DCIT Vs AIA Engineering Ltd (ITAT Ahmedabad)
ITAT Ahmedabad held that settlement payments in relation to patent disputes are allowable as business deduction under section 37(1) of the Income Tax Act since the same is not a penalty for an offence or for a purpose prohibited by law.
Facts- The assessee is engaged in the business of design, development, manufacture, installation and servicing of high chromium wear, corrosion and abrasion resistant casting used in the cement, mining and thermal power generation industries. The assessee has agitated against the action of the Ld. CIT(A) in confirming the disallowance of Rs.31,11,00,000/- made by the AO u/s 37 of the Income Tax Act, 1961 on account of disallowance of compensation paid for settling the patent infringement dispute.
Conclusion- Held that settlement payments in relation to patent disputes are not intended to be disallowed. Thus, that the payment of Rs. 31,11,00,000/- was a compensatory payment made out of commercial expediency to settle a civil dispute and protect the assessee’s business interests. It was not a penalty for an offense or for a purpose prohibited by law under Explanation 1 to Section 37(1). Even the Explanation 3 to Section 37(1) is not applicable to the year under consideration. Even the issue is also not covered under newly inserted clause (iv) to Explanation 3 to section 37(1) of the Act. We, therefore, find the disallowance to be unsustainable and the same is ordered to be deleted. Grounds of the assessee’s appeal are allowed.
