Income Tax Appellate Tribunal - Hyderabad
Coromandel Marketing (Ind) vs Addl. Commissioner Of Income Tax (Asst ... on 17 January, 2003
Equivalent citations: (2004)82TTJ(HYD)636
ORDER
M.V.R. Prasad, Accountant Member
1. This is an appeal filed by the assessee. It is directed against the order of the CIT(A)-III. Hyderabad, dated 29.11.1999 for the assessment year 1996-97.
2. Effective grounds taken by the assessee read as under -
1. "........
2. The learned CIT(A) ignored Ground No. 2 by not giving any finding on this issue regarding detecting of a sum of Rs. 1.15,17.120/-. which was already taxed in Asst. Year 1996-97.
3. The learned CIT(A) erred in disallowing the claim of loss of profit of Rs. 3,11,18,213/- which was supported by documentary evidence accepted by arbitrators High Court, Supreme Court which he failed to analyst and come to his own conclusion in this respect.
4.........."
3. The assessee-company is a marketing orginisation, and it has net work in entire South India for electric bulbs and tubes. One of its suppliers is M/s. Mysore Lamp Works, Bangalore. The assessee entered into a contract dated 1.4.87 with the said company, in terms of which M/s. Mysore Lamp Works undertook to supply specified goosa as per the requirement of the assessee-company. In its turn, the assessee entered into certain agreements with its stockists and dealers. Those agreements, allegedly, contained in a circular letter dated 25.3.1987, a cop of which may be seen at page 227 of the assessee's paper-book Vol. I, are identically worded, except for the difference in the target fixed by the assessee for each stockist/dealer. As the main controversy in this appeal revolves round the so-called agreements with the stockists the said circular letter is reproduced hereunder. The letter to one of the stockists, M/s. Vijaya Agencies, karimnagar, filed before us, reads as under -
"To M/s. Sri Vijaya Agencies D.No. 4-1-63, Mahavir Raod, Karimnagar-505001.
Dated: 25.03.1987 Dear Sirs, We take this opportunity to convey our grated ful thanks to your for the unstinted cooperation extended to us in marketing out goods. We are aware of your great enthusiast and interest in expansion of your market activities which would be possible only on our capacity to provide your and meet your ever-increasing needs for additional supply of goods. We are really very happy to inform you that our capacity to meet your maximum needs shall have no bounds in the very near future (i.e.) from 1.4.1987, from which date we expect enormous supply of goods by M/s. Mysore Lamp Works Limited, Bangalore with who we have finalised a deal and for which an agreement will be concluded by 1.4.1987.
We shall, therefore, be very much glad to make affluent supplies to your of electric goods (GLS Lamps and FTLs) from April, 1987 and we are sure that your would make the best avail of this opportunity to achieve marked increase in your turnover to our mutual benefit.
We feel that a monthly target should be indicated to the bulk Agents and accordingly we wish to make the following target for your per each months for a period of about two years. Kindly confirm the same on this copy and return for our records in having accepted the same.
25W 40W 60" 100W FTLs Total
5 C/s 9 C/s 110 C/s 7 C/s 12 C/s 32 C/s. GLS
12 C/s. GLs.
Signature of the Agent and Stamp
For Sri Vijaya Agencies
S/d-
Manager
Signature of the Sales Executive
M/s. Coromandel Market (India) Pvt. Ltd.
Thanking you,
Yours faithfully,
S/d.
