Law: Income Tax Ordinance, 2001

Section: 23(1)(xviii),24(j),136

(a) Income Tax Ordinance (XXXI of 1979) [since repealed]---.--- ---.----S. 23(1)(xviii)---.---Permissible deductions falling within the purview of S. 23(1)(xviii) of the Income Tax Ordinance, 1979 [since repealed]---.---"Encashment of bank guarantee" for breach of contract by the assessee---.---Damages or compensation paid in the course of carrying on business---.---Scope---.---Assessee-company was awarded a construction contract by Provincial Government subject to furnishing of a performance bond (bank guarantee)---.---Provincial Government encashed the bank guarantee for alleged breach of contract by the assessee---.---Assessee claimed the said amount as expenditure in the income tax return filed for the relevant assessment year and also filed a civil suit against such encashment---.---Income Tax Officer disallowed the said amount as expenditure and added it to the respondent's income on the ground that it (the amount) was recoverable from the Provincial Government---.---Legality---.---Any expenditure incurred as a penalty or fine paid on account of an infraction, breach or violation of law would not be allowed to be an expenditure laid out wholly or exclusively for the purpose of the business of the assessee---.---Whereas any amount paid as damages or compensation was an expenditure laid out wholly or exclusively for the purpose of the business of the assessee---.---Said amount was a revenue loss incurred in the course of carrying on of the business and therefore an admissible deduction under S. 23(1)(xviii) of the Income Tax Ordinance, 1979---.---In the present case, the contract was executed between the assessee and the Provincial Government, in connection with the business of assessee, who failed to perform its part of agreement, as such the Provincial Government encashed the performance bond---.---Encashment of bank guarantee could at best be considered to be damages or compensation paid to the Provincial Government for unsatisfactory performance of a contract by the assessee which was a revenue loss incurred by the latter in the course of carrying on its business---.---Transaction between the parties was purely a business transaction and there was no…

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