Jamna Auto Industries vs. CIT [2008] 299 ITR 92 (P&H) [FB]

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The assessee before the Hon’ble Punjab and Haryana High Court was a Partnership firm. The assessee firm had entered into an agreement with M/s. Deutsche Strahil Metail of Berlin a German firm for supply of certain goods of a particular value. The agreement so arrived at, however, could not be acted upon by the assessee as it did not have the requisite import licence for material intended to be imported. On a dispute being referred to the arbitrator, the assessee had to pay damages to the German firm in terms of the award dated 29th July, 1974 for failure to perform its part of the contract. The assessee firm in its return for the assessment year 1975-96 claimed deduction of the aforesaid amount as business expenses on account of damages for breach of contract. The AO initially allowed the claim of the assessee but withdrew the deduction in reassessment proceedings by referring to the decision of the Jurisdictional High Court in the case of Cineramas vs. CIT [1977] 110 ITR 762 (P&H) in which it has been held that infraction of law, including breaches of obligations are not normal incidents of business and penalties and the damages paid in connection with such infractions and breaches are not expenditure laid out or expended wholly and exclusively for the assessee’s business. On appeal the first appellate authority as well as the Income Tax Appellate Tribunal, Chandigarh Bench, upheld the view taken by the Assessing Officer.

Being aggrieved by the Order of the Appellate Tribunal, the assessee filed an appeal before the Hon’ble Punjab & Haryana High Court under section 260A of the Act. Compensation paid by assessee was on account of breach of contract which does not fall in the category of payment of penalty for breach of any law. The Hon’ble Court followed its own decision in the case of CIT vs. S.A. Builders P. Ltd (2008) 299 ITR 88 (P&H). Thus, it was held that amount paid as damages for breach of contract is eligible for deduction as business expenditure.

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