K. Ashok Kumar
Managing Director
It may be observed that the above letter is also signed by M/s. Vijaya Agencies, which according to the assessee, in dictates its agreement to the target fixed by the assessee. Admittedly, the supplier, M/s. Mysore Lamp Works could not make the supplies to the assessee, and So, the assessee incurred certain losses. The case of the assessee it that because of the breach of the contract by M/s. Mysore Lamp works, the assessee in its turn could not make its supplies to the stockists, with which it entered into the agreements, as per the above circular letters, and so, they had incurred lossed, and the assessee had to make payments to them by way of damages. The assessee made a similar claim for damages on M/s. Mysore Lamp Works and the dispute was subject matter of arbitration proceedings, and the matter ultimately went up the Supreme Court, which fixed the damages along with interest at a round sum figure of Rs. 4-Crores. We are not concerned in this appeal with either the quantum of damages received by the assessee from M/s. Mysore Lamp Works or the year of its receipt or the year of taxability, except to a very limited extent mentioned in ground No. 2 quoted above. We are mainly concerned in this appeal with the claim of the assessee for deduction of an amount of Rs. 3,11,18,213 which was claimed by the assessee as deducting, being the liability for damages incurred by the assessee towards its stockists.
4. So far as ground No. 2 is concerned, the case of the assessee is that out of Rs. 4 Crores alongwith interest awarded by the Hon'ble Supreme Court, vide its judgment dated 18.9.1997, the assessee had returned an amount of Rs. 1,15,27,120 in the assessment year 1996-97, and the same was also brought to tax in that year.
5. Written submissions of the assessee on Ground No. 2 read as under -
"As per Supreme Court order (Item NO. 14 on page 217-226 of Paper Book No. 1), Assessee received Rs. 4 crores as full and final settlement of the claim under arbitration for the dispute between assesse and Mysore Lamp Works Ltd.
As stated in the Suprme Court order at page No. 2 page No. 218 of the Paper-book No. 1, last Para "This court on 11th July 1995, after Noticing the fact that the appellant Deposited a sum of Rs. 1,15,00,000 in the executing Court and the amount has sine been withdrawn by the respondent"
The Assessee offered Income of Rs. 1,15,27,120 (Which was with interest) in the financial year 95-96 Assessment Computation of Total Income, Asstt. order for Assessment Year 1996-97 (Page 13-15) Modification order passed after 1st Appeal before CIT(A) II - Item No. 1 to 5 Page No. 1 to 19 shown in the Paper Book No. 1.
The Assessing Officer in his order U/s. 154 for Assessment Year 1998-99 passed on 25.9.2002 also mentioned that Assessee offered Income of Rs. 1,20,16,334 which includes Rs. 1,15,27,120 towards Loss/Profit Expenditure, Damage against award at Item No. 1 page 1 to the Paper Book II.
Hence having taxed the Income of Rs. 1,15,27,120 in the Assessment year 1996-97, it cannot be included second time during Assessment year 1998-99 or it is to be exclude from Rs. 4-crores Award brought to Income Tax during Assessment year 98-99."
6. The learned Departmental Representative admitted that the amount of Rs. 1.15,27,120 was brought to tax in the assessment year 1996-97 and conceded the ground. The CIT(A) has not discussed this issue, through a specific ground was taken before him, in Form No. 35 filed before him. In the circumstances, the assessee has tobe allowed a deduction of Rs. 1,15,27,120, as otherwise, it would amount to double taxation of the same amount. We accordingly allow this ground of the assessee, and delete the said amount of Rs. 1,15,27,120
7. Now turning to Ground No. 3 taken by the assessee, the assessing officer observed that the amount of Rs. 3,11,18,213 claimed as liability towards its stockists was only a contingent liability. He also observed that the so-called agreement with the stockists contained in the circular letter reproduced by us on Page 2 above, in para 3, was designed prior to entering into anything in the nature of a formal agreement with M/s. Mysore Lamp Works. It may be noticed that the said circular letter dated 25.3.1987 was prior to the formal agreement dated 1.4.1987 with M/s. Mysore Lamp Works. The assessing officer also noticed certain letters ostensibly written by the dealers and stockists to the assessee company claiming losses, and he brushed them aside as of general nature. He has summarised his findings on page 4 and 5 of his order as follows -
"(i) The only letter of agreement seems to have been designed prior to even anything of a formal agreement with MLS
(ii) These letters have unilaterally fixed targets t be achieved by the stockists and dealers by the assessee himself.
