THE ACIT, CIRCLE-1(1), Vijayawada V. THE K.C.P. Ltd., Chennai

ITA 447/VIZ/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2028 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 04-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: I SARISH KUMAR
• Section: 142(1)

Judgement Text

ITA NO.447/VIZAG/2013 THE K.C.P. LIMITED, CHENNAI 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.447/VIZAG/2013 ( / ASSESSMENT YEAR: 2009-10) ACIT , CIRCLE - 1(1) , VIJAYAWADA VS. THE K.C.P. LIMITED CHENNAI [PAN: AAACT804 6J ] ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI I. SARISH KUMAR, DR / RESPONDENT BY : SHRI C. SUBRAHMANYAM, AR / DATE OF HEARING : 01.02.2016 / DATE OF PRONOUNCEMENT : 18.03.2016 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF CIT(A), VIJAYAWADA DATED 21.3.2013 AND IT PERTAINS TO THE ASSESSMENT YEAR 2009-10. ITA NO.447/VIZAG/2013 THE K.C.P. LIMITED, CHENNAI 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, FILE D ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009-10 ON 22.9.2009 DECLAR ING A TOTAL INCOME OF RS.92,74,12,634/-. THE CASE WAS SELECTED FOR SCR UTINY AND ACCORDINGLY, NOTICES U/S 143(2) AND 142(1) OF THE I NCOME-TAX ACT, 1961 (HEREINAFTER CALLED AS THE ACT) WERE ISSUED. IN RESPONSE TO NOTICE, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISHED BOOKS OF ACCOUNTS AND OTHER INFORMATI ON. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THE ASSESSEE HAS CLAIMED AN AMOUNT OF RS.77,40,470/- TOWARDS LIQ UIDATED DAMAGES TOWARDS BREACH OF CONTRACT AND DEBITED TO THE P&L A CCOUNT. THEREFORE, ISSUED A SHOW CAUSE NOTICE AND ASKED TO EXPLAIN THE NATURE OF EXPENDITURE CLAIMED IN THE PROFIT & LOSS ACCOUNT WI TH NECESSARY DETAILS. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE SUBM ITTED THAT IT IS INVOLVED IN THE BUSINESS OF MANUFACTURE OF MACHINER IES ON MAKE TO ORDER BASIS, FOR WHICH ENTERS INTO CONTRACTS WITH T HE CUSTOMERS. AS PER THE SAID CONTRACT, ONE OF THE CONDITIONS IS THAT IN CASE, THE ASSESSEE FAILS TO DELIVER THE MATERIALS AS AGREED IN THE AGREEMENT , LIQUIDATED DAMAGE CLAUSE IS PROVIDED FOR THE DELAY IN SUPPLYING THE M ACHINES. BEING SO, IN ONE OF SUCH CASE, THE ASSESSEE HAS PAID LIQUIDATED DAMAGES FOR BREACH OF CONTRACT AND THE SAME IS CLAIMED AS EXPENDITURE. HOWEVER, THE ITA NO.447/VIZAG/2013 THE K.C.P. LIMITED, CHENNAI 3 ASSESSING OFFICER AFTER CONSIDERING THE EXPLANATION S FURNISHED BY THE ASSESSEE, DISALLOWED THE AMOUNT OF RS.77,40,470/- A ND ADDED TO THE INCOME OF THE ASSESSEE. WHILE DOING SO, THE A.O. HE LD THAT THE LIABILITY ARISES ONLY IN RESPECT OF COMPLETED CONTRACTS ON OR BEFORE THE END OF THE EACH FINANCIAL YEAR. BUT IN THE PRESENT CASE, THE CONTRACT IS NOT COMPLETED, THEREFORE PROVISION MADE FOR INCOMPLETE CONTRACTS CANNOT BE ALLOWED AS DEDUCTION. