The Hyderabad bench of Income Tax Appellate Tribunal (ITAT) has held that payment of contractual obligation pursuant to an arbitration award deductible from Business Income.
Assessee Nipro Medical India Private Limited, was engaged in the business of trading of various medical equipments and consumables They had filed their return of income along with admitting loss under section 115JB of the Income Tax Act, 1961 after the assessment assessing officer determining the loss and make addition of Rs. 3 crores which the assessee paid to one M/s Atlantic Pharmaceuticals towards contractual breach, by holding that it was in the nature of penalty and Rs. 2,64,508/- towards the delay deposit of the provident fund collected from the employees, beyond the stipulated date to the Government account.
Against the order of the assessing officer assessee filed an appeal before the Commissioner of Income Tax Appeal (CIT (A) and before the CIT (A) counsel for the assessee Kishor Phadke, contented that contended that the payment of Rs. 3 crores was not in the nature of penalty or fine but it was the amount that was paid pursuant to the mutual agreement of the parties to terminate the civil suit and in accordance with the order of the Arbitrator.
Hence after considering the contention of the parties CIT (A) allowed the appeal of the assessee but further the aggrieved revenue filed appeal before the ITAT.
Counsel for the revenue Naveen Kumar contented that contract said to have been breached was not between the assessee and M/s Atlantic Pharmaceuticals but it was between M/s Nipro India Corporation Pvt. Ltd and M/s Atlantic Pharmaceuticals; and that therefore, the said amount paid by the assessee could not be said to be for the purpose of business of the assessee.
Counsel for the assessee Kishor Phadke content that assessee was formed as 100% subsidiary of the Nipro Corporation for the purpose of marketing and supply of Nipro products in India.Also , the trading activity the assessee was looked after by M/s Nipro India Corporation Pvt. Ltd, and when once the manufacturing activity had started, all the trading assets and trading liabilities, including third party claims relating thereto, were transferred to the assessee, and therefore, the assessee was justified in making the payment pursuant to the arbitration award.
After considering the contention of the both sides the division bench of the Tribunal compraising, RamaKanta Panda (Accountant Member) and K.Narasimha Chary (Judicial Member dismissed the appeal and held that , “by no stretch of imagination could it be said that the payment for breach of contractual obligation pursuant to an arbitration award in the pending litigation, cannot be said to have been incurred for any purpose which is an offense or which is prohibited by law.”
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