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Principal Commissioner of Income Tax -2 Versus Mazda Ltd.

2017 (9) TMI 1038 - GUJARAT HIGH COURT

Disallowance of liquidated damage - allowable business expenditure u/s 37 - nature of expenses - Held that:- Section 37 of the Act is the residuary provision granting deduction of an expenditure not being expenditure of the nature of capital expenditure or personal expenses of the assessee, which is laid out or expended wholly and exclusively for the purposes of business or profession and not specified in the preceding sections 30 to 36 of the Act. Explanation to section 37(1) would clarify that .....

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business and is not opposed to public policy. See Jamna Auto Industries vs. Commissioner of Income Tax reported [2008 (1) TMI 62 - PUNJAB & HARYANA HIGH COURT] - As noted, the expenditure in question was purely in relation to the assessee's normal business activity and was inherent part of its business transactions. The expenditure was certainly not incurred for any purpose which is an offence or which is prohibited by law. The Tribunal therefore was perfectly justified in granting such expe .....

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2013 involving similar issue has been admitted for consideration of following substantial question of law: Whether the Appellate Tribunal has substantially erred in law in deleting the disallowance of liquidated damages of ₹ 26,12,269/- by overlooking the fact that the same is contrary to the explanation given to section 37(1) of the Income Tax Act, 1961 and cannot form part of expenditure? 2. We therefore admit Tax Appeal No. 647 of 2017 for consideration of following question of law prop .....

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e Companies Act and is engaged in the business of manufacturing and trading of machinery and machinery parts and manufacturing of drink concentrates. For the assessment year 2010-11, the assessee had filed a return of income on 29.09.2010 declaring total income of ₹ 14,53,78,210/-. During the scrutiny assessment, the Assessing Officer noticed that the assessee had claimed business expenditure of ₹ 75,36,037/- by way of liquidated damages in the profit and loss account under the head .....

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hich are tailir made as per specifications received from the parties. The terms of the purchase order specify that any delay will be charged parties of the assessee company at percentage value of order and hence it is parts of the purchase order. The delay in delivery occurs due to delay in drawing approvals by the customer, delay in inspection and performance test of the equipments by the customer or other authorized inspector. Thus, these are normal features inherent in the business in which a .....

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pletion of the contract. The Assessing Officer referred to judgement of the Income Tax Appellate Tribunal in which, the claim of the assessee therein for loss on account of charges for cancellation of the contract came to be rejected. The Tribunal observed that it is not normal incident of assessee's business to enter into contracts, then cancel contract which led to the cancellation charges. Decision of the Tribunal in case of present the assessee for the earlier years was not followed on t .....

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e for breach of the contract. The same was thus in the nature of a penal liability. The expenditure cannot be stated to have been laid out wholly or exclusively for the purpose of business. The assessee, therefore, cannot claim benefit of section 37 of the Act. In support of her contentions, counsel relied on the decision of Division Bench of Kerela High Court in case of Commissioner of Income Tax vs. Bharath Plywood and Timber Products (P.) Ltd. reported in 233 ITR 315. 7. On the other hand, le .....

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8. Material on record would suggest that the assessee, who was in the business of manufacturing and trading of machinery, machinery parts and manufacturing of drink concentrates would sometimes fall behind the time schedule for execution of the contracts. Before the Assessing Officer, the assessee pointed out that the assessee sales specialized products which are tailor made as per the specifications given by the customers. The agreement would envisage that any delay in delivery would be charge .....

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efore emerges from the unopposed averments of the assessee is that the assessee would provide customized product or a machinery. The purchase order would specify the date of delivery of the machinery or execution of the contract. The purchase order itself would specify that in cases of delay, the assessee would be charged at a certain percentage of the value of the order. The delay would occur due to multiple reasons such as delay in approval of the drawings, delay in inspection and performance .....

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the nature of capital expenditure or personal expenses of the assessee, which is laid out or expended wholly and exclusively for the purposes of business or profession and not specified in the preceding sections 30 to 36 of the Act. Explanation to section 37(1) would clarify that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance .....

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. relied upon by the counsel for the Revenue concerned the deduction claimed by the assessee of a penalty paid for delay in remitting employees' State Insurance and Provident Fund contributions. The Court was of the opinion that as per the statute, delay in depositing the contribution would result into penal liability. Such are not the facts in the present case. 13. The Calcutta High Court in case of Mundial Export Import Finance (P) Ltd vs. Commissioner of Income Tax, Kolkata-IV reported in .....

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