2023 (11) TMI 858 - AT - Income Tax

Restriction on deduction of expenditure u/s 37(1) - compensation paid for breach of contract - disallowing the damage charges paid to NHAL treating the same as in contravention of law - Prior Period expenditure - Also AO found that such damage charges were pertaining to the earlier year, therefore the same cannot be allowed as deduction on this count as well, being prior period expenses - HELD THAT - Penalty has been paid by the assessee on account of breach of contract which cannot be equated with the offence, or something prohibited by law. As such, the assessee could not meet the deadline to fulfill the criteria laid down by the contractee being the NHAL and therefore the damages were levied by NHAL. The Hon ble Gujarat High Court in the case of PCIT vs. Mazda Ltd. 2017 (9) TMI 1038 - GUJARAT HIGH COURT has held that the deduction on account of liquidated damages cannot be disallowed under the provision of section 37(1). The amount of damage crystallized in the year under consideration as evident from the various letters written by NHAL - Thus, it cannot be said that such damages are prior period expenses. Assessee is entitled to the damages incurred by it as a deduction. As such, we do not find any infirmity in the order of the Ld. CIT(A). Hence the ground of appeal of the revenue is hereby dismissed. Disallowance of deduction u/s 80-IA(7) - assessee submitted that there was no deduction claimed by the assessee - HELD THAT - DR appearing on behalf of the Revenue could not controvert the findings of the Ld. CIT(A). Accordingly, we concur with the finding of the Ld. CIT(A), on the reasoning that once no deduction has been claimed by the assessee u/s 80-IA of the Act, the question of making any disallowance does not arise . Hence, the ground of appeal of the revenue is hereby dismissed.

Summary

Issues:
1. Disallowance of damage charges paid to NHAL
2. Allowance of deduction under section 80-IA(7) of the Act

Issue 1: Disallowance of damage charges paid to NHAL

The Revenue appealed against the order of the Learned Commissioner of Income Tax (Appeals) regarding the disallowance of damage charges paid to NHAL. The Assessing Officer disallowed the deduction of the expenditure claimed by the assessee, considering it as penalty and pertaining to an earlier year. However, the Ld. CIT(A) deleted the disallowance, stating that the damages were compensatory in nature, not in violation of law, and allowable as business expenditure. The Ld. CIT(A) relied on Circular No. 722 dated 23/12/1998 and the decision in Kanona Chemicals & Industries Ltd. vs. CIT (1995) to support the allowance of damages crystallized in the current year. The Revenue, being aggrieved by this decision, appealed.

The Appellate Tribunal noted that the penalty was paid due to breach of contract, not for an offense or something prohibited by law. Citing the case of PCIT vs. Mazda Ltd., it was held that deduction on account of liquidated damages cannot be disallowed under section 37(1) of the Act. The Tribunal found that the expenditure was incurred for normal business activity and not for any illegal purpose. Additionally, the amount of damage crystallized in the current year, as evidenced by letters from NHAL. Therefore, the Tribunal dismissed the appeal of the Revenue, upholding the order of the Ld. CIT(A) regarding the allowance of the damage charges paid to NHAL.

Issue 2: Allowance of deduction under section 80-IA(7) of the Act

The Revenue raised an issue regarding the allowance of deduction under section 80-IA(7) of the Act. The Ld. CIT(A) noted that the appellant had not claimed any deduction under this provision. The Ld. CIT(A) directed the Assessing Officer to verify this claim from records and delete the addition if found correct. The Ld. DR representing the Revenue could not dispute this finding. The Tribunal concurred with the Ld. CIT(A)'s decision, stating that since no deduction was claimed under section 80-IA of the Act, there was no basis for disallowance. Consequently, the Tribunal dismissed the appeal of the Revenue on this issue as well.

In conclusion, the Appellate Tribunal upheld the decision of the Ld. CIT(A) regarding both issues raised by the Revenue. The appeal filed by the Revenue was dismissed, and the order was pronounced in the Court on 31/10/2023 at Ahmedabad.