2023 (11) TMI 858

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....ssment Year 2018-2019. 2. The first issue raised by the revenue is that the Ld. CIT(A) erred in disallowing the damage charges paid to NHAL for Rs. 1,86,02,000/- treating the same as in contravention of law. 3. The assessee in the present case, a private limited company, is engaged in the activities of operating and maintenance of roads. The AO during the assessment proceedings found that the assessee has claimed the deduction of certain expenditure which were representing in the nature of penalty. Therefore, the AO was of the view that such a penalty cannot be allowed as deduction under the explanation of section 37 of the Act. Besides the above, the AO also found that such damage charges were pertaining to the earlier year, therefore th....

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....nt that the nature of payments claimed as damages is not covered by this circular or Explanation I to section 37 (1) of the Act and is allowable. 6.1 With regard to the contention of the AO that the damages pertain to earlier years, the appellant has submitted that the same has crystallized in this year and allowable in this year. In the case of Kanona Chemicals & Industries Ltd. vs. CIT (1995) 78 Taxman 455 (Cal), the Hon'ble High Court has held that expenditure will be allowed in the year when the same is crystallized. In view of he provisions of section 37(1), Explanation 1 to section 1, Circular No. 722 dated 23/12/1998 of CBDT and the decisions discussed above. I agree with the contention of the appellant that the payment of dama....

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.... the assessee on account of breach of contract which cannot be equated with the offence, or something prohibited by law. As such, the assessee could not meet the deadline to fulfill the criteria laid down by the contractee being the NHAL and therefore the damages were levied by NHAL. The Hon'ble Gujarat High Court in the case of PCIT vs. Mazda Ltd. reported in 250 taxman 0510 has held that the deduction on account of liquidated damages cannot be disallowed under the provision of section 37(1) of the Act. The relevant extract of the order is reproduced as under: 10. Section 37 of the Act is the residuary provision granting deduction of an expenditure not being expenditure of the nature of capital expenditure or personal expenses of the ass....