DCIT, CIR-10(1), KOLKATA, KOLKATA vs. M/S BRIDGE & ROOF CO. INDIA LTD., KOLKATA

- This appeal by the Revenue against the order dated 31.03.2015 passed by Commissioner of Income Tax (Appeals)-4, Kolkata for assessment year 2011-12.

The only issue is to be decided whether the CIT(A) is justified in deleting the addition made by the Assessing Officer on account of unexplained provision for liquidated damages in the facts and circumstances of the case.

Brief facts of the case are that assessee is public limited company engaged in construction contracts mainly in civil, mechanical, turnkey jobs in India and abroad. The assessee filed return of income declaring total income of ₹88,69,13,161/-. The A.Y. 2011-12 DCIT, Cir-10(1) Kol. Vs. M/s Bridge & Roof Co. India Ltd. Page 2 notices u/s. 143(2)/142(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) issued in response to which assessee furnished replies. Accordingly, AO determined the income of the assessee at ₹96,65,51,665/- vide his order dated 25.02.2014 u/s.143(3) of the Act.

The AO during the course of assessment proceedings found that assessee debited an amount of ₹674,31 as liquidated damaged to the profit and loss account. In explanation to the objection raised by AO the assessee stated the said amount was held by various clients on account of work done and all the details involving liquidated damages were submitted to the AO. The liquidated damages were deduced by its clients due to non-completion of project by the assessee within the contractual completion time period as per contract agreement. The AO opined that the said claim is like a bad and doubtful debt and but for non submission of evidence showing the client deducted the said amount and added the said amount to the income of the assessee. Besides the AO also observed that assessee claimed the deduction u/s VAT and Service Tax u/s. 43B of the Act, therefore it would be a double deduction if the claim of liquidated damages are allowed.

Before the Ld. CIT(A) assessee produced cheque slip to have been issued by one of its clients Defence Account Department stating that the client deducted damages for delay in supply by the assessee. Considering the same, Ld. CIT(A) deleted the said amount by observing as under:- “5.3.1 I have gone through the copies of the contracts, the payment invoices/intimations, etc. In all the contracts there is clause for liquidated damages. This is established standard contract clause in such engineering contracts. Such risks are inherent in the very nature of the business contracts. The engineering contracts involve numerous processes of procurement, fabrication, development, testing etc. etc., That is why the contract agreements themselves are very detailed and documented. And – the clients are all undertakings of the Government, Railways, Defence. The appellant itself is also an undertaking of the Government of India. xxxxxxx 5.3.3 As regards proof, documentation, evidence etc – the contract agreements have the relevant clause, the payment intimations mentioning the disallowance are adequate proof. A.Y. 2011-12 DCIT, Cir-10(1) Kol. Vs. M/s Bridge & Roof Co. India Ltd. Page 3 5.3.4 The judicial decision relied upon by the ld. AR of ITQT, Delhi ‘C’ Bench in Huber Suhner Electronics Pvt. Ltd Vs. DCIT [2013] 22 ITR (Trib) 596 (Delhi) wherein the ITAT had held that liquidated damages are revenue expense deductible u/s. 37, is squarely applicable to this case. 5.3.5 As regards the alternative argument of the Assessing Officer of there being component of service ax and VAT, and therefore that since these taxes are allowed as deduction u/s. 43B and therefore that there could be double deduction – this hypothesis is far-fetched and just cannot be. These taxes are accounted for separately; so there just cannot arise mix-up.”

Ld. DR prayed before us that the issue may be remitted to file of AO to consider the claim of assessee in the light of additional evidence filed before Ld. CIT(A) as it was filed for the first time in support of assessee’s claim and there was no opportunity to AO to verify the same.

Ld. AR submits that the clients of the assessee are all undertakings of Government, Defence and Railways and standard practice in contracts that there is clause for liquidated damages for delay in project phase, completion, supply of the goods etc., The Ld. AR submits the clients used to deduct at the time of making payment for delays in execution of contract and supply of goods and the same was claimed by assessee under the head “liquidated, damages” and not as a provision at all. Ld. AR submits that the evidence showing the deduction of damages by the clients were not produced before the AO only for the reason that assessee was not having said evidence during the course of assessment proceedings and was submitted before CIT(A), as when the assessee got said information from the clients and prayed to dismiss the appeal by the Revenue and submitted order passed by CIT(A) is well considered basing on the material available on record in the First Appellate proceedings. 8 Heard both and perused material available on record. We notice that AO added the said amount for non-submission of any evidence showing that the clients of assessee deducted damages from the payments required to be paid to the assessee under agreement. The CIT(A) examined the said agreement and invoice filed by the assessee during the First Appellate proceedings and found a clause enabling the client to deduct moneys from the payment for any breach of contract specifically for not