COMMISSIONER OF INCOME TAX Vs. JIYAJEERAO COTTON MILLS

JUDGEMENT

(1.) IN TIME - -Time essence of contract - -Amount paid pursuant to default clause - -Obligation arose in the course of carrying business of buying and selling goods - -Deduction to be allowed. HELD :

(2.) THE payment was made on account of the contractual obligation under the agreement. When the goods were not delivered within the stipulated period, an extra amount, designated 'penalty' had to be paid. This was done in course of carrying on the business by the assessee. Usually time is not of the essence of the contract but the parties are entitled to make it so by inserting a specific clause in the contract. The parties are entitled to fix the time within which the goods must be delivered and to stipulate that if there is any failure to deliver the goods within the contracted period, extra money will have to be paid to compensate the buyer for non -delivery of the goods in time. The amount paid is allowable. Income Tax Act 1961 s.37(1)

(3.) THE assessee decided to pay the difference to the firm to get out of its legal obligation to deliver the balance quantity of yarn. This payment was made because of the business exigency. Having regard to the fact that the assessee had entered into a contract for supply of 15,000 kgs. of single yarn, out of which 10,205 kgs. had actually been supplied, this transaction was not a speculative one. The contract was substantially carried out. It is not a case where the assessee does not deliver goods pursuant to a contract but settles it otherwise. The payment will be allowed as deduction.