TMI Blog2013 (2) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be considered as penalty. Thus respectfully following the judgment of Commissioner of Income Tax, Pune vs R.D. Sharma and Co.(1982 (3) TMI 52 - BOMBAY HIGH COURT) wherein held that the delay in completion of contract is incidental to the business and liability of compensation arising because of delay is an allowable deduction under the Act. In the case in hand, admittedly, the assessee company claimed liquidated damages paid to the Railway department and other government undertaking enterprises as per contract and due to the delay in completion of supply contract. Therefore, this is an allowable expenditure and the authorities below were not justified in disallowing the same - findings of the CIT(A) that the payment of liquidated damages was capital in nature is not sustainable and deserves to be set aside. Thus the claim of the assessee company for liquidated damages is allowable u/s 37(1) of but the calculation of deduction has to be done by the AO because he has observed that the copies of the contract with M/s Bharat Electronics Ltd., Ghaziabad, Panchkula and Bangalore have not been furnished before him and the details furnished by the assessee before the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax (1997) 227 ITR 172(SC), not attracted on facts of the case and not following the decisions as relied upon by the appellant. 8. That the ld. Commissioner of Income Tax(A) has erred in not disposing ground no.5 dealing with levy of interest under section 234B 234D, without assigning any reasons. 3. Briefly stated, the facts giving rise to this appeal are that the assessee company filed a return of income declaring loss of Rs.2,14,09,637/- and the same was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) and subsequently, this case was selected for scrutiny and a notice u/s 143(2) was sent on 21.08.2008. The Assessing Officer again issued a notice u/s 143(2) of the Act along with a questionnaire u/s 142(1) of the Act on 12.5.2009. Admittedly, the assessee company was incorporated to carry out business of providing electrical and optical connectivity in various fields such as communication, transportation, medical technology, test and measurement of equipment and other industrial activity. In addition to that, the company was also incorporated to carry out wholesale trading, bulk imports with exports and to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract, the liquidated damages is to be recovered equivalent to 2% of the price of any store which the contractor has failed to deliver within the period fixed for delivery in the contract or as extended for each month during which the delivery of such stores may be in arrears. Damages recovered on account of late supply of capital assets have been held to be capital in nature and not allowable as revenue expenditure by Hon ble Supreme Court in Swadeshi Cotton Mills Co.Ltd. v Commissioner of Income Tax (No.2)(1967) 63 ITR 65. Consequent on the decision of the High Court, the assessee s land was not acquired and the assessee did not take possession of the land from Delhi Glass Works. The arbitrator fixed the compensation at Rs.170,000 and this amount was paid by the assessee during the accounting period relevant to the assessment year 1958-59. The decision of Supreme Court in that case was in favour of the Revenue and against the appellant. 2.5 Since liquidated damages have arisen out of a contract for purchase of capital equipment, what is relevant is the nature of goods purchased under the contract, and not the treatment or method of accounting/accounting policy ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e treated as capital receipt. In the light of aforesaid facts and circumstances and discussions made above, the amount of claim lodged by the applicant on account of liquidated damages is not an allowable deduction from its business income under the IT Act, 1961 in its assessment for relevant assessment year. Ground No. 2 to 7 6. We have heard rival arguments of both the parties and carefully considered the same and perused the entire record and citations placed before us by both the parties. As per the observations of the Assessing Officer, the assessee company has claimed liquidated damage amounting to Rs.32,35,721/- which was disallowed by the Assessing Officer. The main basis adopted by the Assessing Officer for above disallowance is as follows:- a) liquidtated damage was to be recovered equivalent to 2% of the price of any stores which the contractor (assessee supplier) has failed to deliver within the period fixed for delivery in the contract. b) the details furnished by the assessee for the claim of liquidated damage includes the name of Bharat Electronics Ltd., Ghaziabad, Panchkula and Bangalore for which no copy of the contract was furnished b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and optical connectivity equipment and the liquidated damages claimed by the assessee were incurred under contract with the purchasers of these equipments. We also observe that the main purchasers-clients of the equipments sold by the assessee supplier company are Indian Railway department, Bharat Electronics Ltd. and public sector enterprises owned by central and state governments. The liquidated damages as claimed by the assessee supplier were to be recovered from the assessee by the purchasers @2% of the price of any store including elements of taxes, duties, freight etc., which the contractor assessee has failed to deliver within