(iii) There is is no formal contractual agreement on the part of any of the dealers.
(iv) As the term goes 'Dealers and Stockists', as is the practice do not deal with any specific product of an exclusive company but would deal with products of various companies in the same line.
(v) The letters ostensible written by the dealers intimating losses are general and Vague. They do not relate to specification of business nor quantify the financial losses which the assessee seeks to claim now.
(vi) The letters in short are self-serving."
he relied mainly upon the decision of the Apex Court in the Case of Bharat Earth Movers Ltd. Vs. CIT ( 2002-Taxindiaonline-123-SC-IT ), which lays down the characteristics of accrued liability eligible for deduction as business expenditure, and disallowed the claim for deduction of Rs. 3,11,18,213.
8. On appeal, the CIT(A) agreed with the findings of the assessing officer. He also observed that the circular letters of the assessee dated 25.3.1987 are all stereo-typed, and the so-called targets are unilaterally fixed, by the assessee, and no evidence, except the so-called letters from the dealers claiming lossed, was produced. In the circumstances, he was of the view that it was not essential for the assessing officer to cross-check the claims made by the assessee with the dealers. As the assessee did not produce any documentary evidence supporting its claim, other than the stereo-typed circular letters issued by its, and the general letters received from the dealers without quantifying any damages, he took the view that there was no crystalised liability, as no damages have actually been claimed, or as the damages paid were actually much less than the claim of Rs. 3,11,18,213. So, he upheld the action of the assessing officer in respect of the disallowance of this claim.
9. Before us, the learned counsel for the assessee pleaded that the above remarks of the CIT(A) have no bearing on the issue. He invited our attention to some of the letters received by the assessee, copies of which may be seen at pages 75/1 to 75/14 of appellant's paper-book Vol. 2. To indicate the flavour of these letters, we reproduce the letter dated 21.88 received from M/s. Vijaya Agencies, Nandyal filled at page-75/1, which reads as under -
"VIJAYA AGENCIES 1/128, Main Bazar, Nandyal -518501 Dated : 2.1.88 To Coromandel marketing India Pvt. Ltd.
3-6-155, Liberty Road, Hydrabad.
Dear Sir, You have fixed a monthly target, we have not supplies correctly. We have made a let of arrangements like Schemes in the Market to sell target bulbs with heavy expenses from our side.
Please Kindly give me with good cooperation and send without stopping. If we send correctly, we will not get losses.
We have delivery from your Company opening up bulbs, but your marketing a lot of problems without sending stocks. We are loosing money and out goods name in the market. Kindly send stocks regularly in figure.
For VIJAY AGENCIES S/d-
Proprietor."
The above letter is followed up by another letter dated 10.7.88 which is filed at page -75/8 of the Paper-Book, and reads as under -
"Translation from Telugu VIJAY AGENCIES 1/128, Main Bazar, Nandyal-518501 Date : 10-1-1988 To Coromendel Marketing India 3-6-155 Liberty Road, Himayath Nagar, Hyderabad.
Respected Sir, Till now, we have extended our cooperation to you uninterruptedly, but your are not extending your cooperation to use. WE are unable to understand the reason for this. Fue to lack of stocks, we are not in a position to move in the market.
To ensue sales as per the target fixed by you in sales of Bulbs, we have in produced Schemes in the local market with lot of expenditure. Instead of sending us the Bulbs as per the Target fixed by you, you have not at all sent any Bulbs to us so far. As the time is over, the Shopkeepers are demanding for Scheme. Hence, we are put to loss due to this Scheme. You will have to shoulder responsibility for such loss.
