Liquidated Damages paid for Non-Compliance of Business Obligations are allowable Expenditure: ITAT [Read Order]

Liquidated Damages

The Income Tax Appellate Tribunal (ITAT) has held that the liquidated damages paid in nature of contractual liability on account of non-compliance of business obligations to customers are allowable as an expenditure under the provisions of the Income Tax Act.

The Assessing Officer disallowed the assessee’s provision for liquidated damages amounting to Rs. 29,92,672/- and Rs. 36,76,295/-

The Revenue’s last substantive ground in both assessment years seeks to revive the Assessing Officer’s action disallowing assessee’s provision for liquidated damaged amounting to Rs. 29,92,672/- and Rs. 36,76,295/-; respectively in both assessment years.

Also Read: Section 54F Benefit not available If Assessee failed to deposit the unutilized amount in Capital Gains Scheme Account: ITAT

Before the tribunal, the department contended that the assessee’s liquidated damages are in the nature of penal liability not allowable as expenditure incurred wholly and exclusively for the purpose of its business.

“She fails to dispute the clinching fact the impugned liquidated damages are in the nature of contractual liability only than arising from violation of any penal provision. We hold in these peculiar facts and circumstances that the assessee had made the impugned provision as per its contractual liability on account of non-compliance/non-fulfillment of its business obligations to only its customer parties. We, therefore, find no merit in Revenue’s instant last substantive ground as well both of its appeals ITA No.1615-1616/Kol/2017 fail, therefore,” the Tribunal said.

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