Liquidated damages allowable as business expenditure

The impugned amount was not in the nature of penalty on account of disobedience or infraction of any law. In fact, the assessee being in the business of execution of Civil Construction work, therefore under an obligation to complete the contract within a specified time and in case of delay, he is subject to liquidated damages. The impugned amount was nothing but in the nature of liquidated damages, therefore allowable as business expenditure. We hold accordingly. The view taken by the ld.CIT(A) is hereby confirmed and this ground of the Revenue is dismissed.

INCOME TAX APPELLATE TRIBUNAL
“ C ” BENCH, AHMEDABAD

I.T.A. No. 736/Ahd/2010
(Assessment Year : 2003-04)

Dy. CIT Vs. M/s. Gayatri Construction Co. 
Date of Pronouncement: 31/1/13

O R D E R

PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :

This is an appeal filed by the Revenue arising out of the order of ld.CIT(A)-Gandhinagar dated 29/12/2009 passed for A.Y. 2003-04 and the only ground is reproduced hereinbelow:-

1. The Ld.CIT(A) was not justified in deleting the addition on account of time limit deduction which was treated as penalty by the Govt.of Gujarat.

2. Facts in brief as emerged from the corresponding assessment order passed u/s. 143(3) of the IT Act dated 18.12.2008 were that the assessee ­firm is in the business of public work construction on contract basis. It was noted by the AO that the assessee has claimed an expenditure of Rs. 59,93,911/- which according to him was in the nature of “penal expenditure”. The explanation of the assessee was that as per the contract agreement, there was a clause of liquidated damages for delay. In case, the assessee as a contractor fails to complete the work within a stipulated date, then because of the said breach required to pay liquidated damages. However, the AO has considered the impugned amount as a penalty imposed on the assessee which according to him was not an admissible deduction. When the matter was carried before the CIT(A), he has held the issue in assessee’s favor as under:-

“2.3. The matter has been considered. I have also gone through the sample running bills approved for payment by the concerned contracting authorities and find the factum of deduction on account of delays as correct in these sample checkings. In any case, the AO has not raised the issue about the veracity and the quantum of the assessee’s claim at Rs. 59,93,911/-. Therefore, the only issue remains to be decided is the legality of the claim. The app is carrying out work for certain authorities – say Gujarat P. W.D. under a contract. As per these contracts, if there is a delay, the contractor, i.e. the assessee is liable to pay certain liquidated damages at certain specified percentage. Both the parties have agreed to the terms and conditions and the liquidated damages which came to be called as time limit deduction, were levied on the app whenever there was a delay. In this sequence of events, neither there is any penal action nor any infringement of law. This was a contractual arrangement. For any explainable or unexplainable reason, there could be a delay in completion of the project. Like any other business, it is for the assessee to conduct its construction business the way it thinks appropriate and it is for the assessee to fulfill its contractual obligations the way it deems appropriate. Various case laws cited by the assessee ’s Authorised Representative go to support this basic proposition that such kind of levies through imposed by Government authorities but are in the nature of contractual impost and are in the nature of the breach of an agreement. These are not penalties for any infraction of law. Therefore, these are to be treated as commercial losses or commercial expenses.