TMI Blog1979 (1) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... of tube-wells and supplying of stores. In the previous year relevant to the assessment year 1970-71, the assessee debited in its books a sum of Rs. 1,29,321 on account of damages and penalty and claimed deduction of the same from the profits and gains of this year. It appears that these amounts were paid by the assessee to the Government departments from whom it had taken certain contracts for breach of the terms of the same and it was claimed by it before the ITO that these payments were not made in violation of any law and as such they were allowable. The ITO, after going into details of the payments made, accepted the claim in respect of a sum of Rs. 4,668 and treated the balance of Rs.1,25,853 as not deductible and added back that amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vy of the penalties and payment of the same. The Appellate Tribunal accepted this contention and placed reliance on the decisions of the Orissa High Court in CIT v. Prafulla Kumar Mallick [1969] 73 ITR 119, that of the Madras High Court in CIT v. Inden Biselers [1973] 91 ITR 427 and of this court in Central Trading Agency v. CIT [1965] 56 ITR 561. The Tribunal hence held that since the penalties were levied and realised during the previous year relevant to the assessment year 1970-71, the assessee was fully justified in claiming deduction of the same in this year and the claim was thus accepted. Now, the following question has been referred for the opinion of this court at the instance of the Commissioner of Income-tax: " Whether, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1] 41 ITR 350 (SC) is that if an expenditure has been incurred for the purpose of carrying on the business, that is, to enable a person to carry on and earn profit in that business, it would be treated as a permissible deduction. It has to be a commercial loss in trade and also contemplable by the parties. However, a penalty imposed for breach of any law during the course of trade cannot be regarded as an allowable expenditure. In the present case, the assessee had to pay damages not for breach of any provision of any law but for breach of contractual obligation and in that behalf it has to be seen as to whether these payments were made to enable the assessee to carry on its business and further whether such payments were contemplable by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it would be liable to pay a penalty of 2 annas per pound on the quantity which it failed to deliver by the due date unless its failure was due to reasons beyond its control. By December 31, 1943, the assessee could supply only 15 tons of onion and hence the Government cancelled the contract and imposed a penalty. It, however, on the application of the assessee, extended the date of delivery to August 31, 1944, but upon the condition that the assessee paid a certain amount as liquidated damages. The assessee paid that amount in the previous years relevant to the assessment years 1945-46 and 1946-47 and claimed deduction of the same as business expenditure. The claim was disallowed by the revenue authorities as also by the Appellate Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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