Penalty Paid to Third Parties for Breach of Contract Not Hit by Explanation u/s 37(1): ITAT Deletes ₹34.71 Lakh Disallowance [Read Order]
Assessee incurred ₹34.71 lakh as fines and charges paid to private parties for breach of contractual obligations; ITAT holds such payments are not for violation of law and directs deletion of disallowance under Explanation to Section 37(1).
The Kolkata bench of Income Tax Appellate Tribunal (ITAT) held that the penalty paid to third parties for breach of contract does not come under the explanation of Sec 37(1). ITAT deleted the ₹34.71 lakh disallowance.
The assessee, Shyam Metalics and Energy Ltd had sold shares of UIL at a loss of Rs. 1,89,53,757/-. Though the assessee had furnished contract notes, bank statements and other documents in support of the sale of shares of UIL, as per the Investigation Wing database, the share of UIL was a penny stock which was being used by entry operators to provide bogus accommodation entries in the guise of capital gains or losses.
The AO in the assessment order observed that the amount of Rs. 34,71,274/-, being penal in nature, was disallowable in terms of Explanation (1) to Section 37(1) of the Act.
Though the assessee assailed the issue before the CIT(A), it had omitted to adjudicate this issue. Aggrieved, the assessee is now in appeal before us.
The assessee showed that the assessee had paid a fine of Rs. 20,500/- to M/s M. Hoque Enterprises for violating the agreed safety norms under the contract. Similarly, a penal charge of Rs. 68,296/- was paid to M/s Treco Earth Movers Pvt Ltd for the loss incurred due to an accident while shifting iron pellets
The Tribunal observed that from the details, it was evident that the aforesaid sum comprised fines paid to third parties for breach of contract or delay in payment of dues or for failure to fulfil obligations arising out of contracts entered into in the course of business. It was further observed that similar small fines/penalties were paid for stolen items or missing parts or damaged goods to private parties.
The Tribunal held that there was merit in the submission of the assessee that the impugned sum was not incurred for the infringement of law but comprised of payments for breach of contracts and in light of the decision of the jurisdictional Calcutta High Court in the case of Apeejay Pvt Ltd Vs CIT, the impugned disallowance was unjustified. The AO was directed to delete the same.
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