2014 (1) TMI 842 - AT - Income Tax

Tribunal allows appeal on liquidated damages but upholds disallowance of irrecoverable amounts.

The Tribunal allowed the appeal in part, reversing the disallowance of liquidated damages deducted by the Government of India as not constituting a ... Disallowance made u/s 37 of the Act - Liquidated damages charged by Government of India on account of delay in supply of vaccines – Held that:- There was an agreement between the assessee and Govt.of India for supply of medicines - assessee had written off liquidated damage as per the terms and conditions of the agreement - payment of liquidated damage has to be allowed – Relying Sardar Prit Inder Singh Versus Commissioner Of Income-Tax [1985 (7) TMI 35 - PATNA High Court] - damages for delay in supply and for supply of articles of inferior quality was not a penalty for infraction of law hence same was deductible and business expenditure - amounts paid to Government as penalty and damages for delay in execution of contracts was a deductible item - the order of the FAA reversed – Decided in favour of Assessee. Disallowance of amounts written off as irrecoverable u/s 37 of the Act - Advance given to Government departments – Held that:- FAA has given a categorical finding of fact that no details of departments except for of the PWD Department were furnished - in view of lack of proof that as to when and to whom these advances were given same could not be allowed u/s.37 or 36(1)(vii)of the Act - The order of the FAA does not suffer from any infirmity - In absence of details of expenditure claimed by the assessee he has rightly disallowed the claim of the assessee – Decided against Assessee. Issues:1. Disallowance of liquidated damages by Government of India and sundry balances written off as irrecoverable.2. Treatment of non-recoverable balances as business loss under section 28 or 37.Analysis:1. The appellant, a public sector undertaking engaged in manufacturing vaccines, filed its return declaring income. The Assessing Officer disallowed Rs.19.37 lakhs written off as sundry balances, citing lack of conformity with prescribed conditions. The First Appellate Authority (FAA) upheld this disallowance. The appellant argued that the amount of Rs.9,68,813 deducted by the Government of India as liquidated damages was not a penalty but a contractual obligation. The Tribunal found that the deduction was not a penalty but liquidated damages as per the agreement terms, allowing the payment. Citing precedents, the Tribunal reversed the FAA's decision on this issue in favor of the appellant.2. Regarding the other amounts written off as irrecoverable, the Tribunal upheld the disallowance of advances to various government departments due to lack of details provided by the appellant. The disallowance of un-reconciled balances was also upheld as the appellant did not press this ground during the hearing. Therefore, these parts of the appeal were dismissed. The Tribunal found no infirmity in the FAA's decision on these issues and decided against the appellant. Overall, the appeal was partly allowed, with certain disallowances upheld and others reversed based on the specific circumstances and legal interpretations presented during the proceedings.