MURIWALA AGROTECH PRIVATE LIMITED ,RAJASTHAN vs. DCIT CIRCLE-14, DELHI

The captioned appeal has been filed by the Assessee against the order of the Commissioner of Income Tax (Appeals)-XXVI, New Delhi (‘CIT(A)’ in short) dated 10.12.2021 arising from the assessment order dated 24.12.2018 passed by the Assessing Officer (AO) under Section 143(3) r.w. Section 147 of the Income Tax Act, 1961 (the Act) concerning AY 2012-13.

3. Briefly stated, the assessee is engaged in manufacturing processed food. The customer of assessee includes State Governments and Government Departments. The assessee filed return of income declaring total income at Rs.1,57,02,000/-. The return filed by the assessee was assessed under Section 143(3) at Rs.1,61,02,000/-. Thereafter, the case was reopened under Section 147/148 of the Act and reassessment order dated 24.12.2018 was passed wherein the Assessing Officer inter alia disallowed expenditure of Rs.43,58,970/- incurred on packing penalty on the ground that expenditure termed as ‘Packing Penalty’ is in relation to breach of contract and hence not allowable deduction under Section 37(1) r.w. Explanation thereto of the Act.

4. Aggrieved by the disallowance, the assessee preferred appeal before the CIT(A). The CIT(A) however declined to give relief on the aforesaid disallowance and passed ex-parte order. The CIT(A) has thus not disposed of the appeal on merit but dismissed on the grounds of indolence and negligence by making a reference to the judgment of the Hon’ble Supreme Court in the case of CIT vs. B.N. Bhattacharya and another, 118 ITR 461.

5. Further aggrieved, the assessee preferred appeal before the Tribunal.

6. When the matter was called for hearing, the ld. counsel for the assessee submitted that the issue is squarely covered in favour of the assessee by several judgments of the Hon’ble High Courts. It was contended that the penalty imposed on the assessee was on account of failure to meet the contractual obligations of delivery of its project to Aganwadi Centres within stipulated contractual time limits. The penalty has been imposed on the assessee in the nature of demurrage for delay in delivery of goods. The penalty is not in the nature of any statutory impost but is in the nature of breach of contract and therefore cannot be equated with expression ‘an offense or prohibition by law’ as contemplated in Explanation-1 to Section 37 of the Act. The copy of agreement executed by the assessee dated 04.02.2010 with Government of Gujarat was referred to where penalty clause has been provided for breach of provisions of the contract.

7. We take notice of the plea of the assessee that the penalty paid in the instant case are in the nature of damages paid for breach of contract and therefore, fully deductible under Section 37 of the Act and Explanation-1 is not attracted. It is true that damages paid for breach of contract are treated to be normal incidence of business unlike the penalty paid on violation of statutory provisions. Similar issue has been examined in CIT vs. Catholic Syrian Bank Ltd., (2003) 130 taxman 447 (Ker); Jammu Auto Industries vs. CIT (2008) 167 taxman 192 (P&H) (FB) and plethora of other judgments. Thus, the issue raised by the assessee appears to be meritorious on first principles. However, in the same vein, we note that the assessee has failed to attend before the CIT(A) and the CIT(A) has passed order ex-parte without expressing any opinion on merits.

8. In this backdrop, we straightaway refer to Section 250(6) of the Act which enjoins that the CIT(A) shall state the points for determination before it and the decision shall be rendered on such points along with reasons for decision. Thus, it is incumbent upon the CIT(A) to deal with the grounds on merits even in ex-parte order. In view of Section 250(6) of the Act, the CIT(A) has no power to dismiss appeal on account of non prosecution as done in the instant case. A bare glance of the order of the CIT(A) shows that CIT(A) has not itself addressed on various points placed for its determination at all and dismissed the appeal of the assessee for default of non appearance. Needless to say, the CIT(A) plays role of both adjudicating authority as well as appellate authority. Thus, the CIT(A) could not have shunned the appeal for non-compliance without addressing the issue on merit. Thus, in view of Section 250(6) of the Act, the issue requires to be restored back to the file of the CIT(A) for adjudication in accordance with law.

9. We further governed by the observations of the Hon’ble Delhi High Court in CIT vs. Eastern Medikit Ltd. (2011) 337 ITR 56 (Del) wherein the Hon’ble High Court observed that it was not proper to decide the issue on merits, converting itself to a Court of first instance and deciding the factual aspect on which the CIT(A) has not returned any findings. Thus, while the issue has been discussed on first principles, it shall be open to the CIT(A) to call for such information or make such inquiry as may be considered necessary for deciding the issue on merits after giving proper opportunity to the assessee.