Penalty on Late Supply of Goods is Compensatory in Nature and is Allowable Business Expenses: ITAT

The Income Tax Appellate Tribunal (ITAT), Delhi, has ruled that the penalty paid on the late supply of goods is not an offence or a crime under the law. Rather, the penalty is like the compensation paid as a breach of contract.

The assessee company, Axa Parenterals Limited, was engaged in the business of producing IV Fluid & Other Pharmaceutical products and participated in government tenders. The assessee had claimed business expenses of Rs 32,91,211 towards the penalty on late supply of goods to the government. As per the assessee, the late supply expenses are allowable business expenditures under section 37 of the Income Tax Act, as they were incurred exclusively for business purposes.

However, the AO disallowed these expenses and made an addition of Rs 32,91,211, holding that the assessee was habitual of making late payments, and the delayed supply of goods is an offence as per explanation 1 to Section 37. This decision was upheld by NFAC.

The ITAT disagreed with both the lower authorities, observing that the penalty amount was paid as compensation for breach of contractual obligations. Considering this, the tribunal ruled that the late supply of goods is not a crime or violation of law but a payment for breach of contract.

Therefore, the tribunal deleted it, and the assessee had correctly claimed it as a deduction of business expenditure.