M/s. Chaudhary Hammer Works Ltd., Ghaziabad V. Addl. CIT, Ghaziabad

CO 359/DEL/2011

• Counselvise Citation: [2011] 122 COUNSELVISE.COM (IT) 6790 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 22 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 23-12-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 01-11-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: B NEW DELHI BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI K.G.BANSAL , ACCOUNTANT MEMBER ITA NO: 4332/DEL/2011 A.Y. : 2006-07 ACIT, RANGE I VS. M/S CHOUDHARY HAMMER WORKS LTD. NEW DELHI NEAR HAPUR ROAD FLYOVER GHAZIABAD PAN/GIR NO: AAACC 6049C C.O. NO: 359/DEL/11 (IN ITA NO: 4332/DEL/2011) A.Y. : 2006-07 M/S CHOUDHARY HAMMER WORKS LTD. VS. ACIT, RANGE I GHAZIABAD GHAZIABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SH. ROHIT GARG, SR.D.R. RESPONDENT BY : SH.GAYATRI NATH SRIVASTAVA, F.C.A.&VICE PRES IDENT O R D E R PER DIVA SINGH, JUDICIAL MEMBER THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE A GAINST THE ORDER DATED 13.7.2011 OF CIT(A), GHAZIABAD PERTAINING TO A.Y. 2006-07. THE ASSESSEE HAS FILED A C.O. IN SUPPORT OF THE IMPUGNE D ORDER. THE SOLE ISSUE AGITATED BY THE DEPARTMENT VIDE GROUND NO.1 R EADS AS UNDER. THE LD.CIT(A) HAS ERRED IN LAW IN HOLDING THAT THE PAYMENTS WERE INCIDENTAL TO THE CARRYING ON THE BUSINESS AND WAS DEDUCTIBLE IN COMPUTING THE ASSESSEES PROFITS. AN Y PAYMENT MADE IN THE NATURE OF LATE DELIVERY CHARGES TANTAMO UNT TO 2 PENALTY AND HENCE THE CIT(A) GHAZIABAD HAS ERRED IN LAW IN ALLOWING THE PAYMENT AS NORMAL BUSINESS EXPENDITURE . 2. THE RELEVANT FACTS ARE THAT THE ASSESSEE IS IN T HE BUSINESS OF MANUFACTURING OF LIGHT AND HEAVY STEEL FORGINGS AN D IN THE YEAR UNDER CONSIDERATION RETURNED AN INCOME OF RS.11,25,51,5 58/-. PERUSING THE DETAILS OF EXPENSES DEBITED TO THE PROFIT AND LOSS A/C THE A.O. OBSERVED THAT THE ASSESSEE HAD DEBITED A SUM OF RS. 13,65,26 7/- ON ACCOUNT OF PAYMENT OF LATE DELIVERY CHARGES. 2.1. THE ASSESSEE WAS REQUIRED TO EXPLAIN THE SAME. THE ASSESSEES COUNSEL VIDE WRITTEN REPLY DT. 24.12.2008 EXPLAINE D THAT THE COMPANY HAS ENTERED INTO VARIOUS CONTRACTS FOR SUPPLY OF GO ODS MANUFACTURED BY IT AS PER DESIGN AND SPECIFICATION OF CUSTOMERS AND TIME LIMIT WAS PRESCRIBED FOR SUPPLYING THE MATERIAL IN THE TERMS OF PURCHASE ORDER GIVEN BY THE CUSTOMERS. IT WAS STATED THAT THERE W AS A CLAUSE IN THE PURCHASE ORDER THAT IN CASE OF LATE DELIVERY THERE WILL BE PRICE REDUCTION IN CONTRACT/DEDUCTION OF LIQUIDATED DAMAGES. THUS IT WAS EXPLAINED THE LIABILITY TO PAY DAMAGES ARISE AT THE POINT OF TIM E WHEN IT OCCURRED. 