Case Law Details
SKF Engineering & Lubrication India Pvt. Ltd Vs JCIT (ITAT Bangalore)
The assessee during the year under consideration has made a provision for liquidated damages for an amount of Rs. 49,20,000/-. The AO during the revision proceedings has disallowed the said amount on the basis that the calculation of liquidated damages is based on percentage agreed upon the time of purchase order and at the time of making the provision the assessee would not be aware of the date of delivery which a future date. Against the appeal filed by the assessee before the CIT(A) the disallowance was upheld on the basis that the liability would arise only on actual supply and therefore the provision made for the year under consideration is an unascertained liability.
On perusal of the workings it is noticed that the provision is made up to the last date of the financial year, i.e. 31.03.2012. The assessee has considered the delivery date as per the purchase order/clause in the contract and calculated the delay up to 31.03.2012. It is also noticed that the amount of liquidated damages is calculated as a percentage of the basic value of the purchase order/contract. This would mean that the provision for liquidated damages is created for the period relevant to the year under consideration. Though the actual damages would be paid only on delivery of lubrication systems or products, the liability, in our view, has to be provided for under the mercantile system of accounting. We see no merit in the contention that the provision made is an unascertained liability on the basis that the liability to pay would arise on a future date.. The CIT(A) relied on the decision of the Hon’ble Madras High Court in the case of FFE Minerals (supra) while upholding the disallowance. In our view this case is distinguishable from assessee’s case since the fact of the said case is different to the extent that only negotiations and discussion took place and the final amount of liquidated damages was computed much later. In assessee’s case, however, the provision is made based on the terms agreed with the customer and it relates to the period relevant for the year under consideration. In view of the above discussion we hold that the provision made for liquidated damages is an ascertained liability and should be allowed as a deduction. The disallowance made by the AO in this regard is deleted.
FULL TEXT OF THE ORDER OF ITAT BENGALURU
This appeal is against the order passed by the National Faceless Appeal Centre (NFAC), Delhi in appeal No. CIT(A), Bengaluru-4/10071/2018-19 dated 29.04.2022 for AY 2012-13.
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