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2020 (12) TMI 986 - AT - Income TaxDisallowance of expenditure of liquidated damages in relation to two parties, holding the same as penal in nature - CIT(A) has in principle agreed that expenses towards liquidated damages are not penal in nature and on production of confirmation from one party i.e. M/s IFFCL deleted the disallowance made by the Assessing Officer - HELD THAT - CIT(A) in absence of reconciliation of amount of the liquidated damages claimed, has rejected the claim of the assessee, however, in our opinion, it is matter of verification from the third-party only and the interest of the justice, one more opportunity can be allowed to the assessee to produce confirmation of the liquidated damages charged by said company to the assessee. If the accounts of both the assessee and the said party can be reconciled, then matter ends and no disallowance would be required in the case of the assessee. Accordingly, we feel it appropriate to restore this issue back to the file of the CIT(A) with the direction to the assessee to produce document in support of its claim of liquidated damages including confirmation of Chandrapura Thermal Power Station and copy of ledger account of the assessee in their books of accounts specifying money withheld in the form of liquidated charges. It is needless to mention that both the assessee and the Assessing Officer shall be provided adequate opportunity of being heard.
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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