As you are not sending the Bulbs in time. It is showing adverse impact of our other business. So, we request you to respond in time and extend you cooperation in spreading in business.
for VIJAYA AGENCIES, S/d-
There is a further follow-up letter from this very concern. The said letter dated 15.9.1988, filed at page-75/11 of the paper-book, reads as under - "
VIJAY AGENCIES A/128, Main Bazar, Nandyal-518501.
Dated : 15-9-1988 Coromandel Marketing India Pvt. Ltd.
Hyderabad.
Respected Sir, We have written two letters dated 2.1.88 and 10.7.88. But you are not supplied any stocks. We are felting sorry you have not sending out regular stocks all out plans are spoiled. So we are getting normal loss.
Further we are writing a letter with list of out loss details given which we demand you to pay out losses. It is order to you.
for VIJAYA AGENCIES S/d-
Proprieter."
It may be observed that the paper-book does not contain the 'details of' loss. allegedly given, as stated in the above letter. The so-called 'Order' to the assessee does not quantify the losses.
10. The above letters are from M/s. Vijay Agencies. nandyal. There are letters from another party of similar name, viz. Sri Vijaya Agencies, Karimnagar. The letter of this party dated 14.7.1988, as copy of which is filed at page 75/9 of the paper-book reads as under -
SRI VIJAYA AGENCIES 4-1-63, Mahaveer Road (Opp : Lane of State Bank of India) Karimnagar-505001.
Dated : 14-7-88 To M/s. Coromandel Marketing (India) Ltd.
Hyderabad.
Dear Sir, We are very sorry to inform you that what our arrangements to said your products are wasted due to short supply of the goods. When you are not in a position to supply as per your target, then to pat a target to us is waste.
We have through that if you supply as per target fixed to us, but you are not supplied he same. So, due to that we are incurred heavy loss by way of business and reputation. So pleas we are requesting you to supply sufficient goods in future to avoid further losses and business improvement.
If you not supply the sufficient stocks in future you are only responsible for our loss occurred.
Thanking you Sir, Yours faithfully For Shri Vijaya Agencies Sd/-
manager The above letter is followed up by a further letter dated 20.9.1988, a copy of which filed at page 75/13 read as under -
Dated : 20-9-88 To 'M/s. Coromandel Marketing (India) Pvt. Ltd.
Hydrabad Dear Sir, We are written several reminders to you for short supply of goods. But after several reminders also you are not supplying target goods.
So we are very sorry to inform that the deficiencies goods means which was fixed target supplies goods. for short supply goods you may send profits for short supply goods, which could not sell because you are not supplied the goods as per requirement (Target).
If you not allow the to recover losses accrued to us due to sport supply, we are decided to discontinue your agency or stockist ship. (out decision will depend upon you decision).
Thanking you Sir, Your faithfully.
for SRI VIJAYA AGENCIES Sd/-
Manager.
11. There are also letters from M/s. Krupa Agencies, Chagalamarri (Kurnool Dist.) filed in the paper-book. Letter dated 6.7.1988 from the said concern, filed at page 75/2 of the paper-book reads as under -
KRUPA AGENCIES Prop : M. Parabhakar Main Bazar, CHAGALAMARRI (Kurnool Dt) A. P. Dated : 6-7-88 To Coromendel Marketing (India) Pvt. Ltd.
Liberty Road, Himayath Nagar, Hyderabad.
Greetings to the above addressee.
You have put up a monthly target to us, for which we are very happy. But you are not sending the Stocks accordingly. Here were too have introduced special Scheme for sales of the tocks. Hence, we will be put to great loss if you do not supply the stocks, Hence, we request you to supply the stocks to ensure no loss to us.
In the past you have made good supplies in SSS I & II. And now, if you do not make the supplies, we will loose within the time stipulated by us. But now due to ht e irregular supplies we are loosing out reputation and it is unfortunate that we are sustaining losses.
Therefore, we request you to make the supplies as per the Target and within time. Further, now we have Navatha Transport. So, please send the stocks through Navatha Transport.