2.2. THE EXPLANATION WAS NOT ACCEPTED BY THE A.O. W HO WAS OF THE VIEW THAT PAYMENT HAS BEEN MADE FOR LATE DELIVERY OF GOO DS WHICH IS ALWAYS IN THE NATURE OF PENALTY. HE WAS OF THE VIEW THAT T HERE ARE INSTANCES THAT THOUGH THERE IS A GENERAL CLAUSE IN THE PURCHASE OR DER SETTING OUT THAT IN CASE OF LATE DELIVERY THERE WILL BE PRICE REDUCT ION BUT IT HAS BEEN OBSERVED THAT PRICE REDUCTION IS NOT MADE IN ALL CA SES. SINCE THE AMOUNT 3 PAID IS AN ADDITIONAL AMOUNT FOR NOT DELIVERING THE GOODS IN TIME THE A.O. HELD THAT IT IS IN THE NATURE OF PENALTY, AS SUCH IT CANNOT BE ALLOWED AS AN EXPENSE. ACCORDINGLY AN ADDITION OF THE SAID A MOUNT WAS MADE TO THE RETURNED INCOME OF THE ASSESSEE. 3. AGGRIEVED BY THIS THE ASSESSEE CAME IN APPEAL BE FORE THE CIT(A). 3.1. THE ARGUMENTS ADVANCED BEFORE THE A.O. WERE RE ITERATED BEFORE THE CIT(A) WHICH HAVE BEEN SET OUT IN PAGES 3,4 AND 5 O F THE IMPUGNED ORDER. IT WAS FURTHER CONTENDED THAT THERE IS A DISTINCTION BETWEEN THE PENALTIES WHICH ARE LEVIED FOR BREACH OF LAW AND CO MPENSATION WHICH ARISES OUT OF BREACH OF A CONTRACT. IT WAS FURTHER ARGUED THAT PENALTY LEVIABLE ON ACCOUNT OF BREACH OF LAW IS NOT PERMISS IBLE AS A DEDUCTION WHEREAS PENALTY FOR BREACH OF CONTRACT IS A BUSINES S LOSS AND HAS TO BE ALLOWED. IN SUPPORT OF THE SAID STAND RELIANCE WAS PLACED ON FULL BENCH JUDGEMENT OF P&H COURT IN M/S JAMNA AUTO INDUSTRIE S, YAMUNANAGAR VS. CIT, HARYANA, ROHTAK; CIT VS. MURARI LAL AHUJA AND SONS, PRAKASH COTTON MILLS P.LTD. VS CIT (1993) 111 CTR (SC) 389 (1993) 201 HR 684 (SC) AND CIT VS. INDO ASIAN SWITCHGEARS P.LTD.; CIT LUCKNOW VS. RELIABLE WATER SUPPLY SERVICES OF INDIA P.LTD. 124 ITR P.199 ; CIT VS. NATIONAL STEEL & GENERAL MILL P.LTD. 188 ITR P.571; SARDAR PRIT INDER SINGH VS CIT 160 ITR P.493; CIT VS. JK COTTON SPINNING AND W EAVING MILLS CO. 123 ITR P.911; CIT VS. TARUN COMMERCIAL MILLS CO.LT D. 107 ITR P.172; CIT VS. INDO ASIAN SWITCH GEARS P.LTD. 222 ITR P.77 2; CIT VS. PRAFULLA KUMAR MALIK 72 ITR P.119. RELYING ON THE PRINCIPLE S LAID DOWN IN THE 4 ABOVE MENTIONED JUDGEMENTS IT WAS SUBMITTED THAT T HE SAID AMOUNT OF RS. 13,65,267/- HAS BEEN DEDUCTED BY VARIOUS CUSTOM ERS OF THE ASSESSEE DUE TO THE REASON THAT THE ASSESSEE HAS FAILED TO S UPPLY THE GOODS IN TIME I.E. A BREACH OF CONTRACTUAL OBLIGATION AND THERE W AS NO INFRACTION OF ANY LAW. IT WAS SUBMITTED THAT WHENEVER A BUSINESS MAN FAILS TO FULFILL A PARTICULAR CONTRACT ENTERED INTO BY HIM HE MAY BE C ALLED UPON TO PAY DAMAGES AS COMPENSATION. THESE DAMAGES ARE NORMAL INCIDENTS OF BUSINESS THE AO HAS NOT DOUBTED THE GENUINENESS O F PAYMENT OF LATE DELIVERY CHARGES. IT WAS FURTHER SUBMITTED THAT SIMILAR DISALLOWANCES HAVE BEEN MADE IN A.YS. 2003-04 AND 2004-05 BY THE A.O. AND THE CIT(A) VIDE ITS ORDER DT. 22.12.2006 AND 22.8.2008 HAS ALLOWED THE CLAIM OF ASSESSEE. 