The Income Tax Appellate Tribunal ( ITAT), Delhi has held that inability to meet the contractual obligation cannot be termed as an infraction of the law.
The revenue authority filed an appeal before ITAT Delhi challenging the order passed by the learned Commissioner of Income Tax (Appeals)-6, Delhi in the case of M/s Mahavir Multi-trade Private Limited, for the Assessment Year 2012-13, and the appellate authority held that the inability to meet the contractual obligation by the assessee cannot be termed as an offence or infraction of law so as to deny the claim of the assessee by invoking sec 37(1) of the Act.
Brief facts of the case are that the assessee is a company engaged in the business of trading of imported coal. For the assessment year 2012-13, they have filed their return of income declaring a loss. The assessment was, however, was completed after making many additions including the addition by way of disallowance under Section 37(1) of the Income Tax Act, 1961, that amount represented the penalty amount for supply of the coal with high moisture and low gross calorific value.
Assessee, therefore, submitted that there was no infraction of law whatsoever in the case of penalty for higher moisture and low GCV so as to attract the provisions of explanation to section 37 (1) of the Act as the deduction represents compensatory levy by buyer parties for not meeting the specifications/agreed parameters of coal.
Learned Assessing Officer, however, did not agree with the assessee and held that since the assessee himself categorised the expenditure as “penalty was levied on the assessee company for not complying with the terms of the contract”, such penalty paid for violation of the contract in the course of the conduct of business cannot be regarded as a deductible expenditure.
The assessee challenged the said addition before the Ld. CIT(A). Ld. CIT(A), reappraised the entire material before him in the light of the provisions under section 37 (1) of the Act and also in the light of the decisions of the Hon’ble Apex Court in the case of Prakash Cotton Mills (P) Ltd 111 CTR SC 389, Swadeshi Cotton Mills Company Limited vs. CIT, Continental constructions Ltd vs. CIT (1992) 101 CTR (SC) 386 and also the decisions of the Kerala and the Andhra Pradesh High Courts in CIT vs. Catholic Syrian bank Ltd (2004) 265 ITR 177 (Ker) and CIT vs. Or television private limited (1996) 218 ITR 173 (AP), reached a conclusion that the expenditure in question was the payment made by way of damages, the compensatory payment made by the assessee and it entitles him to claim the deduction from the income as earned by him and where an element of the delivery is concerned, it is such payment made for the contravention of law is inadmissible. Ld. CIT(A) also held that not meeting the contractual obligation cannot be equated to the infraction of the law. Therefore, deleted the addition and allowed the appeal of the assessee.
While dismissing the appeal, the tribunal members Shri R. K. Panda and Shri K. Narasimha Chary, held that the allegations of the learned Assessing Officer against the assessee only reveals the failure of the assessee to meet the contractual obligations, but the entire assessment order does not reveal which provision of law was violated by the assessee so as to invite the penal consequences. As rightly held by the Ld.CIT(A), the inability to meet the contractual obligation by the assessee cannot be termed as an offence or infraction of the law so as to deny the claim of the assessee by invoking the expression 1 to sec 37(1) of the Act. The authority upheld the decision of the Ld. CIT(A) and consequently find that the grounds of appeal are devoid of merits.
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