For KRUPA AGENCIES, Sd/-
Proprietory Subsequent follow-up letter of the said concern, dated 7.7.88 copy of which is filed at page -75/6 reads as under -
Dated : 7-7-88 To.
Coromandel Marketing (India) Liberty Road, Himayathnagar, Hyderabad.
Greetings to the above Addressee.
It is more than six months, since you have sent the stocks. If you do not send the stocks, we will not be in a position to recovery our dues from the market. Moreover there is every likelihood of the Market even forgetting same of our Bulbs. Once you have fixed the target. y9ou have not at all sent any Bulbs. We have introduced various Schemes to reach your target. You only will be held responsible for the losses sustained by us on account of the said Schemes. don't you feel ashamed o yourself to be such irresponsible. Aren't you responsible for the miseries and losses sustained by us. Apart from you business we are doing the business of some other goods also. We are feeling shame to enter in the market. Now please stop dialogues. Please inform us as to when you are sending the Bulbs. If you send the stocks on that day, then take you amount balance payable by us. Please consider our grievance.
for KRUPA AGENCIES, Sd/-
Proprietor.
Further follow up letter of the said Krupa Agencies dated 7.9.88, filed at page-75/10 of the paper-book reads as under-
Dated : 7-9-88 To Coromandel Marketing (India) Pvt. Ltd., Liberty Road, Himayathnagar, Hyderabad.
Greetings to the above addressee.
We have addressed you letters in the past. You have not sent any replies to those letters nor sent the Bulbs. As you have not sent the stocks as per Target, all our Schemes went futile. As a result thereof we have sustained sever loss. WE have till this day behaved with you hoping that you are human beings. But you have not paid any attention to us. We lost our reputation in the market. We shall inform you about the loss sustained by you. We request you to consider the same and reimburse the said amount of loss to us.
for KRUPA AGENCIES, Sd/.
Beside the above letters, the learned counsel for the assessee has also invited out attention to the internal memos given by the salesmen of the assessee. A copy of such internal memo, filed at page 75/16 of the paper-book, reads as under -
"Respected Sir, I have visited the following towns o my market work that the situation is very embracing both with the dealers and the authorised agents.
Please find the town-wise, particularly major towns which I visited in the fortnight.
1. SRIKAKULAM : - Here out Agent Complained about quality of Lesakshi bulbs. which are getting maximum replacement as manufacturing defects are there. And the dealers are complaining the quality of the product, which it was very bad. The reputation is going with the consumers.
2. BOBBILI : - The Agent complained the quality and replacements accumulated a lot and the outstanding (direct) which he is refused to pay.
3. VIZIANAGARAM : Agent has regretted for the non-supply of stock, and the stocks which he got previously getting replacements and consumer complaints about fusing very soon and when testing.
4. VISAKAHAPTNAM : - The agent has deplored about irregularity supply and replacement are accuring more and more on previous supply as quality (fusing immediately particularly 60W 40W and 100W bulbs) And the outstanding due is high the Agent has not paid and the more over problems he is explaining.
5. KAKINADA : - Here also I faced the same problem and out-standing due is high and replacement goods are laying there. The electrical dealers asking the explanation for the quality defects as we had having very goods quality of product comparing with other competitor brands even.
6. RAJAHMUNDRY : - The Agent is refused to pay as the replacements are there, to settle - And market suffering doe to irregular supply and ultimately competitions took advantage. Please this is the situation which very use never found ever.
And kindly see chat primary orders must be despatched of all waltages, and ensure the stock position properly.
And please follow up with in manufactures as quality is very bad.
And the suppliers are like this we will loose complete market. And agent are not wiling to continue further.
Thanking You Your faithfully.
