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2020 (5) TMI 478 - AT - Income TaxDisallowance of contract benevolent fund (CBF) expenses expenditure allowable u/s 37(1) - Whether CBF is mandatory deduction by State Government and not voluntary in nature - CIT(A) confirmed the order of AO holding that the contribution made by the assessee was purely out of benevolence and not for the purpose of business of the assessee - HELD THAT:- ITAT, Bangalore Bench in the case of Shri S.Basavaraja Vs ACIT in [2018 (7) TMI 2115 - ITAT BENGALURU] was dealing with a case of individual who was also a Civil Contractor and whose case also contribution to CBF was disallowed by the revenue authorities. Tribunal held that the contribution to CBF was for the purpose of business of the assessee and was of revenue in nature and had to be allowed as deduction subject to verification whether the contribution was made in accordance with notification issued by the Government of Karnataka whereby several contractors were obligated to contribute CBF. We are of the view that the deduction claimed has to be allowed subject to verification as mentioned in the order of the Tribunal referred to above. The relevant ground is treated as allowed. Disallowance of Reserve for NOC was purely on business expenditure allowable u/s 37(1) - HELD THAT:- With reference to a specific query as to under what provision in the Contract or any other statutory provision, the assessee is obliged to contribute towards ‘Reserve for NOC’, the ld. Cousel for the assessee submitted that such obligations are part of the Contract entered into with the State Government. Another query was raised by the Bench as to whether the sum contributed towards ‘Reserve for NOC” will be refunded to the assessee in the event of third party certification of execution of good work being given. Assessee expressed his inability to give an answer to this query. In the circumstance, we are of the view that this issue should be remanded to the AO for fresh consideration and the assessee should demonstrate before the AO that the contribution towards ‘Reserve for NOC’ is based on contract between parties or is a contribution which is payable under statute or is a matter of practice while executing the Civil work for State Government. The assessee shall also establish that the sum so contributed will not be refunded to the assessee at any point of time or as to how the sum so refunded would be offered to tax as income as and when the same is received. Penalties paid for non-performance of contract in time was in the nature of compensatory damages and was purely business expenditure u/s 37(1) - HELD THAT:- It is not possible to link the penalties levied under various bills by the PWD as a payment made by way of damages for dealy in execution of contract. The assessee was not able to link the penalty reflected in the bills as penalty for delayed implementation or delayed execution of the contract. This aspect needs detailed verification and the assessee is directed to establish this fact before the AO and for this purpose the issue is remanded to the AO for consideration fresh after due opportunity to the assessee. If the payment is established as for payment for breach of contract and then the same cannot be said to be a payment falling within the ambit of Explanation to Sec.37(1). In this regard, assessee has placed reliance on the decision in the case of Prakash Cotton Mills (P)Ltd. Vs CIT [1993 (4) TMI 3 - SUPREME COURT] and the aforesaid decision clearly lays down the proposition that when a payment by way of impost or by way of penalty or interest is purely compensatory and not penal in nature, the same should be allowed as expenditure u/s 37(1) - A payment of compensation for breach of contract can by no stretch of imagination be termed as penalty for infraction of law
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