Penalty on violation of contract

penalty imposed means deduction from contract value, so its to be treated as discount for contractor.

the same is a business expense, and hence allowable.. it is similar in nature of bad debt/debtor written off..

but this is a penalty imposed on contractor.....how can it be reduction in contract value????

in case i give u a job to finish in 10 days and the contract amount is 10000.and u dont finish it on time ....

now do u expect me do pay u 10000 still??? 

Of course i won't ,...i will pay just 9000...

so this 1000 is a reduction in the contract amount.....bole to maine khud hi discount le liya...ab kya karoge bolo???

penalty imposed by conctract provider means reduction of contract value, so you have to either issue bills for reduced value or issue credit notes, 

penalty provisions are business matters, there is no relation with tax on this subject. if u deny to accept the penalty you can seek legal help in local court for recovery of penalty deductedl, but it payes mental agony just, as justice is deferrred for looooooooooooong time.