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE A SSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE A.O. THE CIT(A) AF TER CONSIDERING THE EXPLANATIONS OFFERED BY THE ASSESSEE AND ALSO RELIE D UPON THE ITAT, HYDERABAD SPECIAL BENCH DECISION IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1982-83 REPORTED IN 34 ITD 50, DELE TED THE ADDITIONS. AGGRIEVED BY THE CIT(A) ORDER, THE REVENUE IS IN AP PEAL BEFORE US. 4. THE LD. D.R. SUBMITTED THAT THE CIT (A) WAS ERRE D IN DELETING THE ADDITIONS MADE BY THE A.O. TOWARDS LIQUIDATED DAMAG ES, BY RELYING UPON THE ITAT, SPECIAL BENCH DECISION IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1982-83. THE LD. D.R. FURTHER SUBMI TTED THAT THOUGH THE ITAT, ALLOWED THE CLAIM OF LIQUIDATED DAMAGES I N ASSESSEES OWN CASE, THE DEPARTMENT HAS NOT ACCEPTED THE ORDER OF ITAT AND THE SAME HAS BEEN CHALLENGED BEFORE THE HONBLE A.P. HIGH CO URT AND THE CASE IS ITA NO.447/VIZAG/2013 THE K.C.P. LIMITED, CHENNAI 4 PENDING FOR ADJUDICATION. SINCE, THE ISSUE HAS NOT REACHED THE FINALITY, THE CIT(A) WAS NOT CORRECT IN DELETING THE ADDITION MADE BY THE A.O. THEREFORE, REQUESTED TO UPHOLD THE ASSESSMENT ORDER . 5. ON THE OTHER HAND, THE AR OF THE ASSESSEE STRONG LY SUPPORTED THE ORDER OF THE CIT(A) AND ARGUED THAT THE ISSUE INVOL VED IN THIS APPEAL IS SQUARELY COVERED BY THE DECISION OF ITAT, HYDERABAD SPECIAL BENCH IN ASSESSEES OWN CASE, FOR THE ASSESSMENT YEAR 1982-8 3 REPORTED IN 34 ITD 50. THE AR FURTHER SUBMITTED THAT THE ITAT, IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2002-03, 2005-06, 2006-07 A ND 2008-09 HAS ALLOWED THE CLAIM OF LIQUIDATED DAMAGES. THEREFORE, REQUESTED TO UPHOLD THE ORDER OF THE CIT(A). 6. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATER IALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. WE HAVE ALSO GONE THROUGH THE CASE LAWS RELIED UPON BY THE ASSESSEE. DURING THE COURSE OF HEARING, THE AR OF THE ASSESSE E SUBMITTED THAT THE ISSUE INVOLVED IN THIS APPEAL IS SQUARELY COVERED B Y THE DECISION OF ITAT HYDERABAD SPECIAL BENCH, IN ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEARS. WE HAVE EXAMINED THE CASE LAWS RE LIED UPON BY THE ASSESSEE IN THE LIGHT OF THE FACTS OF THE PRESENT C ASE AND FIND THAT THE ISSUE I.E. LIQUIDATED DAMAGES FOR BREACH OF CONTRAC T IS HELD DEDUCTIBLE IN ITA NO.447/VIZAG/2013 THE K.C.P. LIMITED, CHENNAI 5 ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEAR . RELEVANT PORTION IS REPRODUCED HEREUNDER: 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIALS AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE CASE LAWS RELIED UPON BY THE PARTIES. DURING THE COURSE OF HEARING, THE A.R. OF THE ASSESSEE SUBMITTED THAT THE ISSUE INVOLVED IN THIS APPEAL, IS SQUARELY COVERED BY THE DECISION OF ITAT HYDERABAD SPECIAL BENCH IN ASSESSEES OWN C ASE FOR THE EARLIER ASSESSMENT YEARS. WE HAVE EXAMINED THE CASE LAWS R ELIED UPON BY THE ASSESSEE IN THE LIGHT OF THE FACTS OF THE PRESENT C ASE AND FIND THAT THE ISSUE I.E. LIQUIDATED DAMAGES FOR BREACH OF CONTRAC T IS HELD IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE IN EARLIER ASSESSME NT YEARS. THE RELEVANT PORTION IS REPRODUCED HEREUNDER: 7. THE NEXT ISSUE IN THE APPEAL RELATING TO THE ASSESSMENT YEAR 2000-01 RELATES TO THE DISALLOWANCE OF LIQUIDATED DAMAGES. THE ASSESSEE MADE A PROVISION O F RS.2,96,006/- TOWARDS LIQUIDATED DAMAGES. THE AO WA S OF THE VIEW THAT THE LIABILITY TO PAY LIQUIDITY DAMAGE S WOULD ARISE ONLY ON COMPLETION OF THE CONTRACT. ACCORDING LY, THE AO VERIFIED THE DETAILS OF CONTRACT AND IDENTIFIED THA T THE LIABILITY TOWARDS THE LIQUIDITY DAMAGES TO THE EXTENT OF RS.2 ,85,000/- HAS NOT CRYSTALLIZED DURING THE YEAR UNDER CONSIDER ATION SINCE THE RELEVANT CONTRACT WAS NOT COMPLETED BY 31 -3-2000. ACCORDINGLY HE DISALLOWED THE ABOVE SAID SUM OF RS. 2,85,000/- . HOWEVER, THE LD CIT (A) NOTICED THAT THE PRESENT ISSUE IS SQUARELY COVERED BY THE DECISION OF ITAT HYDERABAD SPECIAL BENCH IN THE ASSESSEES OWN CASE REPORTED IN 34 LTD 50 (SB) AND ACCORDINGLY GRANTED RELIEF. 