3.2. THE CIT(A) TOOK COGNIZANCE OF THESE FINDINGS I N ASSESEES OWN CASE ARRIVED AT BY THE FIRST APPELLATE AUTHORITY IN THE EARLIER YEARS AND BEING IN AGREEMENT WITH THE FACTS AND THE FINDINGS DELETE D THE ADDITION MADE BY WAY OF DISALLOWANCE. 4. AGGRIEVED BY THIS THE DEPARTMENT IS IN APPEAL B EFORE THE TRIBUNAL. 4.1. LD.D.R. PLACES RELIANCE UPON THE ASSESSMENT OR DER. LD.A.R. ON THE OTHER HAND APART FROM RELYING UPON THE IMPUGNED ORD ER AND THE JUDGEMENTS RELIED UPON THEREIN INVITED OUR ATTENTIO N TO THE C.O. STATING THAT THE CIT(A) HAS PASSED A SPEAKING ORDER AND THE EXPENDITURE IS COMPENSATORY IN NATURE AND DESERVES TO BE ALLOWED. 5 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON A CAREFUL CONSIDERATION O F THE SAME CONSIDERING THE JUDGEMENTS RELIED UPON BY THE ASSESSEE AND TAKE N INTO CONSIDERATION BY CIT(A), AND REFERRED TO BEFORE US , WE ARE OF THE VIEW THAT THE CLAIM OF ASSESSEE HAS RIGHTLY BEEN ALLOWED BY THE CIT(A).THERE IS A DISTINCTION BETWEEN THE PENALTY IMPOSED FOR BREAC H OF LAW AND THE LIQUIDATED DAMAGES/COMPENSATION PAID ON ACCOUNT OF LATE DELIVERY. THE CLAUSE PERTAINING TO COST REDUCTION IN THE EVENTUAL ITY OF LATE DELIVERY IS AN ACCEPTED FACT AND SUCH CONDITIONS ARE INHERENT RIS KS AND INCIDENTAL TO THE RUNNING OF BUSINESS. THE FACTUM OF THE OCCURRE NCE OF THE EVENT FOR WHICH COST REDUCTION HAS OCCURRED HAS NOT BEEN DOUB TED BY THE A.O. THE CHALLENGE POSED BY THE DEPARTMENT IS ONLY ON TH E LEGAL PRINCIPLE THAT A BREACH OF CONTRACT OF THIS NATURE IS NOT AN ALLOW ABLE EXPENSE. ON CONSIDERATION OF FACTS AND JUDICIAL PRINCIPLES, WE ARE OF THE VIEW THAT THE DEPARTMENTS GROUND DESERVES TO BE DISMISSED. 6. ACCORDINGLY FOR THE REASONS GIVEN HEREINABOVE BE ING IN AGREEMENT WITH THE CONCLUSION AND THE FINDING OF THE CIT(A) T HE IMPUGNED ORDER IS UPHELD AS THE DEPARTMENTS GROUND IS DISMISSED. 7. IN THE RESULT THE APPEAL OF THE REVENUE IS DISMI SSED AND THE C.O. BY THE ASSESSEE THOUGH IN SUPPORT OF THE IMPUGNED ORDER IS DISMISSED AS INFRUCTUOUS. PRONOUNCED IN THE OPEN COURT ON 23 RD DECEMBER, 2011. SD/- SD/- (K.G.BANSAL) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23 RD DECEMBER, 2011 *MANGA 6 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CI T(A); 5.DR; 6.GUARD FILE BY ORDER DY. 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