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TMI Blog2016 (2) TMI 411X X X X Extracts X X X X X X X X Extracts X X X X ..... dent : Md. Nizamuddin, Adv. GIRISH CHANDRA GUPTA J. The assesse has come up in appeal under Section 260A of the Income Tax Act, 1961 against a judgement and order dated 23rd March, 2005 of the ITAT 'C' Bench, Kolkata in ITA No. 2129/KOL/ 2004 pertaining to the assessment year 2001-2002. The Tribunal by the impugned order has upheld the order of the CIT (A) confirming disallowance of ₹ 6,67,266/- paid by the assessee to the Calcutta Port Trust (hereinafter referred to as CPT for brevity) by way of compensation for encroachment of land by the assessee from June 1994 to May 2000 and then June 2000 to October 2000. The questions of law which arise for determination in the instant appeal are as follows:- (i) Whether the damages of ₹ 6,67,266/- paid by the Appellant to the Calcutta Port Trust as per Clause 22 of the Lease Agreement dated October 21, 1982 by and between the appellant and Calcutta Port Trust is an expenditure covered by the Explanation to Section 37(1) of the Income Tax Act, 1961? (ii) Whether in the facts and circumstances of the case the payment of ₹ 6,67,266/- to the Calcutta Port Trust by the Appellant was an expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and cannot be treated as a capital expenditure as the land belonged to CPT and not to the assessee. The assessing officer took the view that the assessee had not taken the land on rent or hire and that payment was made to obtain a long-term lease and therefore was a capital expenditure. He also held that the encroachment amount to an infraction of law. The assessing officer relied on the explanation to Section 37(1) of the Act and disallowed the expenditure. The CIT(A) affirmed the AO's order for similar reasons. The Tribunal also upheld the order of the CIT(A). Mr. Nizamuddin learned Advocate appearing for the Revenue relied on the explanation to Section 37(1) which is as follows:- 37. (1) Any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . Explanation -For the removal of doubts, it is hereby declared that any expenditure incurred by an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jab and Haryana High Court elaborately dealt with the question of whether damages paid for breach of contract can be allowed as expenditure under Section 37(1) of the Act. In the aforesaid case the assessee had entered into an agreement with a German Firm for supply of certain goods. The said contract did not fructify, as the assessee did not have the requisite import license for the material intended to be imported. On a dispute being referred to an arbitrator, the assessee had to pay ₹ 50,000/- to the said German firm in terms of the arbitral award. It was this amount which he claimed as deduction. The Court interpreted Section 37(1) as follows:- 10. The legal position may first be analyzed. Section 37(1) of the Act contains the general provisions for allowance as an expenditure. According to Section 37(1), for a particular item of expenditure to be an allowable deduction under this section:- (a) it should not be an expenditure of the nature described in Sections 30 to 36; (b) it should not be in the nature of capital expenditure; or personal expenses of the assessee; and (c) it should have been laid out or expended wholly and exclusively for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 37(1), only that portion of such payment having composite nature which is attributable to its compensatory character for payment as damages is to be allowed as a deduction. The other portion which is attributable to its penalty nature cannot be allowed as a deduction under Section 37(1) because such payment is for infraction of law. In CIT Vs- S.A. Builders Pvt. Ltd. reported in (2008) 299 ITR 88, the assessee was a contractor executing various works. The assessee claimed a deduction on account of compensation paid to the contractee for delaying the execution of works. The issue was whether the compensation paid can be allowed as a deduction. It was held that the compensation paid by the assessee was on account of breach of contract which does not fall within the category of payment of penalty for breach of any law but would be a compensation for breach of contractual obligation, accordingly, will fall in the category of allowable deduction. The above issue was also dealt with by the Supreme Court in the Swedeshi Cotton Mills Co. Ltd. Vs- CIT reported in (1998) 233 ITR 199. The issue before the Supreme Court was regarding deductibility of liability incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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