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TMI Blog2021 (7) TMI 1168X X X X Extracts X X X X X X X X Extracts X X X X ..... scrutiny proceedings, the Assessing Officer submitted as under: The assessee has debited an amount of Rs. 1,10,61,051/- towards Security deposit non performance. When asked about the same, the AR of the assessee filed submissions. The submissions of the AR is carefully considered and it was found that the assessee paid bank guarantee for executing turnkey project with High Explosive Factory, Pune. But, the assessee failed to execute the project. The encashment of bank guarantee is in the nature of penalty levied for the default in executing the project. Further, the assessee has not realized any amount out of this project. As the expenditure claimed by the assessee is penal in nature and as there ws no income out of this project, the expenditure of Rs. 1,10,61,051/- claimed by the appellant was disallowed and added to the income. 5.1 In this regard, the appellant contended as under: The Assessee company is engaged in the business of manufacturing and trading of bulk drugs, chemicals & & intermediates, electronic chemicals, drug development services including chemistry, analytical services and trading of bulk drugs intermediates. During the year under consideration, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to, in question as a penal in nature, any such payment would not pertake character of penalty. It is further submitted that the amount of bank guarantee paid by the assessee to the bank is compensatory in nature and not penal in nature and the expenditure incurred which is in nature of compensatory is allowable u/s. 37(1) of the Act. In this regard, we would like to review the section 37 of the Act, Section 37(1): Conditions laid down under this section for allowance of a) It should not be in the nature of expenditure described in section 30 to 36. b) It should not be in the nature of capital or personal expenditure. c) It must be expended wholly and exclusively for the purpose of the business. Explanation to Section 37(1) : Expenditure incurred for any purpose which is an offence or prohibited by law shall not be allowed. Brief Facts related to the above discussion: There are instances where the assessee incurs and pays certain amount for not fulfilling certain terms of any agreement. In these cases, some of the assessee's book the expenditure under 'Penalty' or 'Penal Charges' in the Profit and loss Account. Now, they claim it to be an allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction under section 37(1) - Held, yes [Pam 4] [In favour of assessee. * HIGH COURT OF GUJARAT in the case of Commissioner of Incometax -1. V .Neo Structo Construction Ltd. wherein it was held that :- "Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Compensation] - Assessment year 2006-07 - Assessee, a contractor, entered into a contract with a contractee '0' - At time of entering into contract, it had given bank guarantee, which was furnished as performance guarantee - Subsequently assessee having noticed that it would not be possible for it to perform contract took decision not to proceed further with contract and informed contractee accordingly - Due to non-performance of contract, contractee encashed bank guarantee and recovered amount - Assessee claimed deduction of said amount as business expenditure - Whether assessee would be entitled to deduction of said amount as business expenditure under section 37(1), as same was compensatory in nature - Held, yes [Para 10] [In favour of assessee]" * [2013] 35 taxmann.com 64 (Gujarat), HIGH COURT OF GUJARAT, Commissioner of Income-tax-II v. Gujarat State Financial Corporation, wherein it has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was in the nature of enabling provision which could have some relation with the approximate quantum of loss which the licensee might suffer in case of an order cancelling the licence for the remaining period. Further, this Bench had an occasion to consider this matter in the case of Shadi Singh Kashmira Singh vs. ITO (1983) 15 TLR 485 (Chg-Trib.) and it was held therein that the payment made in respect of default under s. 36B of the Punjab Excise Act, 1914 was incidental to trade and was allowable as such. * HIGH COURT OF PUNJAB-HARYANA in the case of Commissioner Of Income Tax vs Hoshiari Lal Kewal Krishan on 18 October, 2006 Bench: A K Goel, R Bindal wherein it was held that :- The fine was incurred by the assessee for making belated payments of the said excise duty. Though termed as fine, the payment was not in the nature of punishment but was by way of compensation. The payment was in effect intended to compensate the loss on account of delay in making the payment and was not by way of penalty for breach of law. The amount paid can be considered to be 21 ITA 272/JP/2017 DCIT Vs. M/s Agribiotech Industries Ltd. legitimate business expense of the assessee, though technicall ..... X X X X Extracts X X X X X X X X Extracts X X X X
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