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TMI Blog2021 (7) TMI 1168X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of assessee. - I.T.A. No. 271/HYD/2018 - - - Dated:- 6-5-2021 - Shri S.S.Godara, Judicial Member And Shri Laxmi Prasad Sahu, Accountant Member For the Assessee : Shri P.Murali Mohana Rao, AR For the Revenue : Shri Sunil Kumar Pandey, DR ORDER PER S.S.GODARA, J.M. : This assessee s appeal for AY.2014-15 arises from the CIT(A)-4, Hyderabad s order dated 21-12-2017 passed in case No.0395 / 16-17 / ITO,Wd.16(4) / CIT(A)-4, Hyd / 17-18, in proceedings u/s.143(3) of the Income Tax Act, 1961 [in short, the Act ]. Heard both the parties. Case file perused. 2. Coming to the sole substantive issue raised in assessee s pleadings that both the lower authorities have erred in law and on facts in disallowing its security deposit encashment claim of ₹ 1,10,61,051/- treated as penal in nature, we notice that the CIT(A) s detailed discussion reads as under: 5. Ground nos. 5 to 7 and additional ground nos. 10 to 11 are with regard to addition of ₹ 1,10,61,051/- towards disallowance of security deposit. During the scrutiny proceedings, the Assessing Officer submitted as under: The assessee has debited an amount of ₹ 1,10,61,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of special chemical plant as per terms and conditions of contract. Due to the non execution of the project, the general manager of High Explosives Factory has requested the State Bank of Hyderabad, who to gave guaranteed the contract to remit back the guarantee amount of ₹ 1,10,61,051/- in the favour of High Explosives Factory Public Fund Account i.e Contractee. Later, the bank recovered guarantee amount from the assessee. The assessee has debited the same into P L of the relevant FY i.e., 2013-14 under the sub head Administrative and Selling Expenditure under the head Other Expenditure (Note 25 of Audited Financial Statements). Thus, the assessee incurred the loss in the normal course of the business. The forfeiture of the bank guarantee is compensatory in nature. (b) Loss incurred by the assessee is in nature of compensatory and not in the penal nature and same should be allowed u/s.37 of the Act: In this regard, we would like to submit that merely because of the amount paid on the cancellation of contract, the same cannot be considered as penal in nature. Merely because agreement referred to, in question as a penal in nature, any such payment would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest is allowable. Ground No.5 is allowed. HIGH COURT OF BOMBAY in the case of Commissioner of Incometax- 9. v.Regalia Apparels (P.) Ltd., [2013] 32 taxmann.com 237 (Bombay) wherein it was held that :- Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Forfeiture of bank guarantee] - Assessment year 2004-05 - Assessee was a manufacturer of garments - Apparel Export Promotion Council (APEC) granted to it entitlements for export of garments and knitwares - In consideration thereof, assessee furnished bank guarantee in support of its commitment to abide by terms and conditions in respect of export entitlements - However, loss occurred in course of business and assessee took a business decision not to honour its commitment of fulfilling export entitlement - Consequently, APEC encashed said bank guarantee - Assessee claimed said forfeiture business expenditure - However, Assessing Officer concluded that forfeiture was in nature of penalty and disallowed same - Whether since assessee had not contravened any provision of law, forfeiture of bank guarantee was compensatory in nature and, thus, allowable as deduction under section 37(1) - Hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1972-73 - Assessee, a forest contractor, took on lease certain forests from Government for which it was required to pay penalty to Forest Department - Assessee's claim duction of interest on delayed payment of royalty was disallowed by Assessing Officer on grounds that it was in nature of penalty and that no provision was made for it in accounts -Whether law is wellsettled that if any expenditure incurred by assessee is compensators in nature, deduction has to be allowed under section 37(1) -Held, yes - Whether since in instant case liability to pay interest was not statutory but only contractual in terms of lease deed, it was compensation for deprivation of use of money and was part and parcel of liability to pay royalty and, therefore, it represented expenditure laid out wholly and exclusively for purposes of business which was allowable as deduction under section 37(1) - Held, yes HIGH COURT OF ALLAHABAD in the case of Dharam Chand Dwarka Das ... vs Commissioner, wherein it was held that :- 1969 Current Law Journal 290: It was held that a penalty under s. 18(2) of the Punjab Excise Act was not in the nature of punishment and the option to pay the penalty was i ..... 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