Provision for damages is a specified liability, eligible as an income tax deduction: ITAT

The Bangalore Bench of the Income Tax Appeal Tribunal (ITAT) held that the provision for damages is a specified liability and can be deducted from income.

SKF Engineering & Lubrication India Pvt. Ltd., the person being assessed works in the field of automated lubrication systems, manual lubrication equipment and industrial pumping systems. The assessed returned a total income of Rs.37,18,54,400/- for AY 2012-13 void revised income return. The case was selected for review and an assessment order was made under section 143(3) rws 144C of the Income Tax Act 1961 (the Act) on 16.02.2015, wherein the income of the assessed company was assessed at Rs.37,74,93,367/-.

The PCIT has asserted jurisdiction under Section 263 of the Income Tax Act and set aside the assessment order by ordering the AA to verify the assessee’s claim for payment of damages and to redo the assessment. The AO passed an order under section 143(3) rws 263 of the Act dated 05.06.2018 dismissing the provision for liquidated damages stating that it is an indefinite liability. On appeal, the CIT(A) upheld the AO’s order.

The appraisee stated that he had a contractual obligation to pay liquidated damages since the purchase orders issued by the clients or the contracts entered into by the appraised with his clients contain a liquidated damages payment clause by the assessee if the assessee fails to deliver the lubrication systems/products on or before the scheduled delivery date

On the other hand, the revenues argued that the liability to pay the damages arose at a later date and therefore could not be said to be an established liability and supported the orders of the authorities. lower.

It was found by ITA that the amount of liquidated damages is calculated as a percentage of the base value of the purchase order/contract, which means that the provision for liquidated damages is made for the relevant period at the year considered. Although actual damages are only paid upon delivery of the lubrication systems or products, liability, in our view, should be provided for under the mercantile accounting system.

The ITA Bench consisting of Shri George George K., Judicial Member and Mrs. Padmavathy S., Accounting Member, observed that the provision is made on the basis of the terms agreed with the client and relates to the relevant period for the year under review and held that “the provision made for liquidated damages is a specified liability and should be allowed as a deduction. The disavowal made by the AO in this regard is deleted.”

The appeal filed by the assessee was granted. The assessee was represented by Shri Deepak Chopra and the income was represented by Smt. Priyadarshini Baseganni.

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SKF Engineering & Lubrication India Pvt. Ltd v JCIT

Counsel for the Appellant: Shri Deepak Chopra

Counsel for the Respondent: Smt. Priyadarshini Baseganni


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