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TMI Blog1986 (2) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... 49,539 and Rs. 42,097 totalling Rs. 1,53,411. The above demand was received by the assessee during the accounting year relevant to the assessment year 1981-82 under appeal. The assessee made provision in the accounts for the above demand. The amount was paid on 6-7-1981. The assessee claimed the said amount as a deduction. The ITO disallowed the amount on the ground that the delay in supply of goods occurred in the year 1977 and the amounts were paid only in the year 1981. On appeal, the Commissioner (Appeals) held that the penalty demands raised during the previous year ending 31-3-1980 were attributable to the terms of contract in the form of purchase order. The assessee had not disputed the liability. The contractual liability to pay the penalties had crystallised during the calendar year 1980. The liability had accrued or arisen during the calendar year 1980 and, accordingly it would be allowable as a deduction. Thus, he deleted the addition of Rs. 1,53,410. 3. The learned departmental representative strongly urged that the penalty levied is for infraction of law. The electricity Board is a statutory corporation. For the default committed by the assessee in supplying the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In case of delay in delivery of materials at destination, whatever be the reason, the Board may at its option, demand and recover from you an amount equivalent to half per cent of the value of the materials not delivered within the prescribed time limit for every week of delay or part thereof, subject to a maximum of 5 per cent of the total value of the contract. This right of the Board shall be without prejudice to its rights under the law including the right to cancel he contract, forfeit the deposit and/or recover damages for breach of contract. No doubt, the heading is described as 'Penalty'. But a reading of the above clause makes it clear that the Electricity Board may at its option demand and recover an amount equivalent to half per cent of the value of materials not delivered within the prescribed time limit for every week of delay or part thereof subject to a maximum of 5 per cent of the total value of the contract. This would clearly indicate that for the breach of the contract for supplying the material within the stipulated time, the Electricity Board has the option as stated above to demand liquidated damages fixed at a certain percentage. Accordingly, during the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lay might occur for several reasons and if delay occurs, there is a breach of the condition relating to the completion of the contract work within the stipulated time. Such failure, if it occurs, is clearly incidental to the business of the assessee. In that case also, the amount claimed as deduction was described as 'penalty' but the Bombay High Court held that through the amount claimed as deduction is described as penalty, it is in fact a compensation payable by the contractor to the Government and the nature thereof is wholly different from a penalty which arises from a breach of a statutory provision and the said liability must, therefore, be construed as having arisen on account of the delay in performance and on account of compensation payable to the Government and not strictly in the nature of penalty as in the case of a breach of a penalty provision of law..8. The above two decisions, which are directly on the point, squarely apply to the facts of the instant case. We may also refer to a few other decisions. 9. In CIT v. Prafulla Kumar Mallick. (1969) 73 ITR 119 (Ori.) the assessee, who worked as a paddy procurement agent, was required to supply to the Government paddy a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of penalty and were incidental to the carrying on of the assessee's business. The payments were business expenditure allowable under section 37 of the Income-tax act, 1961 ('the Act'). 15. In CIT v. Chemicals Fibres of India Ltd. [1983] 142 ITR 413 (Bom.), the assessee was granted an advance import license under which it had to export art silk fabrics of the value of nearly Rs. 21 1/2 lakhs by 8-11-1966. The assessee fulfilled a major part of its obligation except for a shortfall of about Rs. 2.74 lakhs which was made up after a delay of one month. The Central Government forfeited the guaranteed amount to the extent of about Rs. 2.74 lakhs which the assessee claimed as a deduction. On those facts, the Bombay High Court held that the breach committed by the assessee was not celebrate and it occurred by reason of sheer inability of the assessee to complete its export obligation in time. The amount which the assessee had to pay under the bond was calculated on the footing of shortfall and it could hardly be looked upon as a penalty for infraction of law or any statutory obligation or public policy, but must me regarded as damages paid under a contract. The sum paid by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Tribunal in Elphinstone Spg. Wvg. Mills Co. Ltd. v. ITO [1984] 7 ITD 333 (Bom.) relied on by the departmental representative, is also distinguishable. That was a case of levy of penalty under section 14 of the Employees' Provident Funds and Family Pension Fund Act, 1952. On the facts of that case, it was held that the levy was for breach of a statutory provision and it is penal in character. That is not the position here. In our view, the Commissioner (Appeals) was perfectly justified in allowing the sum of Rs. 1,53,410 as revenue expenditure in this year. 20. The next item is with regard to relief under section 80J of the Act. The assessee had given certain figures before the ITO for computing capital. But, before the Commissioner (Appeals), he gave a different statement which he accepted without putting the same to the ITO. Since the statement filed before the Commissioner (Appeals) was not put to the ITO we think it proper to restore this item to the file of the Commissioner (Appeals). He may put this statement furnished by the assessee to the ITO and after giving an opportunity of hearing to both the parties the matter may be decided afresh in accordance with law. