2021 (11) TMI 411 - AT - Income Tax

Nature of receipt - Addition of amount received by the assessee from the contractors who delayed in execution of the work to make fit the rented premises for conducting business - case of the assessee before the authorities below that the contract shows that the amount of liquidated damages was fixed at ₹ 20,000/- per day irrespective of contract value and since the contract relates to bring the profit making apparatus into existence, any damage received on account of such delay amounts to capital receipt - HELD THAT - Assessee reduced the cost of project by the amount of liquidated damages received and the cost of the project remained only at balance figure. It is also clear that until and unless the contractor carried out the desired modification, the premises was not fit to commence the business of the assessee and thereby related to bringing the profit making apparatus into existence. We, therefore, are of the opinion that inasmuch as the assessee credited the amounts received to the capital asset and treated it as capital receipts, the same cannot be brought to tax. Hence, this addition is directed to be deleted. Addition on assessee not producing the books of account - HELD THAT - As submitted on behalf of the assessee that the operational revenue of the assessee is around ₹ 258 crores on all India basis and in so far as this particular expenditure this relates to the expenditure of giving gifts to the VIPs and Celebrities which would boost the business of the assessee. Having regard to the magnitude of the business of the assessee and the quantum of expenditure, we are of the considered opinion that such an expenditure could be allowed. Accordingly, the grounds raised by assessee are allowed.

Summary

Issues:
1. Addition of compensation received for delay in project
2. Disallowance of specific expenditure
3. Treatment of liquidated damages as capital receipt

Analysis:

Issue 1 - Addition of Compensation Received for Delay in Project:
The appellant, a company engaged in beauty and health services, contested additions made by the Assessing Officer for compensation received due to project delays. The appellant argued that such compensation should be treated as capital receipt, citing a precedent from the Hon'ble Apex Court. The Tribunal noted that the compensation was received for delays in making rented premises fit for business operations. The contract specified liquidated damages of ?20,000 per day for delays, which were debited to the contractor's account, reducing the project cost. The Tribunal agreed that as the compensation was related to bringing the profit-making apparatus into existence, it should be treated as a capital receipt. Consequently, the addition was directed to be deleted.

Issue 2 - Disallowance of Specific Expenditure:
Regarding the disallowance of ?6,62,799 for failure to produce books of account, the Tribunal found that the Assessing Officer had allowed other deductions despite this issue. The appellant justified the expenditure as essential for business promotion among VIPs and celebrities, which could boost business. Considering the substantial operational revenue of the appellant, the Tribunal opined that such expenditure was reasonable and should be allowed. Therefore, the grounds raised by the appellant were upheld, and the disallowance was set aside.

Issue 3 - Treatment of Liquidated Damages as Capital Receipt:
In the assessment year 2013-14, similar issues arose as in the previous year. Following the decision made for the earlier assessment year, the Tribunal allowed the grounds raised by the appellant for the year 2013-14. Consequently, both appeals were allowed, affirming the appellant's contentions in both cases.

In conclusion, the Tribunal ruled in favor of the appellant, directing the deletion of the addition related to compensation for project delays and allowing the disputed expenditure. The treatment of liquidated damages as capital receipts was upheld, leading to the allowance of both appeals for the respective assessment years.