TaxTMI 
TaxTMI 
2013 (7) TMI 851
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....section 37(1) of the I.T. Act?" 2. The facts leading to the present appeal in nutshell are as under:- 2.1 The assessee company is engaged in the business of construction and erection of plants excluding civil instrumentation and electric works mainly in respect of public sector units like ONGC, HPCL, KRIBHCO, CRL etc. and also for private sector. 2.2 That the assessee filed return for the Assessment Year 2006-07 showing total income of Rs.7,05,44,680/-. 2.3 That the assessee company debited Profit & Loss Account by Rs.70,75,392/- towards encashment of bank guarantee by ONGC. On being questioned about the aforesaid expenditure being laid out or expended wholly exclusively for the purpose of business or profession, it was stated o....
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....wed the said appeal by holding that during the continuity of the business, if in a particular contract, the assessee had to compensate for its own default, by offering performance guarantee, which was a contractual obligation, and that the said business continued later on, then the disallowance for a particular contract be not considered separately, that too, to treat the same as capital expenditure and consequently it is held that the assessee was entitled to the deduction of Rs.70,75,392/- under section 37(1) of the I.T. Act and consequently directed to delete the disallowance of aforesaid amount and adding the same in the total income of the assessee. 5. Feeling aggrieved by and dissatisfied with the impugned judgment and order passed....
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....considered by the Hon'ble Supreme Court in the case of Prakash Cotton Mills P.Ltd. vs. Commissioner of Income-Tax reported in [1993] 201 ITR 684. It is held by the Hon'ble Supreme Court in the said decision that deduction under section 37(1) of the I.T. Act can be allowed when it is found that it is wholly compensatory. It is held by the Hon'ble Supreme Court in the said decision that :- " Whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Incometax Act, 1961, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the....
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....w. A situation may arise where an assessee might have to make a composite payment being "compensatory" and "penal character" both. In that situation, the assessing authority would, of course, be required to segregate the amount containing two characters. After undertaking this exercise, the amount that is held to be of compensatory nature shall be countenanced as allowable expenditure whereas the other portion of the amount, which is penal in nature, shall be refused to be an allowable expenditure." 10. Considering the aforesaid decision of the Hon'ble Supreme Court and the Full Bench decision of the Punjab and Haryana High Court and the facts of the case under our consideration, it appears that ONGC encashed the bank guarantee, which wa....