Admissibility of deduction towards Provision for liquidated damages

Admissibility of deduction towards Provision for liquidated damages

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Admissibility of deduction towards Provision for liquidated damages

FFE MINERALS INDIA (P) LTD. vs. JOINT COMMISSIONER OF INCOME TAX
HIGH COURT OF MADRAS

 Business expenditure—Year of allowability

Provision for liquidated damages
For allowing deduction for a provision, three tests are that (a) an enterprise has an obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation
Second test is not satisfied in this case—The documents placed before the Court will clearly show that there has been negotiations, discussions before the liquidated damages was arrived at, which was much after the subject assessment years
Only those obligations arisen for past event existing independently on the future contract of the enterprise is recognised provision.
 Admittedly, in the instant case, no such past events have been placed before the AO to show that there is every probability that the expenditure will be incurred.
 At best, the assessee can pitch their case as a case of possibility but, not a case of probability

Assessee was not therefore entitled to deduction

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