Sd/-
12. In response to a quarry from the Bench, it is also claimed that the claims made by the stockists on the assessee-company were considered by the Arbitrator, Specification the claim of M/s. Krupa Agencies was examined by the Arbitrator. the relevant witness was examined as CW-6. Our attention is invited the relevant portion of the award of the Arbitrator, which reads as under -
"C.W. 6 is a retail businessmen of Chagalamarri, Kurnool District, Andhra Pradesh. He says that he is dealing with CMI for a long time. He has been doing business since 1977 when it was known as Globe Marketing Agencies. Earlier he used to do business only in soaps and later in Bulbs after it became CMI. Exs. C-1012 to 1018 are the documents produced by him in this behalf. He deposes that he was the Agent of CMI which was supplying bulbs and tubes. He identifies the signature of Sales Executive of CMI on these documents and says that he knew CWS. 4 and 5 and also one Bagogi Sales Executive of CMI. earlier he was doing business under the name of Pratap General Stores and now in the name of Krupa Agencies. He speaks about the defectives and also complained about non-supply of stocks and also irregular supply of bulbs. He also deposed that the was capable of selling more bulbs than what were supplied to him. He denied the suggestion that he wrote Exs. C3 671, 677, 683 at the instance of C.W. 1."
It is stated that the above extract figures at page-15 of the Award. The exhibits C-671, C-677 and C-683 are the three letters received from M/s. Krupa Agencies, which we have extracted herein-above. The learned counsel for the assessee also invited our attention to certain remarks of the Arbitrator figuring at pages 386 and 387 of the Award, which read as under -
".....The cessation of supplies by MLW directly resulted in heavy financial loss over the period of subject-agreement. While CMI could not curtail its expenditure as the subject-agreement subsisted, loses due to non-supply by MLW began to mount up over the period of subject agreement. Keeping in view of the agreement with MLW various schemes were initiated by CMI to sell Lepakshi and Coromandel Brand and agreements were in turn entered into with the stockists, Agents and Dealers to supply these lamps and tubes. As against the huge Purchase Orders. MLW supplied goods worth only Rs. 10.55 Lakhs. As MLW failed to supply CMI the goods, CMI could not honour its own commitment to third parties and the good reputation built up the market over the years was damaged (vide Exs. C-670 to 687). The credibility of CMI slowly but steadily gone eroded. Stockists claimed damages consequent upon CMI's failure to supply the goods. The direct effect of it was that CMI could not enforce and recover the amounts due to it from its stockists. failed to pay back their dues to CMI, payments by CMI to its creditors also got stifled. This damaged the reputation of CMI with its creditors. The Companies like HMT, APLL which had earlier given clean credit facility in supplying stocks to CMI, began to have reservations. Clean credit facility which was forthcoming till then was discontinued and several conditions were placed on CMI for receiving supplies. consequently CMI's image in the eyes of its creditors and suppliers got tarnished."
In the light of the above discussion by the arbitrator about the claims made by the stockists on the assessee-company, it is claimed that there is an accured liability for the payment of Rs. 3,11,18,213 by way of damages, and so, it deserves t be allowed. The learned counsel for the assessee has also mentioned that the assessee had issued credit notices to the parties and such credit notes are enclosed in the paper-book at pages 237 to 261, of the first paper-book. The credit notes are stated to have been issued at 15% of the value of the short-supply. The value of the actual supplies are reduced from the value of the targets fixed fro various items, an on the difference, the credit to the given is worked out at 15% therefore. This method is claimed to have been uniformly followed in respect of all the stockists and that is how the liability of Rs. 3,11,18,213 has been arrived it, and the same is claimed as deduction. The amount of Rs. 3,11,18,213 was credited to the accounts of the concerned stockists in the years of account relevant to the assessment year 1998-99. As per the written submissions filed by the learned counsel for the assessee, the amounts were actually paid as under -
Accounting year 1997-98 Rs. 31,48,048 Accounting year 1998-99 Rs. 14,39,676 Accounting year 1999-00 Rs. 40,61,835 Accounting year 2000-01 Rs. 34,64,850 Accounting year 2001-02 Rs. 33,03,406 paid upto 31.3.2001 Rs. 1,55,17,815 Balance payable as on Rs. 1,85,63,315 31.3.2002
Even though the amounts were paid in the years of account relevant to the subsequent assessment year, it is claimed that the liability has arised in the year of account relevant for the assessment year 1998-99.
