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Ms. Geeta Prabhudas Pawani Income Tax Officer - 23 Apartment, Bhakti Marg Mulund (W), Mumhai 400080 Vs. C-10, Pratyaksha Kar Bhavan Bandra-Kurla Complex Mumbai 400051
June, 19th 2014
                          "G" Bench, Mumbai

                 Before Shri D. Manmohan, Vice President
                and Shri N.K. Billaiya, Accountant Member

                     ITA No. 6535 & 6536/Mum/2012
                   (Assessment Years: 2003-04 & 2006-07)

     Ms. Geeta Prabhudas Pawani         Income Tax Officer - 23(2)(3)
     Pawani Plot, Near Vipul            C-10, Pratyaksha Kar Bhavan
     Apartment, Bhakti Marg             Bandra-Kurla Complex
     Mulund (W), Mumhai 400080          Mumbai 400051
                             PAN - AAFPP8765Q
               Appellant                         Respondent

                   Appellant by:     Shri Subodh Ratnaparakhi
                   Respondent by:    Shri R.K. Sahu

                   Date of Hearing:       17.06.2014
                   Date of Pronouncement: 17.06.2014


Per D. Manmohan, V.P.

     These two appeals are filed at the instance of the assessee and they
pertain to A.Y. 2003-04 and A.Y. 2006-07.

2.     In so far as A.Y. 2003-04 is concerned, penalty levied by the AO for
not declaring the liquidated damages of `63,87,752/- is the subject matter
of dispute.

3.     For the year under consideration assessment was completed on
23.01.2006 determining total income at `2,40,400/-. The Commissioner of
Income Tax called for the records and noticed that the assessee had
advanced a loan of `6 crores to Enterprise Trading Company subject to
certain terms of agreement. According to article 5.1.3 of the terms of
agreement failure on the part of the borrower to repay the debts comprising
of principal amount and interest, on due date, would amount to default in
which event the borrower has to pay liquidated damage @48% per annum
on the defaulting amount. Records show that though the principal amount
was repaid by the borrower the assessee has not recovered any amount on
account of alleged interest liability which works out to `1,33,07,817/-. Since
                                     2            ITA No. 6535&6536/Mum/2012
                                                     Ms. Geeta Prabhudas Pawani

the assessee was following mercantile system of accounting, in the opinion
of the Commissioner, the assessee should have accounted for the liquidated
damages @48% on the outstanding liability of interest of `1.33 crores.

4.    When called upon by the Commissioner the assessee submitted that
the income is neither accrued nor received. It was also contended that
interest was charged on this loan as per stipulated terms in the financial
year 1996-97 and 1997-98. Although the borrower repaid the entire
principal amount it did not pay the interest amount as per the stipulated
terms. Even after consistent follow up nothing could be recovered and it was
doubtful of recovery. Therefore it was considered prudent not to charge
liquidated damages over and above the interest amount outstanding. It is
also contended that no prudent man would think of recovering liquidated
damages when interest amount outstanding is in itself doubtful of recovery.
It was also argued that on real income principle notional income cannot be
brought to tax and by mutual consent the assessee had decided not to
charge liquidated damages. The Commissioner, however, was of the view
that this issue required detailed examination by the AO and therefore set
aside the matter for proper examination. Before the AO the letters
exchanged between the assessee and the Enterprise Trading Co. were
furnished to show that the parties have decided not to charge liquidated
damages and the terms of agreement were altered by subsequent conduct of
the parties. The AO, however, was of the opinion that the assessee having
followed mercantile system of accounting, liquidated damages ought to have
been booked in the hands of the assessee and therefore brought to tax an
amount of `63,87,752/- and further levied penalty of `20,12,142/- on the
ground that the assessee sought to evade tax on the aforementioned sum.

5.    Penalty was affirmed by the learned CIT(A) and therefore the assessee
is in appeal before the Tribunal. At the time of hearing the learned counsel
for the assessee placed before us a copy of the order of ITAT "G" Bench,
Mumbai in assessee's own case for A.Y. 2003-04 (ITA No. 4633/Mum/2011
dated 16.11.2012) to contend that the Tribunal had considered this issue in
great detail in the quantum proceedings while coming to the conclusion that
in the year under consideration liquidated damages had not accrued to the
                                        3            ITA No. 6535&6536/Mum/2012
                                                        Ms. Geeta Prabhudas Pawani

assessee and thus set aside the addition. The learned counsel for the
assessee contended that the addition no longer subsists in the light of the
decision of the Appellate Tribunal in which event the penalty proceedings
have no legs to stand.

6.    On the other hand, the learned D.R. reiterated the submissions made
before the Appellate Tribunal during the quantum proceedings and
contended that the assessee has not completely stopped charging the
interest; it was reduced to 18%. When pointed out that in connection with
liquidated damages there is mutual agreement not to collect liquidated
damages and interest at 48% thereon, the learned D.R. merely relied upon
the order passed by the AO.

7.    Having regard to the circumstances of the case and in the light of the
decision of the ITAT (supra) we are of the view that it is not a fit case for levy
of penalty under section 271(1)(c) of the Act since the addition made in the
quantum proceedings has been deleted by the Tribunal. We hold accordingly
and allow the appeal filed by the assessee.

8.    ITA No. 6536/Mum/2012 is with regard to the appeal filed by the
assessee pertaining to A.Y. 2006-07 wherein addition of `6,60,238/- was
made by the AO referable to "interest on liquidated damages" worked out
@48% of outstanding interest liability; in the opinion of the AO as well as the
CIT(A) the liquidated damages, as well as interest thereon, accrues to
assessee from year to year.

9.    In this case also the learned counsel for the assessee placed reliance
upon the order of the Tribunal to submit that even for A.Y. 2003-04 the
Tribunal had taken a view that on account of the letters exchanged between
the parties there is an explicit agreement for not charging liquidated
damages and interest thereon which amounts to changing the terms of
agreement prior to the end of the accounting year 1997-98 in which event
the interest component on the assumed liquidated damages cannot be
added in the subsequent years.

10.   We have carefully considered the rival submissions and perused the
record. We have already considered this issue in the penalty proceedings.
                                        4            ITA No. 6535&6536/Mum/2012
                                                        Ms. Geeta Prabhudas Pawani

For the reasons given therein and respectfully following the order of the
Tribunal (supra) we hold that the interest component of liquidated damages
did not accrue to the assessee in this year and direct the AO to delete the

11.     In the result, the appeals filed by the assessee are allowed.

Order pronounced in the open court on 17th June, 2014.

                   Sd/-                                   Sd/-
              (N.K. Billaiya)                        (D. Manmohan)
           Accountant Member                         Vice President

Mumbai, Dated: 17th June, 2014

Copy to:

   1.   The   Appellant
   2.   The   Respondent
   3.   The   CIT(A) ­ 11, Mumbai
   4.   The   CIT­ 23, Mumbai City
   5.   The   DR, "G" Bench, ITAT, Mumbai

                                                       By Order

//True Copy//
                                                    Assistant Registrar
                                            ITAT, Mumbai Benches, Mumbai
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