the period fixed for the delivery in the contract under condition no. 0702(a) of the contract which reads as follows:- 0702. Failure and Termination:- If the Contractor fails to deliver the stores or any instalment thereof within the period fixed for such delivery in the, contract or as extended or at any time repudiates the contract before the expiry of such period the Purchaser may without prejudice to his other rights:- (a) recover from the Contractor as agreed liquidated damages and not by way of penalty a sum equivalent to 2 per cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Haryana High Court in the case of Jamna Auto Industries vs Commissioner of Income Tax (2008) 167 ITR 192 (P H)(FB), the judgment of Hon ble Rajasthan High Court in the case of Commissioner of Income Tax vs Sohan Lal Kunwar Sons (1987) 164 ITR 129 and the judgment of Hon ble Bombay High Court in the case of Commissioner of Income Tax, Pune vs R.D. Sharma Co. (1982) 137 ITR 333. 12. In the judgement of Prakash Cotton Mills (P) Ltd. vs Commissioner of Income Tax (supra), the Hon ble Apex Court relied on its own decision in the case of Mahalaxmi Sugar Mills Co. (1980) 123 ITR 429 (SC) and on the decision of Division Bench of the Hon ble Andhra Prakdesh High Court in the case of Hyderabad Allwyn Metal Works Ltd. (1988) 172 ITR 113 (AP) held as under:- The decision of this court in Mahalaxmi Sugar Mills Co.(1980) 123 ITR 429 and the decision of the Division Bench of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd.(1988) 172 ITR 113 with the views of which we are incomplete agreement, are, in our opinion, decisions which settle the law on the question as to when am amount paid by an assessee as interest or damages or penalty could be regarded as compensator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt containing two characters. After undertaking this exercise, the amount that is held to be of compensatory nature shall be countenanced as allowable expenditure whereas the other portion of the amount, which is penal in nature, shall be refused to be an allowable expenditure. (Emphasis supplied by underline) 14. The assessee s counsel has also placed his reliance on the judgment of Hon ble Rajasthan High Court in the case of Commissioner of Income Tax vs Sohan Lal Kunwar Sons (supra) wherein their lordships held that when the expenditure was incurred wholly and exclusively for the purpose of business and in the interest of business and for commercial exigency, then the same is an allowable deduction under the Act. The assessee s counsel has also placed his reliance on the judgment of Hon ble Bombay High Court in the case of Commissioner of Income Tax, Pune vs R.D. Sharma wherein their lordships held that the delay in completion of contract is incidental to the business and liability of compensation arisen in this regard is an allowable deduction. 15. In the light of above citations, in the present case, the findings of the Commissioner of Income Tax(A) are being rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure, which was in the nature of capital expenditure'. That the Liquidated Damages were in the nature of capital. That even though it was taken to the Revenue account by the applicant it never arose out of the business of the applicant. That the amount was not paid wholly and exclusively for the purpose of business within the meaning of Sec.37(1) therefore, the same could not be allowed as deduction from the income of the year under review. 2.7 Since liquidated damages have arisen out of a contract for purchase of capital equipment, what is relevant is the nature of goods purchased under the contract, and not the treatment or method of accounting/accounting policy adopted by the applicant. In this regard it would be apposite to refer to the decision of the Hon'ble Supreme Court in the case of Travancore Rubber and Tea Co. Ltd. v. C.I.T. [2000] 243 ITR 158 wherein it was observed as under: The logic of the principle is that the assessee's right to recover the compensation was to place the assessee in the same position as if the breach had not taken place. Applying the rule to this case, if the agreed sums of money under the agreements had been received by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electronics Ltd., Ghaziabad, Panchkula and Bangalore have not been furnished before him and the details furnished by the assessee before the Assessing Officer for the claim of liquidated damages was at much more percentage than prescribed in the contract. In this situation, we restrict our finding to that the claim of assessee on liquidated damages deducted under the agreed condition of the contract as allowable u/s 37(1) of the Act subject to the verification of actual claim by the Assessing Officer. Hence, we restore the issue of calculation of allowable amount of liquidated damages for the year under consideration to the file of Assessing Officer with the direction that the Assessing Officer would verify the quantum of claim of the assessee for liquidated damages and allow the deduction for the same as claimed by the assessee. 19. With this direction, ground no. 2 to 7 are allowed. Ground No.1 20. This ground is general in nature and needs no adjudication. We therefore dismiss the same. Ground No. 8 21. This ground is consequential and premature and in view of above discussion and allowability of ground no. 2 to 7, the same becomes infructuous and we also dismiss t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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