.
2. Whether the deduction claimed by the assessee for the said payment is allowable under section 37(1) of the Income Tax Act.

Analysis:

Issue 1:
The primary issue in this case was whether the amount paid by the assessee as compensation to customers for delay in handing over properties should be treated as a penalty or compensation. The Assessing Officer disallowed the amount, considering it as penal in nature. However, the Ld CIT(A) deleted the addition after considering various judicial pronouncements and the submissions of the appellant. The Ld CIT(A) held that the payment made by the assessee was compensatory in nature and not penal. The Ld CIT(A) referred to the agreement clause under which the payment was made and emphasized that it was a common practice in the construction business to compensate for breach of terms of the agreement. The Ld CIT(A) relied on case laws such as CIT v. Indo Asian Switch Gears Pvt. Ltd. and CIT-II Ludhiana v. Hero Cycles Ltd to support the decision that compensatory payments for breach of agreement are allowable deductions under section 37(1) of the IT Act.

Issue 2:
The second issue revolved around whether the deduction claimed by the assessee for the payment made as compensation was allowable under section 37(1) of the Income Tax Act. The revenue contended that the Ld CIT(A) did not examine the facts properly and failed to determine whether the payment was compensatory in nature. However, the Appellate Tribunal upheld the decision of the Ld CIT(A) and dismissed the revenue's appeal. The Tribunal noted that the payment made by the assessee was in the form of compensation for delay in handing over possession of properties, as per the agreement with customers. The Tribunal emphasized that such compensatory payments are prevalent in the industry and are not penal in nature. The Tribunal distinguished the case laws cited by the revenue and supported the Ld CIT(A)'s decision that the payment was compensatory and allowable as a deduction under section 37(1) of the IT Act.

In conclusion, the Appellate Tribunal upheld the decision of the Ld CIT(A) and dismissed the revenue's appeal, holding that the payment made by the assessee was compensatory in nature and allowable as a deduction under section 37(1) of the Income Tax Act.