13. The learned Departmental Representative. On the other hand pleaded that liability for damages arises from a contract, as rights and liabilities of the contracting parties are spelt out in the contract, and damages for breach of contract have also to be spelt out or at least the contract should provide for ascertainment of damages through arbitration of dispute. It is pleaded that agreements entered into by the assessee with M/s. Mysore Lamp Works dated 1.4.1987 is a formal contract, and is totally different from the alleged contracts, contained in the circular letters issued by the assessee, fixing the targets to its stockists/dealers. The rights and liabilities of the parties are spelt out in the assessee's contracts contained in the circular letters spelt out nothing of the sort. The circular letters only contained the targets unilaterally fixed by the assessee, for being achieved by the stockists/-dealers, though they are agreed to by the stockists. The assessee cannot claim any damages if the corresponding stockists failed in a reaching the targets. and vice-versa the stockists cannot claim any damages if the supplies are not made by the assessee-company. The so-called agreements contained in the circular letters do not even out the arbitration proceedings in case of disputes. The assessee has not committed himself to anything apart from expression of a vague hope that the supplies would be made. The learned DR pleaded that only liquidated damages or damages chat can be quantified with some definiteness can be allowed as a deduction under S.37 of the Income-tax Act, even then the system of accounting followed by the assessee is mercantile system, as in the present case. In support of this proposition, he relied upon the decision of the Apex Court in Bharat Earth Movers V/s CIT ( 2002-Taxindiaonline-123-SC-IT ) and the decision of the Hon'ble Kerala High Court in N. Sundareswaran V/s. CIT 226 ITR 142> It is also claimed that simply because the assessee could claim damages from M/s. Mysore Lamp Works, in pursuance of its agreement with them, it does not follow that there is any liability to pay similar damages, on the part of the assessee to its stockists or the dealers. The agreement between the assessee and the stockists and M/s. Mysore Lamp Works is not a tripartite agreement, and the claim of the stockists of the assessee dos not stand on the same footing as the claim of the assessee on M/s. Mysore Lamp Works.
14. In the rejoinder, the learned counsel for the assessee reiterated his stand that the expenditure of Rs. 3,11,18,213 was incurred out of business exigency and its genuineness is proved by the fact that the arbitrator considered the claims of the stockists and he concluded by stating that as the assessees has followed the mercantile system of accounting, the claim has to be considered in the year in which the liability is incurred, as distinct from the year in which the payment is made.
15. We are of the view that the claim for deduction of liability towards stockists can be allowed only of payment basis. We are in agreement with the contentions made out by the learned Departmental Representative. simply because the assessee could claim damages from M/s. Mysore lamp Works, it does not follow that there is a corresponding liability on the part of the assessee t share the said amount of damages with the stockists. The liability of the assessee to meet the losses of the stokists and dealers for failure to make supplies, if any, stands on altogether a different footing. As stated by the learned Departmental Representative, the so-called agreement contained in the circular latter of the asessee to its stockists, cannot be regarded as an agreement between the and the stockits saddling the assessee with any liability in case of failure to make the supplies as per the targets fixed.
