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2017 (4) TMI 164 - AT - Income TaxDisallowance made on account of demurrage charges and penalty charges imposed - Held that:- The contractees, Steel Authority of India and Central Coalfields Limited imposed the instant punitive charges on account of breach of contract which does not fall in the category of payment of penalty for breach of any law of the land but is simply a compensation for breach of contractual obligations. In other words, the punitive charges arose out of the failure of the assessee to complete the work within the time frame agreed with the contractees, Steel Authority of India and Central Coalfields Limited. Such types of penalties are usual in this, line of business and the contractees deduct such charges from the payment disbursed by them. The works undertaken as agreed in the contracts entered into were not completed in time and therefore punitive charges under the default clause as laid down therein had to be paid. It is not a penalty for breach of law. Such payment was perforce made to honour the contractual obligation under the agreements executed. This was done in course of carrying on of the business by the assessee. In the instant case, there was a specific requirement to complete the work in time and a clause for imposing punitive charges was included for any default. These rights and obligations arose in course of carrying on of the business of the respondent. Therefore, this payment made under a contractual obligation is to be allowed under section 37(1) of the Act. We find that the payments in the form of punitive charges made by the assessee could under no circumstances be regarded as illegal payments or payments which were opposed to public policy. We find that as long as the payment made is not by way of default on account of infraction of any law and/or opposed to public policy, the same would be allowable as deduction. We hold that in the instant case, the punitive charges paid are only compensatory in nature pursuant to the contractual obligation which is directly connected or intrinsically related with the carrying on of its business which unequivocally qualifies as an allowable deduction under section 37(1) of the Act. - Decided in favour of assessee.
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