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Mundial Export Import Finance (P) Ltd. Versus Commissioner Of Income Tax Kolkata - Iv Circle

2016 (2) TMI 411 - CALCUTTA HIGH COURT

Compensation for loss suffered by CPT due to occupation of land in excess of what was demised - whether the aforesaid expenditure is an amount expended fully and exclusively for business purposes within the meaning of Section 37(1)? - Held that:- The payment was made to compensate the loss suffered by CPT due to occupation of land in excess of what was demised to the assessee. Therefore, the payment did not partake the character of penalty. The payment could not partake the character of a capita .....

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r. Arnab Chakraborty, Adv. For the Respondent : Md. Nizamuddin, Adv. GIRISH CHANDRA GUPTA J. The assesse has come up in appeal under Section 260A of the Income Tax Act, 1961 against a judgement and order dated 23rd March, 2005 of the ITAT 'C' Bench, Kolkata in ITA No. 2129/KOL/ 2004 pertaining to the assessment year 2001-2002. The Tribunal by the impugned order has upheld the order of the CIT (A) confirming disallowance of ₹ 6,67,266/- paid by the assessee to the Calcutta Port Trus .....

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by the Explanation to Section 37(1) of the Income Tax Act, 1961? (ii) Whether in the facts and circumstances of the case the payment of ₹ 6,67,266/- to the Calcutta Port Trust by the Appellant was an expenditure incurred wholly and exclusively for the purposes of the Appellant's business and therefore allowable as deduction under Section 37(1) of the Income Tax Act, 1961, in determining the Appellant's income for the assessment year 2001-02? (iii) Whether the expenditure of ₹ .....

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expenditure covered by the Explanation to Section 37 (1) of the Act and/ or that such expenditure was capital in nature and, therefore, on both counts was not an allowable deduction under Section 37(1) of the Income Tax Act, 1961, the Tribunal has misdirected itself in law, has acted by an outright refusal to consider relevant matters and has taken into consideration irrelevant materials and whether the said findings of the Tribunal are perverse? The facts and circumstances in brief are as follo .....

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f a longterm lease in respect of the encroached land could be placed before the Board of Trustees for examination. Such payment was duly made. The assessee claimed that such payment amounting to ₹ 6,67,266/- was a revenue expenditure. The assessing officer was not inclined to allow the same. He issued a notice to show cause why such expenditure should not be disallowed on the grounds that:- (a) It was capital in nature; (b) It was an expenditure in connection with an infraction of law. The .....

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37(1) of the Act and disallowed the expenditure. The CIT(A) affirmed the AO's order for similar reasons. The Tribunal also upheld the order of the CIT(A). Mr. Nizamuddin learned Advocate appearing for the Revenue relied on the explanation to Section 37(1) which is as follows:- "37. (1) Any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and .....

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ch expenditure." He contended that the explanation disallows any expenditure incurred by the assessed for any purpose which is an offence or which is prohibited by law. He further contends that the amount in question was paid to CPT because the assessee encroached a piece of land belonging to CPT. This act of the assessee, he submits, amounted to an act which is prohibited by law and hence such expenditure cannot be allowed as a deduction. Mr. Chakraborty learned Advocate for the appellant .....

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t applicable to the instant case. He further contended that the nature of the impost needs to be examined in each case. If it is found that the impost is composite in nature being partly compensatory and partly penal then the proportion between the two requires to be determined and accordingly apportionment is to be made. The portion which is penal in nature cannot be allowed as a deduction. However, the remaining portion which is compensatory in character can be allowed as a deduction. He in su .....

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within the meaning of Section 37(1) of the Act quoted above. In Jamna Auto Industries, Yamunanagar -Vs- The CIT Haryana, Rohtak reported in (2008) 299 ITR 92 a full bench of Punjab and Haryana High Court elaborately dealt with the question of whether damages paid for breach of contract can be allowed as expenditure under Section 37(1) of the Act. In the aforesaid case the assessee had entered into an agreement with a German Firm for supply of certain goods. The said contract did not fructify, a .....

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(1), for a particular item of expenditure to be an allowable deduction under this section:- (a) it should not be an expenditure of the nature described in Sections 30 to 36; (b) it should not be in the nature of capital expenditure; or personal expenses of the assessee; and (c) it should have been laid out or expended wholly and exclusively for the purpose of the business or profession of the assessee; 11. The phraseology-laid out or expended wholly and exclusively for the purposes of business o .....

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ether the expense has been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration and that expenditure was necessitated or justified by commercial expediency. 12. Whenever certain damages are to be paid by an assessee for the breach of a contract, such damages are treated to be normal incidences of business. For allowability as a deduction, a claim for damages is to be tested on the touchstone of the provisions .....

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acted in an unlawful manner which has rendered him liable to penalty, the sum so paid cannot be claimed as a deductible expense. Infraction of the law is not a normal incident of business and, therefore, no expense which is paid by way of penalty for a breach of law is admissible deduction. In cases where a penalty has to be incurred, for the reason of the assessee having carried on business in an unlawful manner or in contravention of certain rules and regulations, such penalty could not be reg .....

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on under Section 37(1) because such payment is for infraction of law. In CIT -Vs- S.A. Builders Pvt. Ltd. reported in (2008) 299 ITR 88, the assessee was a contractor executing various works. The assessee claimed a deduction on account of compensation paid to the contractee for delaying the execution of works. The issue was whether the compensation paid can be allowed as a deduction. It was held that the compensation paid by the assessee was on account of breach of contract which does not fall w .....

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Employee s Provident Fund Act, 1952 and the penalty levied on the assessee under the Central Sales Tax Act. The Supreme Court followed its earlier judgement in Prakash Cotton Mills Pvt. Ltd. -Vs- CIT reported in (1993) 201 ITR 684 and held that wherever an amount has been paid by way of damages, the compensatory payment made by the assessee entitles him to claim deduction from the income earned by him and where an element of penal levy is concerned, any such payment made for contravention of la .....

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