The Delhi bench of the Income Tax Appellate Tribunal (ITAT) observed that Punitive damages is not allowable as expenditure
The facts in brief were that the Assessee had filed its Return of Income on 29/09/2014, declaring a loss of Rs. 10,47,12,787/- for the year under consideration. The case underwent scrutiny, and subsequently, the assessment under Section 143(3) of the Income Tax Act, 1961, was concluded via an order dated 27.12.2016, resulting in a NIL income after adjusting losses amounting to Rs. 15,35,763/-.
In the assessment order, the Assessing Officer disallowed Rs. 10,45,73,650/- on account of legal and professional expenses and compensation under Section 37(1) of the Income Tax Act 1961, along with Rs. 16,74,900/- disallowed on account of expenses towards amounts written off under Section 36(2) Income Tax Act 1961.
The counsels for the respondent Zafarul Haque Tanweer rebutted the same by submitting that those principles were applicable where otherwise there was no violation of any law. The learned DR further submitted that in the case of the assessee, there were explicit findings of the Supreme Court that there were violations of Municipal Laws concerning the provision of exit gates and installation of fire extinguishers, etc.
The counsels for the Assessee R.S. Singhvi and Satyajeet Goel pointed out that the assessee had earlier paid compensation and the present year compensation is only part of it, culminating the whole. It was submitted that even otherwise the assessee was running in loss which has been accepted and the disallowance of compensation is part, as such does not affect the Revenue.
The counsels for the Assessee R.S. Singhvi and Satyajeet Goel drew the attention of the Bench towards the ledger account, a copy available at page nos. 112-117, containing details of legal and professional expenses. It was submitted that the expenses were only part of the major expenses which had already been paid in the earlier years. He drew attention to the fact that legal and professional charges were paid for defending the assessee company of its prospective liability, and there was no dispute regarding the genuineness of the payments, as the same were made to top lawyers of the country through banking channels.
The counsels for the respondent Zafarul Haque Tanweer however, relied on the orders of Income tax authorities below to submit that they are not related to the present year and are in respect of the business which was closed down long back.
The two member bench of the tribunal comprising M.Bala Ganesh (Accountant member) and Anubhav Sharma (Judicial member) concluded that ground with its sub-grounds was decided in favour of the assessee to the extent that except for the punitive damages of Rs.25 lakhs, the remaining disallowances are not sustained.
Accordingly, the appeal of the assessee was allowed partly.
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