G.L. Construction Pvt Ltd Vs ACIT (ITAT Mumbai)
In a recent ruling, the Income-tax Appellate Tribunal (ITAT), Mumbai Bench, has allowed a tax appeal filed by M/s G L Construction Pvt Ltd, setting aside the disallowance of certain payments termed as “penalties” by government authorities. The tribunal held that these deductions, made from the assessee’s bills for non-compliance with contractual terms in road construction projects, were in the nature of business expenditure and not penalties for offences or acts prohibited by law.
The case involved the assessment year 2018-19, where the assessee, a company engaged in road construction for government bodies like MCGM, NMMC, and MMRDA, faced deductions from their certified bills. These deductions, totaling Rs. 45,91,698/-, were labelled as penalties for various reasons including delays, issues with machinery deployment, incorrect barricades, quality defects (like cracks), lack of proper records, failure to remove debris, public inconvenience due and non-submission of technical reports or non-compliance with tender conditions. The company recovered a portion of these amounts (Rs. 2,50,839) from employees, resulting in a net amount of Rs. 42,44,859 claimed as a deductible business expense under Section 37(1) of the Income-tax Act, 1961.
The assessing officer (AO), the National e-Assessment Centre, Delhi, disallowed the claimed expenditure, interpreting the payments as violations falling under Explanation 1 to Section 37(1) of the Act, which disallows expenditure incurred for any purpose which is an offence or which is prohibited by law. This decision was subsequently upheld by the National Faceless Appeal Centre (NFAC), Delhi (Ld. CIT(A)), leading the assessee to file an appeal before the ITAT.
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