Rajesh Bindal, J. - (1.) THE following question of law has been referred for opinion of this Court arising out of order dt. 9th Sept., 1988 passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, 'the Tribunal') in ITA No. 493/Chd/1987 for the asst. yr. 1983 -84: Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that forfeiture of security deposits amounting to Rs. 16.27 lakhs by way of compensation for not completing the contract works within the stipulated period specified in the agreement, constituted an allowable commercial loss, notwithstanding the fact that the matter is pending disposal before the arbitrator ?
(2.) BRIEFLY , the facts are that the assessee in the present case is a contractor executing various works. While computing the income for the assessment year in question, the assessee claimed a deduction of Rs. 16.27 lakhs on account of compensation paid to the contracted for delay in execution of the works. The claim was rejected by the AO. However, in appeal, the Commissioner of Income Tax (Appeals) [for short, 'the CIT(A)'] while relying upon a judgment of Hon'ble the Supreme Court in CIT v. : [1967]65ITR395(SC) held that the amount in question, being only on account of compensation for breach of contract and not a penalty for breach of law, was allowable. In further appeal by the Revenue, the Tribunal upheld the order passed by the CIT(A) while relying upon an earlier order passed by it in the case of Punjab Wireless Systems Ltd. It was observed by the Tribunal that the amount in question had already been forfeited by the contractee by invoking the bank guarantees furnished by the assessee. We have heard learned Counsel for the parties and with their assistance perused the paper book.
(3.) THE only contention raised by learned Counsel for the Revenue is that the penalty of any kind suffered by the assessee on account of default in execution of contract cannot be allowed as a business expense and the AC) was right in disallowing the claim made by the assessee on that account. To buttress the submission, he relied upon a judgment of this Court in Cineramas v. . On the contrary, learned Counsel appearing for the assessee submitted that there is distinction culled out by various judicial pronouncements in penalty leviable for breach of law and penalty/compensation arising out of the breach of contract. Whereas the penalty leviable on account of breach of law is not a permissible deduction, however, penalty which is on account of breach of contract is certainly a business loss and has to be allowed. He referred to CIT v. , Prakash Cotton Mills (P) Ltd. v. CIT : (1993) 111 CTR (SC) 389 :, (1993) 201 HR 684 (SC) and CIT v. .;