The Mumbai Bench of Income Tax Appellate Tribunal(ITAT)allowed deduction of ₹42.44 lakh as business expenditure under Section 37(1) of Income Tax Act,1961 rejecting the disallowance for contractual penalties deducted by government authorities.
G.L.Construction Pvt Ltd,appellant-assessee,was engaged in road construction for government bodies like MCGM, NMMC, and MMRDA. During project execution, these authorities deducted Rs.45,91,698/- from certified bills, citing delays, quality issues, lack of machinery, and other lapses as reasons for penalties. In some cases, the appellant recovered part of these amounts from engineers and project managers.
The assessee argued that these deductions were part of routine business operations and not penalties for any offence under law, especially considering the large scale of projects ranging from Rs.100 to Rs.250 crores.
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However, the Assessing Officer(AO) disallowed Rs.42,44,859/-, treating it as not allowable under Section 37(1) of the Act. The Commissioner of Income Tax(Appeals)[CIT(A)] upheld the disallowance. Aggrieved, the appellant filed the present appeal before the tribunal.
The assessee counsel submitted a Paper Book containing 30 pages, which was taken on record. It included a summary of payments made to MCGM, HPCL, and others, some through credit card and car insurance. Out of the total expenditure of Rs.44,95,698/-, Rs.2,50,839/- was recovered from employees, and the remaining Rs.42,44,859/- was claimed as a deductible expense under Section 37(1). A detailed break-up of these payments was provided in the Paper Book.
In support of the claim, the counsel relied on the Delhi ITAT ruling in Mahavir Multitrade (P) Ltd, where it was held that non-compliance with contract terms did not amount to an offence under law. The Kolkata ITAT ruling in Ripley & Co Ltd was also cited, where demurrage charges paid to Railways were treated as business expenses. Further reliance was placed on Farseen Rubber Industries Ltd, where similar payments were considered commercial in nature and not disallowable under Explanation 1 to Section 37(1) of the Act.
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The two member bench comprising Anikesh Banerjee(Judicial Member) and Padmavathy.S(Accountant Member) heard both sides and reviewed the records. It found that the penalty and late fee payments were not for breaking any law but were part of normal business operations under contract terms with government authorities.
The appellate tribunal noted that similar payments had been allowed in earlier cases like Mahavir Multitrade, Farseen Rubber Industries, and Ripley & Co Ltd, where such expenses were not treated as violations of law.
It held that the disallowance of Rs.42,44,859/- was not justified, set aside the appellate order, and directed that the amount be allowed as a business expense.
Therefore,the appeal filed by the assessee was allowed.
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