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taking over by the assessee of the business of the firm of Radiant Engg. Co., is not the liability of the.assessee but of its predecessor in business and it cannot be allowed in the hands of the assessee. At any rate, the said liability of the previous firm will be a capital expenditure and cannot be allowed as a deduction. The Commissioner (Appeals) also was not justified in giving a direction to allow sales tax liability in the year in which it is paid. Since there is no demand raised in this year, it cannot be allowed. It is allowable only in the year when the sales had taken place. Reliance was placed on the decisions in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), CIT v. V. Krishnan [1980] 121 ITR 859 (Mad.) and L. Kunhamu Haji v. State of Kerala [1985] 155 ITR 516 (Ker.). 24. The learned counsel for the assessee submitted that the business of the firm was taken over by the assessee with assets and liabilities and the same business was carried on by the assessee. Hence, the sales tax liability of the previous firm is allowable in the hands of the assessee as the business of the firm was taken over with its liabilities. The demand for 1974-75 and 1975-76 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment to sales tax in respect of the sales of coffee made during 1958-59 was made on 31-1-1961 raising a demand of Rs. 20,507. A question arose whether the said amount is allowable as a deduction in the hands of the assessee. The Madras High Court held that the assessee had stepped into the shoes of the firm in respect of the coffee business having taken over the entire assets and liabilities and being a mere reflection of the firm it was entitled to deduct the sum of Rs. 20,507 in its assessment for 1962-63. In Hind Motor Cycle Work's case the assessee took over the business carried on by another firm. The assessee claimed a trade liability of the erstwhile firm as a deduction. On those facts, the Allahabad High court held that as the firm has taken over the entire assets and liabilities of the erstwhile firm, the liability to pay the sum of Rs. 14,250 under the Court decree was a trading liability and was allowable as a deduction. In CIT v. Amalgamated Development Ltd. [1967] 65 ITR 395 (SC) the assessee-company purchased the assets and liabilities of the firm. The consideration was paid by the issue of shares to the vendor in the share capital of the assessee-company. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the period from 10-3-1978 to 31-12-1980 is allowable as a deduction in the assessment year 1981-1982 now under appeal. The original sales tax assessment for the assessment years 1975-76 to 1977-78 of the erstwhile firm were completed on the said firm prior to 10-3-1978. The assessee took over the business of the said firm with its assets and liabilities from 10-3-1978. After the assessee took over the business of the said firm, the Sales Tax Department issued notices on 20-3-1980 for the assessment years 1974-75 and 1975-76 and revised the original assessments for those years and issued demand notices dated 29-4-1980 raising an additional demand of Rs. 43,383 and Rs. 22,930 for the assessment years 1974-75 and 1975-76, respectively, totalling to Rs. 66,313. On the basis of the additional demand raised for those two years, the assessee made a provision for the said sum of Rs. 66,313 and also Rs. 1,57,275.32 relating to the assessment years 1976-77 and 1977-78 which the assessee anticipated would be the additional sales tax demand for those two years. Thus, the total provision made for all the four years was Rs. 2,23,588.32 which was claimed by the assessee as an allowable deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Calcutta High Court held that the liability to pay sales tax was not contingent because it was being disputed by the assessee. In respect of the ultimate results, the claim by the assessee could not be rejected. The ITAT v. B. Hill Co. (P.) Ltd. [1983] 142 ITR 185 (All.), the sales tax authorities served notices dated 26-3-1966 to show cause why sales tax on the goods imported and acquired in Bombay from 1-4-1969 onwards be not deemed to have been sold in Bombay. The assessee disputed its liability and further proceedings were stayed by the Bombay High Court. However, the assessee made a provision for Rs. 1,50,000 in the assessment year 1967-68 which was claimed as a deduction. The Allahabad High Court held that the assessee is entitled to deduction of Rs. 1,50,000 for which it had made provision in respect of sales tax liability. The ratio in the above cases squarely applies the instant case. The decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case has been considered in the above.two decisions. The decision of the Madras High Court in V. Krishna's case is a case where no provision has been made in the accounts. It is on those facts the Madras High Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X
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