Penalty treatment

Some examples ....

1. Suppose a penalty under the GST Act, 2017 has been levied on an assessee for purchasing goods for specified purpose on concessional tax rate than @ 1% (normal rate @ 4%) and not utilise the same for the purpose for which it was bought. This penalty or fine has been levied for breach of contract to utilise goods for specified purpose and same will be allowed as deduction.

2. A penalty for breach of contract is deductible and a penalty for breach of legal provisions of any Act, is no deductible.

 3. The interest paid on arrears of GST and outstanding balance of GST is compensatory and hence allowed as deduction.

 4. The penalty paid for non-payment of GST within the prescribed time ,is not deductible as expenditure.

5. Where an assessee has paid penalty to Electricity Board for late supply of required materials as mentioned in the contract , is allowed as deductible expenditure . The penalty is paid for breach of terms of a contract and not violation of any provisions of Act and is on compensatory nature.

6. The damages paid for failure to comply with terms o agreement ,due to change in government policies is allowable as deductible expenditure.

 7. Penalty paid by the assessee contractor for non-completion of contract within a stipulated time is allowable as deduction.

 8. The liquidation damages paid in consequence of contractual liability would be allowable as business expenditure.

9. An amount paid under Section 14B of the EPF as damages for default in making payment of PF contributions ie penal in character and hence not allowed as an expenditure.

10. Where there is allotment of quota for import of foreign cotton by federation and the assessee did not import the allotted quantity, the payment of guarantee amount for bales not imported is not in nature of penalty and hence allowed as an expenditure.

11. The amount paid due to shortfall in export performance is allowable as deduction

The list is not exhaustive...

Thus, the penalty or fine levied on the assessee is allowed as expenditure under provisions of Section 37(1) only on the basis of their nature, whether such fine or penalty is of compensatory nature or penal nature. If fine or penalty is of compensatory nature then it will be allowed as expenditure or in case it is penal , not allowed as deductible expenditure. A fine or penalty consisting of monetary as well as prosecution will be always considered as penal action and not allowed as deduction. Therefore ,the expenditure which can be deducted in connection with the business carried by the assessee is the expenditure which can properly be regarded as such. The penalties paid for violating the law in the course of the conduct of business cannot be regarded as deductible expenditure , as the assessee is expected to carry on business in accordance with the laws of land and not in violation of law. The penalty incurred by the assessee for the violation of applicable statute ,unless the true nature of penalty is compensatory, is not to be regarded as deductible item of expenditure.

My Pleasure ....