2014 (6) TMI 251

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.... as compensation to its customers for violation of provision of agreement which it had entered into with them. The payments were made for delay in handing over of possession of properties purchased by its customers. The Assessing Officer held such payments to represent penalty and therefore disallowed the amount holding the payments were penal in nature. The Assessing Officer rejected the contention of assessee that the payment was not penalty but was in the form of compensation which was paid to payee for breach of terms of agreement entered into with its customers. 2. Aggrieved the assessee filed appeal before Ld CIT(A) and Ld CIT(A) relying upon a number of judgments and on the basis of submission of assessee deleted the addition by hol....

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....-II Ludhiana v. Hero Cycles Ltd(2009) 178 Taxman 484 (P&H), the Hon'ble jurisdictional High Court held that the assessee could be allowed deduction on account of extra charges paid by it to Electricity Board for drawing extra load in peak hours in violation of power regulations. While allowing the deduction the Hon'ble High Court held as under:- "There is no doubt that payments made in the nature of penalties or fines for any wrongful act cannot be allowed as permissible deductions. But mere label of the payment is not conclusive. Certain payments may be identical to the business and have to be allowed on the test of commercial expediency, if no violation of law the amount may be allowed as deduction. The test has to be applied fro....

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.... 5. The Ld AR, on the other hand, argued that issue is squarely covered in favour of assessee as the payment was not a statutorily liability but it was a compensation paid to aggrieved parties for violation of provision of agreement and in this respect he read out the order of Ld CIT(A). 6. We have heard the rival submissions of both the parties and have gone through the material available on record. We find that the payment made to its customers was in the form of compensation which was paid to its customers for delay in handing over the possession of properties and these payments were in accordance with clause 10 of agreement withits customers. The liability to pay such compensation arose in the course of business of assessee. This type ....