The ACIT, Circle-1(1)(1), Ahmedabad V. M/s. Chittorgarh Kota Tollway Pvt. Ltd., Ahmedabad

ITA 560/AHD/2022

AI Insights

The case revolves around an appeal by the revenue against the order of the Learned Commissioner of Income Tax (Appeals), which pertained to the assessment year 2018-2019. The primary issue was the disallowance of damage charges amounting to Rs. 1,86,02,000 paid to NHAL, which the Assessing Officer (AO) treated as a penalty and thus not deductible under section 37(1) of the Act. The CIT(A) reversed the AO's decision, leading to the revenue's appeal to the Tribunal. The Tribunal agreed with the CIT(A), noting that the damages were related to contractual breaches and not penalties or illegal payments, thus deductible as business expenses.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 135806 (ITAT-AHMEDABAD)
• Duration Of Justice: 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 08-08-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 08-12-2022
• Other Referred Cases: Kanona Chemicals & Industries Ltd. vs. CIT, PCIT vs. Mazda Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SHRIJAIMINSHAH

Judgement Text

आयकरअपीलीयअधिकरण , अहमदाबादनयायपीी INTHEINCOMETAXAPPELLATETRIBUNAL, ‘’A”BENCH,AHMEDABAD BEFORESHRIWASEEMAHMED,ACCOUNTANTMEMBER And SHRITRSENTHILKUMAR,JUDICIALMEMBER आयकरअपीलसं ./ITANo.560/AHD/2022 धििाधरणवरध/Asstt.Year:2018-19 A.C.I.T, Circle-1(1)(1), Ahmedabad. Vs. M/s.ChittorgarhKotaTollway Pvt.Ltd., 222,AdvaitComplex, Vastrapur, Ahmedabad-380054. PAN:AAECC3027C (Applicant)(Respondent) Revenueby:ShriSanjayKumar,Sr.D.R Assesseeby:ShriJaiminShah,A.R सुिवाईकीतारीख /DateofHearing:09/08/2023 घोरणाकीतारीख/DateofPronouncement:31/10/2023 आदेश/ORDER PERWASEEMAHMEDACCOUNTANTMEMBER: ThecaptionedappealhasbeenfiledattheinstanceoftheRevenueagainst theorderoftheLearnedCommissionerofIncomeTax(Appeals),(NFAC),Delhi arisinginthematterofassessmentorderpassedunders.143(3)oftheIncome TaxAct,1961(here-in-afterreferredtoas"theAct")relevanttotheAssessment Year2018-2019. ITAno.560/AHD/2022 Asstt.Year2018-19 2 2.ThefirstissueraisedbytherevenueisthattheLd.CIT(A)erredin disallowingthedamagechargespaidtoNHALforRs.1,86,02,000/-treatingthe sameasincontraventionoflaw. 3.Theassesseeinthepresentcase,aprivatelimitedcompany,isengagedin theactivitiesofoperatingandmaintenanceofroads.TheAOduringthe assessmentproceedingsfoundthattheassesseehasclaimedthedeductionof certainexpenditurewhichwererepresentinginthenatureofpenalty.Therefore, theAOwasoftheviewthatsuchapenaltycannotbeallowedasdeductionunder theexplanationofsection37oftheAct.Besidestheabove,theAOalsofound thatsuchdamagechargeswerepertainingtotheearlieryear,thereforethesame cannotbeallowedasdeductiononthiscountaswell,beingpriorperiodexpenses. Thus,theAOdisallowedthesameandaddedtothetotalincomeoftheassessee. 4.OnappealbeforetheLd.CIT(A),deletedthesame.Therelevantextractof theorderisreproducedasunder: Ihavegivenmycarefulconsiderationtotherivalsubmissions,perusedthematerialon recordanddulyconsideredthefactualmatrixofthecaseaswellastheIhavegivenmy carefulconsiderationtotherivalsubmissions,perusedtheapplicablelegalpositionfor arrivingatthefollowingdecision. 1.Groundno.1oftheappealisagainstdisallowancebusinessexpenseofRs. 1,86.02.000/-consideringitinthenatureofpenalty.Aspertheappellanttheclaimof damagesconsistsofRs.94.02lakhsfordefaultinmaintenanceobligationofTollPlaza, avenueplantationandmaintenanceofcivilworks,Rs.20lakhsfornotinstallingWIMsand Rs.72lakhfornegativechangeofscopefornon-constructionofadministrativebuildingand medicalaidpostatAiroliTollPlaza.Allthesedamagescompensatoryinnatureandthereis noviolationoflawandnotcoveredbyExplanationItosection37(1)oftheAct.The damageshavebeenpaidasperthetermsofthecontract.Appellanthasfurtherreliedon CircularNo.722dated23/12/1998whereinitismentionedthatpaymentsonaccountof protectionmoney,extortion,hafta,bribesetcwillnotbeallowedasbusinessexpenditure. Iagreewiththeappellantthatthenatureofpaymentsclaimedasdamagesisnotcovered bythiscircularorExplanationItosection37(1)oftheActandisallowable. 6.1WithregardtothecontentionoftheAOthatthedamagespertaintoearlieryears,the appellanthassubmittedthatthesamehascrystallizedinthisyearandallowableinthis year.InthecaseofKanonaChemicals&IndustriesLtd.vs.CIT(1995)78Taxman455 (Cal),theHon'bleHighCourthasheldthatexpenditurewillbeallowedintheyearwhen thesameiscrystallized.Inviewofheprovisionsofsection37(1),Explanation1tosection 1,CircularNo.722dated23/12/1998ofCBDTandthedecisionsdiscussedabove.Iagree withthecontentionoftheappellantthatthepaymentofdamagesisnotforanoffence ITAno.560/AHD/2022 Asstt.Year2018-19 3 andisnotprohibitedbylawhascrystallizedduringtheyearhence,allowableasbusiness expenditure.Accordingly.theAOisdirectedtodeletetheaddition.Thegroundofappealis 'Allowed'. 