TaxTMI 
TaxTMI 
2013 (2) TMI 19
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.... Tax(A) has erred in holding the amount paid as liquidated damages as capital expenditure, not allowable under section 37 of the Income Tax Act. 4. That the ld. Commissioner of Income Tax(A) has erred in observing that liquidated damages have arisen out of a contract for purchase of capital asset, without appreciating that the contract was for sale of goods. 5. That the ld.CIT(A) has erred in not allowing the deduction on the basis of terms of the relevant contract, erroneously interpreted by the ld. Assessing Officer while disallowing the claim for liquidated damages. 6. That the ld. Commissioner of Income Tax(A) has erred in holding that the liquidated damages do not constitute expenditure laid out wholly and exclusively for the purposes of business. 7. That the ld. Commissioner of Income Tax(A) has erred in placing reliance on the decisions of Swadeshi Cotton Mills Co. Ltd. v Commissioner of Income Tax(No.2) (1967) 63 ITR 65, Travancore Rubber and Tea Co. Ltd. vs Commissioner of Income Tax (2000) 243 ITR 158 (SC) and Tuticorin Alkali Chemicals and Fertilizers Ltd. vs Commissioner of Income Ta....
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....alent to 2 per cent of the rpice of any stores (including elements of taxes, duties, freight, etc.) which the contractor has faield to deliver within the period fixed for delivery in the contract or as extended for each month during which the delivery of such stores may be in arrears. (B) The details furnished for liquidated damages also includes the name of Bharat Electronics Ltd., Ghaziabad, Panchkula and Bangalore for which no copy of contract is furnished. (C) The details furnished reveals that the liquidity damage is claimed at much more rate then prescribed in the contract of Railways. In view of above facts of the case, the claim of in respect of liquidity damage amounting to Rs.32,35,721/- is not allowable and the same is disallowed and added to total income of the assessee." 5. The assessee filed an appeal before the Commissioner of Income Tax(A) challenging the disallowance of liquidity damages made by the Assessing Officer. The ld. Commissioner of Income Tax(A) dismissed the appeal of the assessee with the following observations:- "2.4 It is a fact that the appellant has entered in....
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.... excluded expenditure, which was in the nature of capital expenditure. That the Liquidated Damages were in the nature of capital. That even though it was taken to the Revenue account by the applicant it never arose out of the business of the applicant. That the amount was not paid wholly and exclusively for the purpose of business within the meaning of Sec. 37(1) therefore, the same could not be allowed as deduction from the income of the year under review. 2.7 Since liquidated damages have arisen out of a contract for purchase of capital equipment, what is relevant is the nature of goods purchased under the contract, and not the treatment or method of accounting/accounting policy adopted by the applicant. In this regard it would be apposite to refer to the decision of the Hon'ble Supreme Court in the case of Travancore Rubber and Tea Co. Ltd. vs Commissioner of Income Tax (2000) 243 ITR 158 wherein it was observed as under:- "The logic of the principle is that the assessee's right to recover the compensation was to place the assessee in the same position as if the breach had not taken place. Applying the rule to t....
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.... damages was of capital expenditure and not allowable u/s 37(1) of the Act. The AR submitted that in view of legal precedents, provisions of law and facts of the case, the amount of liquidated damages is an allowable expenditure because it was paid out of a contractual obligation which was not a provision but actual expenditure, not paid for any offense and was not prohibited by any law. The AR further submitted that the expenditure was not in the nature of any penalty for infraction of any law. 8. Replying to the above submissions, the DR supported the orders of authorities below and submitted that the liquidated damages paid by the assessee were in the nature of capital expenditure which were not paid wholly or exclusively for the purpose of business within the meaning of Section 37(1) of the Act. Therefore, the same could not be allowed as deduction from the income of the year under consideration. He further submitted that since the liquidated damage has arisen out of a contract for purchase of capital equipment, therefore, the ld. Commissioner of Income Tax(A) rightly held the same in the nature of capital. Ld. DR placed his reliance on the decision of Hon'ble Supreme Court ....
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....gard to altered circumstances, the appellant assessee textile company subsequently cancelled the contracts as the machinery to be purchased would not be required for its business and the assessee company paid Rs.15,000 and Rs.20,000 respectively to the other contracting parties (sellers of the textile machinery) as compensation. In this case, the Hon'ble Apex Court held that the payment was made neither for the purpose of earning profit nor for the purpose of furthering, protecting or continuing its business which was to be carried on from day-to-day. In this case, the Supreme Court finally held that the payment was made with the object of avoiding an unnecessary investment in capital assets and was in the nature of capital expenditure. On careful perusal of above judgment of Hon'ble Apex Court, we respectfully hold that the benefit of the ratio of this judgment is not available to the revenue in the present case because the present case is related to the issue of allowance of liquidated damages paid by the assessee seller company under contractual obligation to the purchasers of electrical equipments which is a day-to-day business activity of the assessee company which is not an e....
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.... of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refused to give deduction to that component which is penal in nature." (Emphasis supplied by underline) 13. The Full Bench of Hon'ble Punjab & Haryana High Court in the case of Jamna Auto Industries (supra) considered the allowability of business expenditure and their lordships held as follows:- "19. In view of the authoritative pronouncements of the Apex Court and also of this Court, it would thus, be concluded that whenever an assessee has indicated any amount, which had been paid either by way of damages or penalty, to be an allowable expenditure under Section 37(1) of the Act, the Assessing Authority is obliged to discover the nature of such amount vis-is two prominent aspects, whether it is compensatory or penal. The Assessing Authority would there upon permit the amount as an allowable deduction that may be discovered to be purely of compensatory nature as payment for damages. However any statutory amount paid by the assessee which ....
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....the assessee did not take possession of the land from Delhi Glass Works. The arbitrator fixed the compensation at Rs.1,70,000 and this amount was paid by the assessee during the accounting period relevant to the assessment year 1958-59. The decision of Supreme Court in that case was in favour of the Revenue and against the appellant. 2.5 Since liquidated damages have arisen out of a contract for purchase of capital equipment, what is relevant is the nature of goods purchased under the contract, and not the treatment or method of accounting/accounting policy adopted by the applicant. Applying the rule to this case, if the agreed sums of money under the agreements had been paid by the assessee, they would have been credited in its account as a capital expenditure and not Revenue expenditure. That being so, the amounts paid must also be treated as capital payment. The plea of the applicant that the amount to be treated as a Revenue expenditure within the meaning of Sec.37(1) for the purposes of business, is not borne out from the record. The similar issues has been discussed in Swadeshi Cotton Mills Co. Ltd. V. Commissioner of Income-tax (1967) 063 ITR 0065 (SC),....
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....eriod fixed for delivery in the contract and in case the assessee supplier(seller) company failed to deliver the ordered goods to purchaser enterprise within the period fixed for delivery in the contract, then liquidated damage @2% of the price of stores was to be recovered from the assessee supplier company by the purchaser Railway company. In this condition, it is specifically mentioned that the payment of liquidated damages would not be considered as penalty. 17. In this context, we respectfully follow the judgment of Hon'ble Bombay High Court in the case of Commissioner of Income Tax, Pune vs R.D. Sharma and Co.(supra) wherein it was held that the delay in completion of contract is incidental to the business and liability of compensation arising because of delay is an allowable deduction under the Act. In the case in hand, admittedly, the assessee company claimed liquidated damages paid to the Railway department and other government undertaking enterprises as per contract and due to the delay in completion of supply contract. Therefore, in our considered opinion, this is an allowable expenditure and we are inclined to hold that the authorities below were not justified in dis....