Case Study -------------- CIT v. Regalia Apparels Pvt. Ltd (2013) The assessee is engaged in the business of manufacturing of garments. The Apparel Export Promotion Council granted to the assessee entitlement for export of garments and knit wares. In consideration for export entitlements, the assessee furnished a bank guarantee in support of its commitment that it shall abide by the terms and conditions in respect of export entitlements. The failure to fulfill the obligation to export would render the bank guarantee liable to forfeiture. The assessee started incurring losses and hence decided not to utilize the export entitlements, which consequently led to forfeiture of bank guarantee by the Export Promotion Council. The assessee recorded the payment as penalty in its books. It, however, claimed deduction under section 37(1) on the ground that such expenditure was compensatory and not penal in nature. The Assessing officer contended that though expenditure was incurred for business purpose, the forfeiture of bank guarantee was in the nature of penalty and therefore, the same can not be allowed as deduction. The Tribunal, however, observed that the assessee had taken a conscious business decision not to honour its commitment of fulfilling the export entitlements in view of losses being suffered by it. The High Court concurred with the view of Tribunal holding that there is no contravention of any provision of law and the forfeiture of the bank guarantee was compensatory in nature and therefore, allowable as deduction under section 37(1). Admin, CA n U. Source: ICAI Updates
Posted on: Tue, 24 Sep 2013 16:36:11 +0000