2019 (12) TMI 29 - AT - Income Tax

Disallowance u/s 37(1) - penalty amount for supply of the coal with high moisture and low gross calorific value - HELD THAT - As rightly held by the CIT(A),the inability to meet the contractual obligation by the assessee cannot be termed as an offence or infraction of law so as to deny the claim of the assessee by invoking the expression 1 to sec 37(1). We are in agreement with the CIT(A) that the eligibility of an item to tax or tax deduction can hardly be made to depend on the label given to it by the parties and at the same time the absence of a specific label cannot be destructive of the right of an assessee to claim a deduction, if in fact, the consideration for the receipt can be attributed to the sources indicated in the section. Merely because the assessee categorised the claim under penalty levied on the assessee company for not complying to the terms of the contract , is not permissible to the jump to the conclusion that such penalty was in respect of any offence or infraction of law committed by the assessee so as to invoke the provisions under Explanation 1 to section 37 (1) of the Act. The expression penalty was levied on the assessee company for not complying to the terms of the contract , clearly indicates that it is a civil consequence for not complying with certain terms of contract and has nothing to do with any offence. CIT(A) rightly applied the law laid down in the case of Prakash Cotton Mills 1993 (4) TMI 3 - SUPREME COURT , Swadeshi Cotton Mills 1997 (5) TMI 5 - SUPREME COURT and Continental Construction Limited 1992 (1) TMI 5 - SUPREME COURT and Catholic Syrian Bank 2002 (11) TMI 17 - KERALA HIGH COURT and Bharat Televisions Private Limited 1998 (3) TMI 2 - SUPREME COURT to the facts of this case, and reached a right conclusion that the disallowance cannot be sustained. Appeal of the Revenue is dismissed

Summary

Issues:
Interpretation of penalty for non-compliance under section 37(1) of the Income Tax Act, 1961.

Analysis:
The case involved a dispute regarding the deduction of a penalty amount under section 37(1) of the Income Tax Act, 1961. The appellant, a company engaged in trading imported coal, had filed a return declaring a loss, which was assessed at a lower amount due to various additions, including a penalty for supplying coal with high moisture and low gross calorific value. The assessing officer disallowed this penalty as a deductible expenditure, considering it a violation of the contract terms. The appellant argued that the penalty was compensatory in nature, not an infraction of law. The Commissioner of Income Tax (Appeals) (CIT(A)) reviewed the case in light of relevant legal precedents and concluded that the penalty was a compensatory payment, allowing the deduction. The Revenue challenged this decision, contending that supplying inferior coal violated the contract and fell under Explanation 1 to section 37(1) of the Act, making it non-deductible. The appellant argued that failure to meet contractual obligations did not constitute a legal offense, and the CIT(A) correctly applied legal principles in allowing the deduction. The Tribunal analyzed the case, noting that the assessing officer failed to identify a specific legal violation by the appellant, focusing solely on contractual breaches. The Tribunal agreed with the CIT(A) that the penalty was compensatory, not punitive, and the appellant's failure to meet contract terms did not amount to a legal offense. By applying relevant legal precedents, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal and affirming the deduction of the penalty amount.