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| The Tax Publishers2021 TaxPub(DT) 2400 (Del-Trib) INCOME TAX ACT, 1961
Section 37(1)
Once provision of liquidated damages was arising out of a contractual obligation and the basis of providing the provision was past experience and such a reasonable basis of estimation had been regularly followed by assessee in the past, then ostensibly it could not be held that the basis of estimation or working of the provision was not correct. Accordingly, no disallowance was justified, especially when it was not the charge of AO that assessee had made some kind of excessive provision in this year in relation to past.
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Business expenditure - Provision of liquidated damages - Provision of liquidate damages was arising out of contractual obligation -
Assessee, engaged in the manufacturing of cement plant technology equipment and for rendering services on such supply. It claimed deduction of provision of liquidated damages. AO disallowed deduction on the ground that assessee had been unable to show as to how it had quantified said provision and there was no degree of certainty or any kind of scientific methodology adopted by the assessee. Held: Assessee had entered into written contract with parties wherein there was specific clause agreed amongst parties in relation to liquidated damages on account of delay in deliverables. The relevant clauses clearly pointed out that there was a contractual obligation to pay liquidated damages in respect of contract whenever there would be default in providing services on time to the customers and in terms of deliverables as agreed in the contract. Since time was the essence of contract and any delay in delivery of goods would have resulted in liability to pay damages, therefore, assessee had made provision by taking into account the period of delay from the close of accounts. Apart from that, assessee had also reversed provision for liquidated damages in the year in which clients waived off said liquidated damages and written back amount was offered to tax by assessee. Once a provision was arising out of a contractual obligation and the basis of providing the provision was past experience and such a reasonable basis of estimation had been regularly followed by assessee in the past, then ostensibly it could not be held that the basis of estimation or working of the provision was not correct. Accordingly, no disallowance was justified, especially when it was not the charge of AO that assessee had made some kind of excessive provision in this year in relation to past.
REFERRED :
FAVOUR : In assessee's favour.
A.Y. :
INCOME TAX ACT, 1961
Section 37(1)
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