The circular letter does not spell out any such liability on the part of the assessee. It does not even provided for arbitration, nor has arbitration been undertaken to settle the dispute between the assessee and the stockiests. The letters received from the stockists, which we have reproduced hereinabove, do not quantify the losses, and they do not even hold the assessee liable to meet those losses. At any rate, the letters do not contain the figures of losses incurred by the concerned parties. No legal proceedings have been undertaken by these parties against the assessee, and so, there is no ascertained liability on the part of the assessee towards its stockists. With regard to the credit notes allegedly sent by the assessee, we have specifically enquired of the learned counsel for the assessee whether the postal acknowledgements in support of the action of sending the accredit notes are available. He has mentioned that no such acknowledgements are available. In the circumstances, the claim of having sent the credit notes is also not established. In the year of account relevant for the assessment year 1998-99, what was paid was only an amount of Rs. 31,48,048. There is a huge gap of almost a decade between the receipt of letters fro the stockists, which took place in 1988. and the so-called sending of credit notes in 1997. There is an yawning gap of almost a decade between the unquantified claims of stockists and alleged entertainment of those claims by way of sending credit notes, which, as already mentioned, is not established.
16. The evidence tendered by the assessee, in the form of letters received by its from stockists/dealers complaining against short supply of goods by the assessee to them, which resulted in losses in their business, or in the form of internal memos received by the assessee from its salesman, or the proceedings before the Arbitrator, only indicates the damage in reputation that the assessee has suffered in the eyes of its stockists and dealers and in market, and non of them establish any liability on the part of the assessee wards its stockists/dealers. Consideration of the claim of the stockists on the assessee by the arbitrator does not taken the case of the assessee any far. What was under the consideration of the arbitrator was the claim of the assessee for damages against M/s. Mysore Lamp Works. In that context, to buttress its own claim, the assessee must have martial led evidence before the Arbitrator the show that it incurred damages towards its stockists. mere fact of consideration of such claim by the arbitrator does not prove that there is a crystalised liability on the part of the assessee towards its stockists and dealers. The award of the arbitrator is binding on M/s Mysore Lamp Works vis-a-vis the assessee, nut it has no binding effect on the assessee vis-a-vis the assessee, but it has no binding effect on the assessee vis-a-vis the stockists/dealers of the assessee.
17. The internal memos allegedly given by the assessee's salesmen also do not prove any liability on the part of the assessee. They are only reports indicating the dissatisfaction of the stockists with the failure of the assessee to have effected supplies in sufficient quantities, and as such, they do not indicate any crystalised liability on the part of the assessee towards it stockists/dealers.
18. We are of the view that the decisions cited by the learned Departmental Representative support his stand, in the case of Bharat Earth Movers. V/s CIT ( 2002-Taxindiaonline-123-SC-IT ), the Apex court observed as under -
"If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty brought the actual quantification may not be possible. If these requirements are satisfied the liability is not contingent one. The liability is in praesenti though it will be discharged at a future are, It does not make any difference it the future rate. It does not make any difference if the future date on which the liability shall have to be discharged is not certain."
We are of the view that in the present case, the liability has not definitely arisen in the accounting year relevant to the assessment year 1998-99. It is not a case where merely the quantification has been postponed. There are no parameters obtaining in the accounting year relevant fro assessment year 1998-99, for effecting quantification of the claims of the stockists. The claims must have been settled through mutual negotiations, and it must be held that he claims were settled in the year of payment. In the year of account relevant for assessment year 1998-99, only an amount of Rs. 31,48,048 has been paid. The learned Department Representative conceded in principal, the claim for deduction or Rs. 31,48,048 being the payments made in the year of account relevant for the assessment year 1998-99, but at the same time, wanted the matter to be remanded to the assessing officer for verification of the genuineness of the claim of payment of Rs. 31,48,048. We do not see any reason for acceding to his part of the request. Assessee's accounts are audited, and the assessing officer has not doubted the payments at all, the so, there is no justification for further verification of the payment at this stage. There cannot be piece-meal assessments. So far this year, we hold that the assessee is entitled for deduction under S3 37 of the Act, of any payments aggregating to an amount of Rs. 31,48,048, as expenditure incurred out of commercial expediency. The rest of the payments in other subsequent years may be considered for deduction in respective years.
19. In the result, assessee's appeal is partly allowed.