Disallowance of Income Tax deduction on Business Expenditure for Payment of Penalty to Clients/Customers for Breach of Contract: ITAT Remands Ex-parte Order to AO for Re-adjudication

The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) remanded the ex-parte order to the files of Assessing Officer for re-adjudication in regards to the disallowance of deduction on business expenses for the payment of penalties to clients or customers for contract violations.

The assessee in this case is Bandi Hemasunder Reddy, during the assessment proceeding the AO disallowed the deduction claimed under business expenditure. The disallowance under challenge is made upon invoking the Explanation 1 to section 37(1) of the Income Tax Act,1961 to the tune of Rs.9,39,837/- in respect of the penalty paid by the appellant to its clients / customers for breach of contract under the facts and circumstances of the case.

Aggrieved by the order the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], which uphold the order of the Ld.AO in completing the assessment under Section 144 of the Income Tax Act though the order passed by the AO is an ex-parte one.

Further aggrieved the assessee filed an appeal before the Tribunal. The Authorised Representative of the assessee (AR) Smt. Sunaina Bhatia, submitted that the penalty is for non-performance of contract and this penalty is in course of business expenditure since the same is paid for non-performance of contract and not as a result of committing an offence which is prohibited under any law and same is an allowable expenses under Section 37 of the Income Tax Act.

The AR prayed to remit the matter  to the file of CIT(A) for fresh adjudication.

Nischal .B appeared as Departmental Representative (DR).

The Two Member Bench comprising of Chandra Poojari, Accountant Member and Ms. Madhumita Roy, Judicial Member observed that having regard to the penalty compensatory in nature and the assessment order is ex-parte, to meet the ends of justice it would be fit and proper to remit the issue to the file of the AO to verify the same afresh and to pass a reasoned order.

The AO was further directed to give an opportunity of being heard to the assessee and to consider the evidence / judgment to be relied upon by the assessee during the course of hearing of the matter.

Hence, the appeal filed by the assessee was allowed for statistical purposes.

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