Charges paid to electricity board on account of failure to consume contracted amount of electricity is an allowable expenditure:

AO disallowed business expenditure being payment made by the assessee to the electricity board on the count that the same was expended towards penalty. ITAT observed that the assessee had to pay higher charges to the electricity board for failing to consume contracted amount of electricity, which as per the agreement would result into higher rate of electricity charges. Hence, ITAT held that such amount could not have been disallowed. While holding so, ITAT permitted the AO to verify that the charges were levied for the period prior to the sale of property. On Revenue’s appeal, Hon’ble High Court also held that merely because the assessee failed to consume minimum committed electricity and therefore ended up paying higher rate of electricity, such payment cannot be categorised as penalty. ITAT had, therefore, correctly deleted the disallowance. Accordingly, Revenue’s appeal was dismissed.

[CIT Vs. Rajkot Jilla Co. Op. Cotton Marketing Union Ltd. – Tax Appeal No.797 of 2013]