Farseen Rubber Industries Limited. Vs DCIT (ITAT Kolkata)
Income Tax Appellate Tribunal (ITAT) Kolkata, in a recent ruling, overturned the decision of the Commissioner of Income Tax (Appeals) and the Assessing Officer, allowing Farseen Rubber Industries Limited to claim a deduction of Rs. 1 crore paid as compensation to M/s. JK Tyre & Industries Limited. The dispute centered on whether this expenditure fell under the ambit of Explanation 1 to Section 37 of the Income Tax Act, which disallows expenses incurred for purposes considered an offense or prohibited by law.
Farseen Rubber Industries, engaged in manufacturing automotive rubber tubes and mixing natural rubber compound on a job work basis, filed its return of income for the assessment year 2013-14, declaring a loss. During a scrutiny assessment, the Assessing Officer observed a payment of Rs. 1 crore made by the company to M/s. JK Tyre & Industries Limited, described as “compensation to principal for non-fulfilment of contractual obligation.”
The company explained that M/s. JK Tyre & Industries Limited, their principal, discovered technical shortcomings during a surprise factory visit. Specifically, there was a discrepancy in the amount of rubber used for production, leading to a shutdown of the factory. This situation prompted M/s. JK Tyre & Industries Limited to consider canceling their agreement. Following negotiations, M/s. JK Tyre & Industries Limited initially raised a bill for Rs. 3 crore, which was subsequently negotiated down to Rs. 1 crore. Farseen Rubber Industries then paid this amount and claimed it as an expenditure in their Profit & Loss Account.
