Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of Forfeiture of assessee's security deposits by way of compensation for not completing contract work within stipulated period specified in agreement, constituted an allowable commercial loss and deduction on that account could be not denied on ground that it amounted to payment of penalty Where the question for consideration was as to whether forfeiture of the assessee's security deposits by way of compensation for not completing the contract works within the stipulated period specified in the agreement, constituted an allowable commercial loss or could be disallowed on the ground that it was penalty : Held that in the present case, the compensation paid by the assessee was on account of breach of contract which does not fall in the category of payment of penalty for breach of any law but would be a compensation for breach of contractual obligations. Accordingly, it would fall in the category of allowable deduction. JUDGMENT 1. Rajesh Bindal, J.-The following question of law has been referred for the opinion of this court arising out of order dated September 9, 1988, passed by the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, "the Tribunal") in I. T. A. No. 493/Chandi/87 for the assessment year 1983-84 : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that forfeiture of security deposits amounting to Rs. 16.27 lakhs by way of compensation for not completing the contract works within the stipulated period specified in the agreement, constituted an allowable commercial loss, notwithstanding the fact that the matter is pending disposal before the arbitrator ?" 2. Briefly, the facts are that the assessee in the present case is a contractor executing various works. While computing the income for the assessment year in question, the assessee claimed a deduction of Rs. 16.27 lakhs on account of compensation paid to the contractee for delay in execution of the works. The claim was rejected by the Assessing Officer. However, in appeal, the Commissioner of Income-tax (Appeals) (for short, "the CIT(A)")…

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