1964 (3) TMI 120 - HC - Income Tax

High Court Allows Deductions for Liquidated Damages

The High Court ruled that the firm was entitled to claim deductions for the liquidated damages paid under section 10(2)(xv) of the Indian Income-tax Act. ... - Issues:Interpretation of section 10(2)(xv) of the Indian Income-tax Act regarding deduction of liquidated damages paid for breach of contract.Analysis:The case involved a registered firm engaged in the supply of dehydrated vegetable products to the Government. The firm failed to deliver the contracted quantity of onions by the specified date, resulting in a penalty imposed by the Government. Subsequently, the Government reconsidered its decision, extended the delivery deadline, and required the firm to pay liquidated damages of 2% to keep the contract alive. The firm claimed deductions for the paid damages under section 10(2)(xv) of the Act, but the Income-tax Officer, Appellate Assistant Commissioner, and Tribunal disallowed the claim.The Tribunal referred the question of whether the paid damages were permissible deductions under section 10(2)(xv) to the High Court. The High Court analyzed the nature of the payment, emphasizing that the damages were paid to enable the firm to fulfill the contract and earn profits, not as penalties for breach of contract. The court cited the case law of Strong and Company of Romsey Ltd. v. Woodifield to support its interpretation that the payment was made by the firm as a trader for commercial expediency.Drawing on the Supreme Court decisions in Eastern Investments Limited and Royal Calcutta Turf Club cases, the High Court concluded that the payment of damages was directly connected to the firm's business activities and made for the purpose of carrying on the business. The court distinguished this case from precedents where payments were disallowed as penalties for breach of contract, highlighting the commercial necessity and business purpose behind the damages paid by the firm.In contrast to cases like Mask & Co. and Himalaya Rosin-Turpenline Manufacturing Company, where deductions were disallowed due to dishonesty or penalties imposed for rule violations, the High Court found that the damages paid by the firm in this case were permissible deductions under section 10(2)(xv) of the Act. The court rejected the Commissioner's arguments based on other case precedents and ruled in favor of allowing the deductions claimed by the firm.Ultimately, the High Court answered the Tribunal's question in the affirmative, stating that the firm was entitled to claim deductions for the paid damages. The court directed the issuance of a copy of the judgment to the Appellate Tribunal and awarded costs to the assessee, assessing counsel's fee at &8377; 200.