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TMI Blog2017 (9) TMI 1038X X X X Extracts X X X X X X X X Extracts X X X X ..... curred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Where an assessee has to pay damages to other party to fulfill the contract entered into by him in the ordinary course of his business, the amount of damages to be paid is allowable deduction if it is in the ordinary course of business and is not opposed to public policy. See Jamna Auto Industries vs. Commissioner of Income Tax reported [2008 (1) TMI 62 - PUNJAB & HARYANA HIGH COURT] As noted, the expenditure in question was purely in relation to the assessee's normal business activity and was inherent part of its business transactions. The expenditure was certainly not incurred for any purpose which is an offen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for final disposal. 3. Issues being identical, we may record facts from Tax Appeal No. 647 of 2017. The respondent-assessee is a company registered under the Companies Act and is engaged in the business of manufacturing and trading of machinery and machinery parts and manufacturing of drink concentrates. For the assessment year 2010-11, the assessee had filed a return of income on 29.09.2010 declaring total income of ₹ 14,53,78,210/-. During the scrutiny assessment, the Assessing Officer noticed that the assessee had claimed business expenditure of ₹ 75,36,037/- by way of liquidated damages in the profit and loss account under the head 'administrative and selling expenses'. The Assessing Officer called for the det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income Tax Appellate Tribunal in which, the claim of the assessee therein for loss on account of charges for cancellation of the contract came to be rejected. The Tribunal observed that it is not normal incident of assessee's business to enter into contracts, then cancel contract which led to the cancellation charges. Decision of the Tribunal in case of present the assessee for the earlier years was not followed on the ground that the department had not accepted the position and had filed appeal before the High Court. 5. CIT (Appeals) allowed the assessee's appeal relying on the decision of the Tribunal in case of the assessee in earlier assessment years. The Tribunal in further appeal by the Revenue also relied on its earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that the assessee sales specialized products which are tailor made as per the specifications given by the customers. The agreement would envisage that any delay in delivery would be charged to the assessee at a prescribed percentage of the value of the order. The assessee pointed out that such terms were part of the purchase orders. Typically delay in delivery would arise due to delay in approval of the drawings by the customer, delay in inspection and performance tests of the equipments by the customer or authorized inspector. These are normal features inherent to the business in which the assessee was engaged. 9. No contrary facts are brought on record by the Revenue. What therefore emerges from the unopposed averments of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. As noted, the expenditure in question was purely in relation to the assessee's normal business activity and was inherent part of its business transactions. The expenditure was certainly not incurred for any purpose which is an offence or which is prohibited by law. The Tribunal therefore was perfectly justified in granting such expenditure. 12. The decision in case of Keralal High Court in case of Bharath Plywood and Timber Products (P.) Ltd. relied upon by the counsel for the Revenue concerned the deduction claimed by the assessee of a penalty paid for delay in remitting employees' State Insurance and Provident Fund contributions. The Court was of the opinion that as per the statute, delay in depositing the contributio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the penalty for infraction of law and damages for breach of contract in the context of deduction under section 37(1) of the Act. The Court held that whenever damages are to be paid by an assessee for a breach of contract, such damages are treated to be normal expenses of business. It was further held that where an assessee has to pay damages to other party to fulfill the contract entered into by him in the ordinary course of his business, the amount of damages to be paid is allowable deduction if it is in the ordinary course of business and is not opposed to public policy. 15. In the result, both the questions are answered in favour of the assessee and against the Revenue. Tax appeals are dismissed. - - TaxTMI - TMITax - Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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