DEPUTY COMMISSIONER OF INCOME TAX Vs. ACHIEVER BUILDERS (P) LTD.
INCOME TAX APPELLATE TRIBUNAL
DEPUTY COMMISSIONER OF INCOME TAX
Achiever Builders (P) Ltd.
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(1.) THIS is an appeal filed by the revenue against the order of Ld CIT(A) dated 15.7.2013. The only grievance involved in this appeal is the action of Ld CIT(A) by which he had deleted an amount of
Rs.16,95,250/ - which was disallowed by Assessing Officer being an amount in the nature of penalty. The
facts of the case are that assessee is a builder and it had paid an amount of Rs. 16,95,250/ - as
compensation to its customers for violation of provision of agreement which it had entered into with them.
The payments were made for delay in handing over of possession of properties purchased by its
customers. The Assessing Officer held such payments to represent penalty and therefore disallowed the
amount holding the payments were penal in nature. The Assessing Officer rejected the contention of
assessee that the payment was not penalty but was in the form of compensation which was paid to payee
for breach of terms of agreement entered into with its customers.
(2.) AGGRIEVED the assessee filed appeal before Ld CIT(A) and Ld CIT(A) relying upon a number of judgments and on the basis of submission of assessee deleted the addition by holding as under: -
"I have considered the facts of the case, the submissions of the appellant and various judicial pronouncements on this issue. The appellant had to pay a penalty of 16,95,250/ - to the customers since it had to comply with clause No. 10 of the agreement with customers as per which it had to pay penalty @ Rs..53.80 per sq. metre or Rs..5/ - per sq.ft. per month of the saleable area for the period of delay. This penalty was not levied by any statutory authority or law in force. It is a common practice in construction business and applies to both buyer or as well as seller. The objective of this penalty is to compensate the other party for any breach of the agreement with regard to timely completion of the project. As regards penalty paid for breach of an agreement, it has been held by the jurisdictional High Court in the case of CIT v. Indo Asian Switch Gears Pvt. Ltd. (1996) 222 ITR 757 (P&H) 1997 that the penalty paid by assessee for late delivery of goods being breach of an agreement was incidental to business and therefore allowable u/s 37(1) of the IT Act. While allowing the claim of the assessee, the Hon'ble High Court held as under: -
"The true test is whether there is a breach of law or the breach of an agreement. If it is in the latter category, then damages paid would be treated to be business or commercial loss and admissible as deduction u/s 37(1). Since it was incidental to business, it could not be disallowed."
Further more, In the case of CIT -II Ludhiana v. Hero Cycles Ltd(2009) 178 Taxman 484 (P&H), the Hon'ble jurisdictional High Court held that the assessee could be allowed deduction on account of extra charges paid by it to Electricity Board for drawing extra load in peak hours in violation of power regulations. While allowing the deduction the Hon'ble High Court held as under: -
"There is no doubt that payments made in the nature of penalties or fines for any wrongful act cannot be allowed as permissible deductions. But mere label of the payment is not conclusive. Certain payments may be identical to the business and have to be allowed on the test of commercial expediency, if no violation of law the amount may be allowed as deduction. The test has to be applied from case to case."
In addition to these two judicial pronouncements the following judgments corroborate the stand that payments satisfying the test of commercial expediency have to be allowed, if no violation of law or public policy is involved.
"Haji Aziz and Abdul Shakooer Brothers v. CIT (1961) 41 ITR 350 (SC).
Malwa Vanaspati Chemicais Co. v. CIT(1997)142 ITR 137 (SC). Prakash Cotton Mills Pvt. Ltd. v. CIT(1993) 111 CTR SC 389. CIT v. Industrial Cables (India) Ltd. (2007) 212 CTR (P&H) 513.
"Hence, after a careful consideration of the facts of the case together with various judicial pronouncement and submissions of the appellant, I hold that the appellant rightly claimed deduction of r.16,95,250/ - on account of penalty for breach of its contract with allottees regarding timely completion of the project. This ground of appeal is thus allowed."
(3.) AGGRIEVED the revenue is in appeal before us.
At the outset, the Ld DR submitted that Ld CIT(A) had without going into facts had deleted the addition and she further read para 5.3. of Ld CIT(A)'s order with the proposition that Ld CIT(A) himself had
referred the amount as penalty. She further submitted that Ld CIT(A) did not give his findings as to
whether the payment was compensatory in nature or not. Therefore, without examining the agreement,
the Ld CIT(A) has failed to discharge his duty. Reliance in this respect was placed on the following case
1. 286 ITR 403 in the case of CIT v. Jaya Ram Metal Industries.
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