2015 (12) TMI 289 - AT - Income Tax

Tribunal allows deduction for liquidated damages as business expenditure under Income Tax Act

The Deputy Commissioner of Income-tax, Circle-4, Ahmedabad Versus GMM Pfaulder Ltd,

The tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the assessee's claim for liquidated damages as a deductible business ... Disallowance of assessee’s claim in respect of its liquidated damages - CIT(A) deleted the addition - Held that:- A coordinate bench in assessee’s appeal [2011 (2) TMI 1351 - ITAT AHMEDABAD] directed the Assessing Officer to allow the assessee’s claim on actual basis and that wherever the other party had claimed liquidated damages in current assessment year, it would be allowed. It was further of the view that the assessee has to submit individual account of its customers as per law. The assessee has succeeded in the previous round of proceedings. Thus, the Revenue’s argument on the issue of revised return according fails. A perusal of the case file reveals that the assessee filed all details of liquidated damages in question in the shape of individual ledger accounts from 01- 04-2002 to 31-03-2003. The same contain certification as per rules to have been filed in the course of assessment. The Assessing Officer still quoted lack of evidence and held that this claim was only in the nature of a provision. This voluminous evidence was nowhere even adverted to. The Revenue’s second argument quoting lack of evidence also stands rejected because of the sufficient supportive material regarding the impugned claim of liquidated damages. Revenue argument that these liquidated damages are only in the nature of a provision is unacceptable as we find that the CIT(A) on this issue has followed similar orders passed in earlier assessment year in assessee’s own case on the very issue. It has come on record that these claims have arisen from late delivery of goods beyond the specified period in the relevant previous year. The assessee passed these amounts in the books after ascertaining the claim in case of each customer. We find that the Assessing Officer himself in a consequential order dated 26-03-2003 for assessment year 1990-91 has followed a similar course of action. Various orders of the tribunal in assessee’s own case in assessment year 1984-85, 86-87, 89-90,90-91 have already decided the very issue in assessee’s favour. The Revenue fails to point out any distinction on facts. - Decided in favour of assessee. Issues:1. Challenge to deletion of disallowance/addition of liquidated damages claim by the Assessing Officer.2. Claiming liquidated damages as business expenditure under sections 36(1)(vii) and 37(1) of the Income Tax Act, 1961.3. Dispute regarding the nature of liquidated damages as a provision or actual expenditure.Analysis:1. The appeal involved a challenge by the Revenue against the deletion of disallowance/addition of the assessee's claim for liquidated damages by the CIT(A). The Revenue contended that no evidence was furnished to establish the debiting of the sum as a provision for expected further expenditure. However, the CIT(A) accepted the claim based on detailed submissions by the assessee regarding the liability for liquidated damages arising from late delivery of goods to customers.2. The assessee argued that liquidated damages were business losses incurred during the course of business and should be treated as allowable deductions under sections 36(1)(vii) and 37(1) of the IT Act, 1961. The CIT(A) upheld the claim, emphasizing that the liability for liquidated damages was properly accounted for in the books of accounts as a compensation for late delivery of goods, and had been allowed in previous assessment years by the ITAT.3. The Revenue raised concerns that the liquidated damages were merely a provision and not actual expenditure. However, the tribunal found that the CIT(A) had correctly followed previous orders in the assessee's case, where similar claims were allowed as actual expenditures. The tribunal noted that the claims had arisen from late deliveries of goods, were properly accounted for, and were consistent with past decisions in the assessee's favor. As a result, the Revenue's argument regarding the nature of the liquidated damages was rejected.In conclusion, the tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the assessee's claim for liquidated damages as a deductible business expenditure. The judgment highlighted the importance of proper accounting treatment and judicial consistency in determining the tax treatment of such claims.