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2017 (6) TMI 515 - AT - Income TaxDisallowance of compensation paid on breach of contract - failure to fulfill the sale agreement of property - property was not belonging to the assessee - crystallization of liabiltiy - bogus or colourable device to avoid taxation - Held that:- Assessee need not to be the owner of the property and still enter into a contract with promoters to sell such property to deliver in future to the buyer of the property - this nature of business of assessee has been accepted by AO for the AY 2008-09 - Liability to pay damages arises only on passing award by arbitrator and not on the date of breach of contract and further it has been held that Liability can be said to have crystallized only when the damages is determined and accepted by both the parties as per the decision of Kerala High Court in the case if Asuma Cashew Co. v. CIT 1989 (2) TMI 23] Entries in the books of accounts are not conclusive of matter if the same are not in conformity with the accounting principles - true nature of the transaction and whether it has resulted in profit or loss to the assessee is required - assessee firm has maintained its accounts on mercantile system - the principle of prudence seeks to ensure that provision ought to be made for all known liabilities and losses even though there may remain some uncertainty with its determination - The liability to pay the compensation and damages is also a certain liability as per the terms and conditions of the agreement - the failure of the assessee to fulfill its obligation is in the nature of default of business obligation and therefore the compensation paid by the assessee would become an allowable claim being the business loss - when the assessee has realized in definite terms that it would not be possible for it to honour the commitment and obligation under the agreement then the liability arises under the agreement is a certain liability - therefore the liability to pay the compensation was never disputed by the assessee, only the quantum was settled through Arbitration - liability to pay the compensation was crystallized when the assessee accepted its failure to perform its part under the agreement within the stipulated time period - The assessee has offered the income arising from the project in question to tax and therefore the transaction of development of properties in question cannot be held as a bogus or colourable device - Decided in favor of assessee
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