5.BeingaggrievedbytheorderoftheLd.CIT(A),therevenueisinappeal beforeus. 6.TheLd.DRbeforeusreiteratedthefindingscontainedintheAssessment Order. 7.Ontheotherhand,theLd.ARbeforeusfiledapaperbookrunningfrom pages1to79andcontendedthatthepenaltywaspaidbytheassesseedueto non-adherenceoftheconditionsofthecontractawardedbyNHAL.Theld.ARto thiseffecthasdrawnourattentiononpage67ofthepaperbookwherethe natureofdamagespaidtoNHALwasspecified.Likewise,theLd.ARalsodrawn ourattentiontopage73ofthepaperbookwheretheamountofpenaltyofRs. 72,00,000/-wasshownonaccountofnon-constructionofadministrativebuilding withinthetime.Thus,theLd.ARcontendedthatthepenaltywasnotonaccount ofviolationoflaw,thereforethesamecannotbedisallowed.TheLd.AR vehementlysupportedtheorderoftheld.CIT-A. 8.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Theprovisionofexplanation1tosection37(1)of theAct,excludesallowingthedeductionoftheexpenditureincurredforthe purposewhichisanoffenceorprohibitedbylaw.However,inthegivencase,we notethatthepenaltyhasbeenpaidbytheassesseeonaccountofbreachof contractwhichcannotbeequatedwiththeoffence,orsomethingprohibitedby law.Assuch,theassesseecouldnotmeetthedeadlinetofulfillthecriterialaid downbythecontracteebeingtheNHALandthereforethedamageswerelevied byNHAL.TheHon’bleGujaratHighCourtinthecaseofPCITvs.MazdaLtd. reportedin250taxman0510hasheldthatthedeductiononaccountofliquidated ITAno.560/AHD/2022 Asstt.Year2018-19 4 damagescannotbedisallowedundertheprovisionofsection37(1)oftheAct.The relevantextractoftheorderisreproducedasunder: 10.Section37oftheActistheresiduaryprovisiongrantingdeductionofanexpenditure notbeingexpenditureofthenatureofcapitalexpenditureorpersonalexpensesofthe assessee,whichislaidoutorexpendedwhollyandexclusivelyforthepurposesofbusiness orprofessionandnotspecifiedintheprecedingsections30to36ofthe Act.Explanationtosection37(1)wouldclarifythatanyexpenditureincurredbyan assesseeforanypurposewhichisanoffenceorwhichisprohibitedbylawshallnotbe deemedtohavebeenincurredforthepurposeofbusinessorprofessionandnodeduction orallowanceshallbemadeinrespectofsuchexpenditure. 11.Asnoted,theexpenditureinquestionwaspurelyinrelationtotheassessee'snormal businessactivityandwasinherentpartofitsbusinesstransactions.Theexpenditurewas certainlynotincurredforanypurposewhichisanoffenceorwhichisprohibitedbylaw. TheTribunalthereforewasperfectlyjustifiedingrantingsuchexpenditure. 9.Wealsonotethattheamountofdamagecrystallizedintheyearunder considerationasevidentfromthevariousletterswrittenbyNHALwhichareplaced onpages67to73ofthepaperbook.Thus,itcannotbesaidthatsuchdamages arepriorperiodexpenses.Inviewoftheabove,weareoftheviewthatthe assesseeisentitledtothedamagesincurredbyitasadeduction.Assuch,wedo notfindanyinfirmityintheorderoftheLd.CIT(A).Hencethegroundofappealof therevenueisherebydismissed. 10.ThesecondissueraisedbytherevenueisthattheLd.CIT(A),erredin allowingthedeductionoftheassesseeu/s80-IA(7)oftheAct,amountingtoRs. 3,09,769/-only. 11.AttheoutsettheLd.ARbeforeussubmittedthattherewasnodeduction claimedbytheassesseeundertheprovisionofsection80-IA(7)oftheAct. Therefore,thequestionofmakingdisallowanceforthedeductiondoesnotarise. Theld.ARalsodrewourattentiontothefindingoftheld.CIT-Awhichis reproducedasunder: 7.Withregardtogroundno.2oftheappeal,theappellanthassubmittedthatithadnot claimedanydeductionu/s80IAoftheAct.Insupportcopyofstatementofincomeand ITRacknowledgmentisfiled.AOisdirectedtoverifyfromrecordsanddeletetheaddition ifthecontentionisfoundcorrect.Thegroundofappealistreatedas'Allowed'. ITAno.560/AHD/2022 Asstt.Year2018-19 5 12.TheLd.DRappearingonbehalfoftheRevenuecouldnotcontrovertthe findingsoftheLd.CIT(A).Accordingly,weconcurwiththefindingoftheLd. CIT(A),onthereasoningthatoncenodeductionhasbeenclaimedbythe assesseeu/s80-IAoftheAct,thequestionofmakinganydisallowancedoesnot arise.Hence,thegroundofappealoftherevenueisherebydismissed. 13.Intheresult,theappealfiledbytherevenueisherebydismissed. OrderpronouncedintheCourton31/10/2023atAhmedabad. Sd/-Sd/- (TRSENTHILKUMAR)(WASEEMAHMED) JUDICIALMEMBERACCOUNTANTMEMBER (TrueCopy) Ahmedabad;Dated31/10/2023 Manish