7.1 THE FACTS RELATING TO THE ISSUE ARE STATED IN B RIEF. THE ASSESSEE ENTERS INTO CONTRACT FOR SUPPLY OF MACHINE RY. ACCORDING TO THE TERMS OF CONTRACT, IF THE MACHINER Y IS NOT SUPPLIED WITHIN THE SCHEDULED DATE, THE ASSESSEE HA S TO PAY COMPENSATION TO THE BUYER IN THE FORM OF LIQUIDATED DAMAGES CALCULATED ON THE BASIS OF AN AGREED RATE. AT THE END OF EVERY FINANCIAL YEAR, THE ASSESSEE COMPANY IDENTIFIES THE CONTRACTS IN WHICH THE SCHEDULED DAT E HAS EXPIRED AND ALSO QUANTIFIES THE LIQUIDATED DAMAGES PAYABLE. ACCORDINGLY THE ASSESSEE COMPANY MAKES PROVISIONS I N THE ACCOUNTS. ACCORDING TO THE ASSESSEE THE POINT OF AC CRUAL OF LIQUIDITY DAMAGES IS THE POINT WHEN THE BREACH OF SCHEDULED DATE OCCURRED. HOWEVER, THE AD WAS OF THE VIEW THAT THE POINT OF ACCRUAL IS THE DATE OF COMPLETION OF RELEVANT CONTRACT. ITA NO.447/VIZAG/2013 THE K.C.P. LIMITED, CHENNAI 6 7.2 AS NOTICED BY THE LD CIT(A), THE ISSUE REGARDIN G THE POINT OF ACCRUAL OF LIQUIDITY DAMAGES HAS BEEN SETT LED BY THE DECISION OF THE HYDERABAD SPECIAL BENCH IN THE ASSE SSEES OWN CASE REFERRED SUPRA, WHERE IN IT WAS HELD THAT THE CLAIM FOR DAMAGES AROSE AT THE POINT OF BREACH AND AT THAT PO INT OF TIME, THE LIABILITY ACCRUED AND HENCE THE PROVISION FOR LIQUIDATED DAMAGES WAS TO BE ALLOWED AS DEDUCTION. SINCE THE LD CIT (A) HAS FOLLOWED THE DECISION OF THE SPECIAL BENCH OF THE ITAT, WE DO NOT FIND ANY REASON TO INTERFERE WI TH HIS DECISION. 6. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE C ASE AND ALSO APPLYING THE RATIOS OF THE COORDINATE BENCH OF THIS TRIBUNAL, WE ARE OF THE OPINION THAT THE CIT(A) RIGHTLY DELETED THE ADDITIO N. WE DO NOT FIND ANY ERROR OR INFIRMITY IN THE ORDER OF CIT(A). THEREFOR E, WE DIRECT THE A.O. TO DELETE THE ADDITIONS MADE ON ACCOUNT OF LIQUIDATED DAMAGES AND UPHELD THE CIT(A) ORDER. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 7. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE C ASE AND ALSO APPLYING THE RATIOS OF THE DECISION OF COORDINATE B ENCH OF THIS TRIBUNAL, IN ASSESSEES OWN CASE FOR EARLIER ASSESSMENT YEARS , WE ARE OF THE OPINION THAT LIQUIDATED DAMAGES PAID FOR DELAY IN D ELIVERY OF MATERIALS IS DEDUCTIBLE EXPENDITURE IN THE YEAR IN WHICH THE LIA BILITY TO PAY ARISES AS PER THE AGREEMENT BETWEEN THE CUSTOMERS. THE CIT(A) HAS RIGHTLY DELETED THE ADDITION. WE DO NOT FIND ANY ERROR OR IN FIRMITY IN THE ORDER OF THE CIT(A). THEREFORE, WE INCLINED TO UPHOLD THE OR DER OF THE CIT(A) AND DIRECT THE A.O. TO DELETE THE ADDITIONS. ITA NO.447/VIZAG/2013 THE K.C.P. LIMITED, CHENNAI 7 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 18 TH MAR16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 18.03.2016 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT THE ACIT, CIRCLE-1(1), VIJAYAWAD A 2. / THE RESPONDENT THE K.C.P. LIMITED, RAMAKRISHNA BUILDINGS, NO.2, DR.P.V. CHERIAN CRESCENT, EGMORE, CHENNAI. 3. + / THE CIT, VIJAYAWADA 4. + ( ) / THE CIT (A), VIJAYAWADA 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM