Provision for Liquidated Damages is an ascertained liability, allowable as Income Tax Deduction: ITAT [Read Order]

Liquidated Damages - Income Tax Deduction - ITAT - taxscan

The Bangalore Bench of the Income Tax Appellate Tribunal ( ITAT )has held that the provision for liquidated damages is an ascertained liability and is allowable as a deduction from Income.

SKF Engineering & Lubrication India Pvt. Ltd., the assessee is in the business of automated lubrication systems, manual lubrication equipment and industrial pumping systems. The assessee returned a total income of Rs.37,18,54,400/- for AY 2012-13 vide revised return of income. The case was selected for scrutiny and an assessment order was passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (the Act) on 16.02.2015 wherein the assessee company’s income was assessed at Rs.37,74,93,367/-.

The PCIT invoked jurisdiction under Section 263 of the Income Tax Act and set aside the assessment order by directing the AO to verify the claim of the assessee about the provision of liquidated damages and redo the assessment. The AO passed an order under Section 143(3) r.w.s. 263 of the Act dated 05.06.2018 disallowing the provision for liquidated damages stating that it is likean unascertained liability. On appeal, the CIT(A) confirmed the order of the AO.

It was stated by the assesseethat he was under contractual obligation to pay liquidated damages since the purchase orders raised by the customers or the contracts entered into by the assessee with its customers contain a clause for payment of liquidated damages by the assessee if the assessee fails to deliver the lubricating systems/products on or before the scheduled delivery date

On the other hand, the revenue submitted that the liability to pay the liquidated damages is arising at future date and therefore it cannot be stated to be an ascertained liability and supported the orders of the lower authorities.

It was noticed by the ITAT that the amount of liquidated damages is calculated as a percentage of the basic value of the purchase order/contract, whichmeans that the provision for liquidated damages is created for the period relevant to the year under consideration. Though the actual damages would be paid only on delivery of lubrication systems or products, the liability, in our view, has to be provided for under the mercantile system of accounting.

The ITAT bench of Shri George George K., Judicial Member and Ms Padmavathy S., Accountant Member observed that the provision is made based on the terms agreed with the customer and it relates to the period relevant for the year under consideration and held that “the provision made for liquidated damages is an ascertained liability and should be allowed as a deduction. The disallowance made by the AO in this regard is deleted.”

The appeal filed by the assessee was allowed. The assessee was represented by Shri Deepak Chopra and the revenue was represented by Smt. Priyadarshini Baseganni.

Subscribe Taxscan Premium to view the Judgment

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates