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2020 (12) TMI 986 - AT - Income Tax


Issues:
Disallowance of liquidated damages as business expenditure under Section 37(1) of the Income-tax Act, 1961.

Detailed Analysis:
The assessee appealed against the disallowance of ?22,76,088 as liquidated damages incurred in the course of business. The Assessing Officer disallowed the claim, stating that the damages were a result of non-compliance with business obligations, making them not allowable under section 37 of the Act. The Ld. CIT(A) called for evidence but found the documents unilateral and sustained the disallowance for one party and partially deleted for another. The Ld. CIT(A) held that the expenses must not be penal in nature and asked for confirmation from both parties. The assessee contended that the damages were business-related and provided various documents to support the claim. However, the evidence presented was deemed insufficient to prove the claim, lacking confirmations from the parties charging liquidated damages.

The Tribunal observed that while the Ld. CIT(A) agreed that liquidated damages were not penal, confirmation from one party led to the deletion of disallowance. However, the lack of reconciliation for the other party's damages led to the rejection of the claim. The Tribunal opined that verification from the third-party could resolve the issue, suggesting giving the assessee another opportunity to produce confirmation of liquidated damages charged by the second party. If accounts can be reconciled, no disallowance would be necessary. Therefore, the issue was remanded back to the Ld. CIT(A) for further examination with directions for the assessee to provide necessary documentation and for both parties to be heard adequately.

In conclusion, the appeal of the assessee was allowed for statistical purposes, emphasizing the need for proper documentation and reconciliation of accounts to determine the eligibility of liquidated damages as business expenditure under the Income-tax Act, 1961.

 

 

 

 

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