2023 (7) TMI 221 - AT - Income Tax

Disallowance of expenditure incurred on packing penalty - ex-parte order by CIT(A) - plea of the assessee that the penalty paid in the instant case are in the nature of damages paid for breach of contract and therefore, fully deductible u/s 37 of the Act and Explanation-1 is not attracted - HELD THAT - It is true that damages paid for breach of contract are treated to be normal incidence of business unlike the penalty paid on violation of statutory provisions. Similar issue has been examined in CIT vs. Catholic Syrian Bank Ltd., 2002 (11) TMI 17 - KERALA HIGH COURT , Jammu Auto Industries 2008 (1) TMI 62 - PUNJAB HARYANA HIGH COURT and plethora of other judgments. Thus, the issue raised by the assessee appears to be meritorious on first principles.In the same vein, we note that the assessee has failed to attend before the CIT(A) and the CIT(A) has passed order ex-parte without expressing any opinion on merits. We straightaway refer to Section 250(6) of the Act which enjoins that the CIT(A) shall state the points for determination before it and the decision shall be rendered on such points along with reasons for decision. Thus, it is incumbent upon the CIT(A) to deal with the grounds on merits even in ex-parte order. CIT(A) plays role of both adjudicating authority as well as appellate authority. Thus, the CIT(A) could not have shunned the appeal for non-compliance without addressing the issue on merit. Thus, in view of Section 250(6) of the Act, the issue requires to be restored back to the file of the CIT(A) for adjudication in accordance with law - Appeal of the assessee is allowed for statistical purposes.

Summary

Issues involved:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of expenditure on packing penalty under Section 37(1) r.w. Explanation of the Income Tax Act, 1961 for AY 2012-13.

Details of the Judgment:

Issue 1: Disallowance of Expenditure on Packing Penalty
The assessee, engaged in manufacturing processed food, challenged the disallowance of expenditure of Rs.43,58,970 incurred on packing penalty. The Assessing Officer disallowed the expenditure on the ground that it was related to breach of contract and hence not allowable deduction under Section 37(1) of the Act. The Commissioner of Income Tax (Appeals) dismissed the appeal ex-parte, citing negligence, without addressing the merits. The Tribunal noted that the penalty paid was in the nature of damages for breach of contract, not a statutory impost, and thus deductible under Section 37 of the Act. The Tribunal referred to various judgments supporting the assessee's position and emphasized that the Commissioner of Income Tax (Appeals) should have dealt with the grounds on merits even in an ex-parte order. It was held that the issue required to be restored back to the file of the Commissioner of Income Tax (Appeals) for adjudication in accordance with the law. The appeal of the assessee was allowed for statistical purposes.

Separate Judgment delivered by the Judges:
No separate judgment was delivered by the judges in this case.