SUGAM PARK,KOLKATA vs. DCIT, KOLKATA

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,

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

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.