TMI Blog2013 (7) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... nst Revenue. - Tax Appeal No. 641 of 2012 - - - Dated:- 9-7-2013 - M. R. Shah And Sonia Gokani,JJ. For the Appellant : Mr. Manav A. Mehta, Advocate JUDGMENT (Per : Honourable Mr. Justice M. R. Shah) 1. Present Appeal has been preferred by the Revenue challenging the impugned judgment and order passed by the Income Tax Appellate Tribunal (hereinafter referred to as the ITAT ) dated 24.2.2012 raising following question:- Whether the Hon ble Tribunal has erred in law by allowing encashment of bank guarantee as business expenditure as per section 37(1) of the I.T. Act? 2. The facts leading to the present appeal in nutshell are as under:- 2.1 The assessee company is engaged in the business of construction and erectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid amount of Rs.70,75,392/- as business expenditure and adding it to the total income of the assessee, the assessee preferred the appeal before CIT(Appeals) and CIT(Appeals), by order dated 23.9.2009, partly allowed the said appeal. However, CIT(Appeals) dismissed the appeal with respect to the disallowance of the aforesaid amount of Rs.70,75,392/-. 4. Feeling aggrieved by and dissatisfied with the order passed by CIT(Appeals) dated 23.9.2009, the assessee preferred appeal before the ITAT and by the impugned judgment and order, the ITAT has allowed the said appeal by holding that during the continuity of the business, if in a particular contract, the assessee had to compensate for its own default, by offering performance guarantee, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 37(1) of the I.T. Act. Relying upon the decision of the Full Bench of Punjab and Haryana High Court in the case of Jamna Auto Industries vs. Commissioner of Income-tax reported in [2008] 299 ITR 0092, wherein the High Court held that damages for breach of contract is allowable as business expenditure if not incurred for contravention of any law. The ITAT has allowed the appeal and held that the assessee shall be entitled to the deduction of the aforesaid amount under section 37(1) of the I.T.Act. 8. Identical question came to be considered by the Hon ble Supreme Court in the case of Prakash Cotton Mills P.Ltd. vs. Commissioner of Income-Tax reported in [1993] 201 ITR 684. It is held by the Hon ble Supreme Court in the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 37(1) of the Act, the assessing authority is obliged to discover the nature of such amount vis-a-vis two prominent aspects, whether it is compensatory or penal. The assessing authority would there upon permit the amount as an allowable deduction that may be discovered to be purely of compensatory nature as payment of damages. However, any statutory amount paid by the assessee which is sought to be claimed as an allowable expenditure on account of penalty, in that eventuality, the same shall be disallowed being payment of infraction of law. A situation may arise where an assessee might have to make a composite payment being compensatory and penal character both. In that situation, the assessing authority would, of course, be requ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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