Liquidated damages paid for delay in delivery of machinery not allowable if liability hadn’t crystalise during year

Liquidated damages paid for delay in delivery of machinery not allowable if liability hadn't crystalise during year

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Liquidated damages paid for delay in delivery of machinery not allowable if liability hadn’t crystalise during year

Facts:
a) The assessee was engaged in the business of turnkey projects, in which, time was the essence of contract and one of the conditions enumerated in the contract was delivery of equipment in time which would lead to liquidated damages if not done within the stipulated time.
b) The assessee’s case was that there was delay in delivery of machinery due to which the liability to pay liquidated damages arose. The assessee claimed deduction of liquidated damages under section 37(1).
c) Assessing Officer (AO) rejected assessee’s claim on ground that liability to pay damages didn’t crystalise in relevant year and thus it wasn’t a case of payment of ascertained liability.
d) CIT(A) & ITAT upheld order of AO. Aggrieved-assessee filed the instant appeal before the High Court.
The High Court held in favour of revenue as under:
1) There was no past events had been placed before the AO to show that there was every probability that the expenditure was to be incurred.
2) The documents placed before the High Court clearly showed that there had been negotiations, discussions before the liquidated damages was arrived at, which was much after the subject assessment year.
3) These all documents were in fact strengthening the case of the revenue and the findings rendered by the Commissioner (Appeals) as well as the Tribunal, which had held that there was no ascertained liability. Therefore, impugned order passed by authorities below did not require any interference. – [2018] 98 taxmann.com 170 (Madras)

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