Ambalal Sarabhai Enterprises Ltd. Vs The ACIT/DCIT Circle-1(1)/ Circle-1(1)(1) Race Course Circle (ITAT Ahmedabad)
ITAT Ahmedabad held that disallowance of claim of damages under section 14B of the P.F. Act not justified since 40% of damages are compensatory. Thus, held that P.F. damages that are compensatory in nature are allowed as deduction and balance 60% being penal in nature are not allowable.
Facts- The assessee-company is mainly engaged in the manufacture of drugs and pharmaceuticals, it also provides marketing and consultancy activities in respect of drugs and pharmaceuticals, fine chemicals, industrial glass containers, packing materials, electronic tests and measuring instruments, consumer electronic and industrial research. There are 15 divisions including service units catering to the needs of other units of corporate body.
The assessee filed return of income for the respective A.Y. and the cases were selected for scrutiny. The assessments were completed under section 143(3) of the Act. The AO made certain disallowances and additions in the income of the assessee for the respective A.Y.s. CIT(A) partly allowed the appeal. Being aggrieved, both revenue and assessee has preferred the appeal.
Conclusion- Held that it is an established position, based on the Hon’ble Supreme Court’s decision in the case of Swadeshi Cotton Mills Co. Ltd. vs. CIT [233 ITR 199 (SC)], that where a composite levy includes both compensatory and penal elements, the compensatory portion can be allowed as a deductible business expenditure under Section 37(1). In the assessee’s own case for A.Y. 2001-02, the Coordinate Bench had upheld the CIT(A)’s decision to allow 40% of the damages under Section 14B of the Act as compensatory while treating the balance 60% as penal in nature and disallowing the same. This decision was in line with earlier years. Applying the principle of judicial consistency, we are inclined to follow the co-ordinate bench’s decision in the assessee’s own case. Accordingly, 40% of the damages of are allowed as compensatory and deductible under Section 37(1) of the Act, while the balance 60% is disallowed as penal in nature. The AO is directed to verify the computation and ensure that the disallowance is limited to 60% of the damages.
