Disallowance u/s 37 for penalty/demurrage for late delivery of goods

Disallowance u/s 37 for penalty/demurrage for late delivery of goods not for any offence prohibited by law but merely normal business expenditure – ITAT

ABCAUS Case Law Citation:
ABCAUS 2924 (2019) (05) ITAT

Important Case Laws Cited/relied upon by the parties
Mahalakshmi Sugar Mills Co. Ltd. vs. CIT (1984) 19 Taxman 447(Delhi)
Jamuna Auto Industries v. CIT (2008) 167 Taxman 192

In the instant appeal, the Revenue had challenged the order of the Commissioner of Income Tax (Appeals) in deleting the addition made on account of disallowance of expenditure u/s 37 of the Income Tax Act, 1961 (the Act) towards late delivery of consignment to BHEL and Indian Railways.  

The Assessing Officer (AO) had completed the assessment u/s 143(3) r.w.s 148 of the Act, assessing income after disallowing the expenditure u/s 37 of the Act claimed for penalty paid to BHEL and Indian Railways for late delivery of consignment of goods.

Aggrieved assessee preferred an appeal before the CIT(A) and succeeded. The CIT(A) relying on the various judgments of Hon’ble Courts gave a finding that the alleged penalty was not in violation of any law or an offence prohibited by any law.

Not satisfied, the Revenue went in appeal before the Tribunal against the deletion of disallowance made by the assessee towards penalty/demurrage for late delivery of goods.

The Tribunal noted that the alleged penalty was paid by the assessee to BHEL and Indian Railways for late delivery of consignment of goods for making contraventions of contractual agreement with these two parties. It was not the case of Revenue authorities that the penalty has been paid for any offence by the assessee which is prohibited by any law.

The Tribunal ovserved that the Hon’ble Delhi High Court had held that that payment of demurrage is not in the nature of damage or penalty and it is merely a charge made by the railway administration to compensate itself for keeping the goods of the assessee in its custody beyond a particular time. Payment of demurrage is incidental to business and its impact is to increase the cost to the assessee of the goods transported. Therefore, the expenditure on this account can be said to be laid out wholly and exclusively for the assessee’s business.

Also the Tribunal observed that another Hon’ble High Court had held that whenever certain damages are to be paid by an assessee for the breach of a contract, such damages are treated to be normal incidences of business.

Accordingly, the Tribunal held that the alleged amount was not a penalty for any offence prohibited by law but was merely normal business expenditure which was incurred by the assessee for non-fulfillment of the contractual agreement with the parties for not delivering goods on time.

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