SUGAM PARK,KOLKATA vs. DCIT, KOLKATA
In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.
What did the Tribunal hold?
The Tribunal held that the payments, though termed 'penalty' in the agreement, were compensatory in nature for non-fulfillment of contractual obligations, not for violation of any law. Therefore, they were allowable as deductions.
What were the facts?
The assessee claimed deductions for delayed payment charges and interest on delayed payment related to a construction project agreement. The Principal Commissioner of Income Tax initiated proceedings under Section 263, considering these payments as penal and thus not deductible.
What were the issues?
Whether payments made for non-fulfillment of contractual obligations, termed as 'penalty', are deductible under Section 37 of the Income Tax Act and if the order passed under Section 263 was justified.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, KOLKATA
Before: Shri Rajpal Yadav, Vice- & Shri Girish Agrawal
Per Shri Rajpal Yadav, Vice-President (KZ):- The present appeal is directed at the instance of assessee against the order of ld. Principal Commissioner of Income Tax-9, Kolkata dated 28th March, 2023 passed under section 263 of the Income Tax Act for A.Y. 2018- 19. 1
Assessment Year : 2018-2019 Sugam Park
Brief facts of the case are that the assessee has filed its return of income electronically on 24.09.2018 declaring total income of Rs.1,53,61,590/-. The case of the assessee was selected for scrutiny assessment and income of the assessee was determined equivalent to the amount declared by the assessee by way of a scrutiny assessment dated 24.03.2021.
The ld. Principal Commissioner on perusal of the assessment record formed an opinion that the assesese has debited the following amounts, namely- (a) delay payment charges of Rs.60,00,000/-; (b) interest on delayed payment of Rs.3,25,000/-.
According to the ld. Pr. CIT, the deduction claimed by the assessee of the above payments ought not to have been allowed to the assessee and, therefore, order of the ld. Assessing Officer is erroneous and prejudicial to the interest of Revenue. The ld. Pr. Commissioner issued a show-cause notice to the assessee under section 263. In response to the show-cause notice, it was contended by the assessee that it has entered into an agreement with Asansol Durgapur Development Authority for construction of residential township on an area of 30.094 acres. As per Clause 9 of the Agreement, if the assessee fails to complete the construction within the time period,
Assessment Year : 2018-2019 Sugam Park then, the assessee would be liable to pay penalty @ Rs.5,00,000/- per month for each month of delay in completion of the Project beyond the time schedule mentioned in the Agreement and on the delay of the payment, interest would be charged. The ld. Pr. Commissioner was of the view that this amount of Rs.60,00,000/- was penal in nature and, therefore, it would have not been allowed to the assessee as deduction. Hence, he initiated the proceeding under section 263. The ld. Pr. Commissioner ultimately after hearing the assessee set aside the assessment order and relegated the issue to file of ld. Assessing Officer to make inquiry and then, re-determine the income of the assessee.
With the assistance of ld. Representatives, we have gone through the record carefully. It is pertinent to note that Sub-Clause 9 of the Agreement reproduced on page 6 of the impugned order and is the foundation of the controversy. Therefore, we deem it appropriate to take note of this sub-clause, which reads as under:- "The Party of the second Part shall execute the project within a period of four years from the date of receiving necessary sanctions from all concerned authorities. The Party of the second Part shall however file all necessary applications before the appropriate sanctioning authorities within 90 days from the date of receiving possession of the site from the Party of the First Part. In the event of failure on the part of the Party of the Second Part to comply with the time schedule specified in the instant Memorandum of Understanding, Party of Second part shall be liable to pay penalty the rate of Rs.5 lakhs per month for each month of 3
Assessment Year : 2018-2019 Sugam Park delay in completion of the project beyond the time schedule mentioned herein above. The penalty of Rs.5 lakhs per month (if applicable) will be adjusted against the Security Deposit of the Party of the second Part. ”
As per the ld. Pr. CIT, the amount paid by the assessee towards non-fulfilment of the contract is penal in nature and, therefore, as per Explanation 1 to Section 37, it is not an allowable deduction. The ld. Assessing Officer has committed an error for granting the deduction of this amount and, therefore, his order deserves to be termed as erroneous, which has caused prejudice to the interest of the Revenue. We are of the view that though expression ‘penalty’ has been used in Clause 9 of the Agreement between the assessee and Asansol Durgapur Development Authority, but it is not on account of infringement of any provision of law, rather it is on account of non-fulfilment of contractual obligation. The penal consequences would be, if it is a penalty by any Law Enforcing Agencies for violation of any Rule and Regulation. Explanation 1 to Section 37 prohibits allowance of deduction of those expenditures, which are incurred in violation to any Rules and Regulation. Here the word ‘penalty’ does not connote to any criminal activity or any violation of any law, rather it is compensatory in nature on account of non-fulfilment of contractual obligation. Therefore, ld. Pr. Commissioner erred in construing the facts and circumstances. The assessment order is not erroneous and no action under Assessment Year : 2018-2019 Sugam Park section 263 is required to be taken against such an assessment order. We allow this appeal of the assessee and quash the order of ld. Pr. Commissioner passed under section 263 of the Income Tax Act.
In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on July 19, 2023.
More judgments on Section 37
- Mohammed Javed Bhati, Sikar vs Income Tax Officer, Ward 1, SikarITA 994/JPR/2025[2018-19]Status: Disposed21 Oct 2026AY 2018-19
- Deputy Commissioner of Income Tax, Circle… vs Sun Pharma Advanced Research Company…ITA 933/AHD/2025[2013-14]Status: Disposed15 Oct 2026AY 2013-14
- Deputy Commissioner of Income Tax, Circle… vs Sun Pharma Advanced Research Company…ITA 932/AHD/2025[2015-16]Status: Disposed15 Oct 2026AY 2015-16
- Deputy Commissioner of Income Tax, Circle… vs Sun Pharma Advanced Research Company…ITA 931/AHD/2025[2014-15]Status: Disposed15 Oct 2026AY 2014-15
- Sun Pharma Advanced Research Company… vs The ACIT, Circle-2(1)(1), VadodaraITA 768/AHD/2025[2015-16]Status: Disposed15 Oct 2026AY 2015-16
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