Payments in respect of Penalty to the Customers for Defective Goods supplied constitutes legitimate Business Loss: ITAT Mumbai [Read Order]


The Mumbai bench of ITAT, in recently directed the Assessing Officer to allow the claim of expenditure made by the assessee towards the payment of penalty levied by the customers for defective goods. According to the Tribunal, the same constitutes legitimate business loss which is duly covered under section 36 of the Income Tax Act, 1961.

In the instant case, the assessee’s claim for the said expenditure while filing the income tax return for the relevant assessment year was rejected by the assessing officer on ground that the assessee has not fulfilled any condition as laid down under section 36(1)(vii) read with section 36(2) of the Act. The Commissioner of Income Tax (appeals) on appeal preferred by the assessee, upheld the said order.

When the matter was brought before the Tribunal on second appeal,the Tribunal quashed the orders of the lower authorities by finding that the same constitutes a genuine business loss as claimed by the assessee. While accepting the contentions of the assessee, the Tribunal observed that “From the facts before us we find that the advances are given in the ordinary course of business and when the advances made remained unadjusted due to absconding of suppliers from the open market, the assessee has no other alternative but to write off the said advances as business loss. We are of the considered view that the same constitutes legitimate business loss incurred by the assessee. During the course of hearing the ld. Counsel submitted that it is business loss and therefore has to be allowed. Accordingly, we set aside the order of ld. CIT(A) and direct the AO to allow the claim of the assessee.”

Read the full text of the order below.