Facts of the Case

The present appeal pertains to Assessment Year 2008–09, wherein the Revenue challenged the order of the Income Tax Appellate Tribunal dated 28.07.2021.

The respondent/assessee had initially created a provision for liquidated damages amounting to ₹3,87,12,148/- in AY 2007–08. Subsequently, in AY 2008–09, the assessee claimed a total deduction of ₹4,37,36,387/-, which included:

  • ₹3,87,12,148/- (provision made in earlier year), and
  • ₹50,24,239/- (additional liquidated damages incurred during the relevant year)

The Assessing Officer disallowed the earlier provision component on the ground that the assessee failed to substantiate the actual incurrence of such damages, while allowing only the additional amount.

Issues Involved

  1. Whether the assessee was entitled to claim deduction of liquidated damages that were provided in a preceding assessment year but crystallized during the relevant assessment year.
  2. Whether the findings of the CIT(A) and Tribunal allowing such deduction were sustainable in law.
  3. Whether any substantial question of law arose for consideration before the High Court.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the assessee had failed to establish that it actually suffered damages corresponding to the provision made in the earlier assessment year.
  • It was argued that deduction should not be allowed without concrete proof of crystallization of liability.
  • The Assessing Officer had rightly disallowed the amount of ₹3,87,12,148/- due to lack of substantiation.

Respondent’s Arguments (Assessee)

  • The assessee submitted that the liquidated damages were genuinely incurred due to delays in supply to BSNL and MTNL.
  • It was demonstrated that such damages were adjusted against invoices raised, thereby establishing actual loss.
  • The assessee argued that the liability had crystallized and was therefore allowable as deduction in the relevant year.

Court Findings / Order

  • The CIT(A), after examining detailed records including purchase orders, invoices, and adjustments made by BSNL and MTNL, held that the assessee had indeed suffered liquidated damages corresponding to the provision made earlier.
  • The Tribunal upheld the findings of the CIT(A) and rejected the Revenue’s appeal.
  • The High Court observed that:
    • The findings recorded by the CIT(A) were pure findings of fact.
    • No material was brought on record to show that such findings were perverse.
    • Therefore, no substantial question of law arose for consideration.

Important Clarification

  • The judgment clarifies that liquidated damages, though provided in an earlier year, can be allowed as deduction when actual liability crystallizes and is substantiated by evidence.
  • It reinforces the principle that findings of fact by appellate authorities (CIT(A) and ITAT) will not be interfered with unless shown to be perverse.

 

Sections Involved

  • Section 37(1) of the Income Tax Act, 1961 (General deduction provision)
  • Appellate provisions under the Income Tax Act relating to CIT(A), ITAT, and High Court jurisdiction

 

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/60808122023ITA7192023_163321.pdf

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