Income Tax Appellate Tribunal - Cochin
A. Yunus Kunju vs Income-Tax Officer on 20 May, 1986
Equivalent citations: [1986]19ITD9(COCH)
ORDER
P.I. Mohan Singh, Judicial Member
1. These appeals filed by the assessee and the revenue relate to the assessment year 1978-79 and arise out of the order of the Commissioner (Appeals), Trivandrum, dated 26-3-1985. The main point for consideration in the appeal filed by the assessee is regarding the disallowance of foreign claims amounting to Rs. 19,89,200. The second ground taken by the assessee is regarding the disallowance of Rs. 20,000 out of car expenses sustained by the Commissioner (Appeals). The third ground taken by the assessee is regarding disallowance of a portion of the claim made by the assessee under Section 35B of the Income-tax Act, 1961 ('the Act'). The ground taken by the revenue in its appeal is that on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in holding that the assessee should get further weighted deduction under Section 35B on the commission of Rs. 2,44,760 paid to Kasturi Nagesh Pai.
2. The assessee is a cashew exporter. Certain liabilities towards foreign claims had been incurred in the accounting year relevant to the assessment year in question. There were four such claims in all. They are as follows :
Rs.
(i) Hollander Trading Corporation as per arbitrator's award dated 23-8-1977 and 28-8-1977 2,48,400
(ii) Gibbs Nathaniel as per arbitrator's award dated 28-2-1978 4,53,200
(iii) Zaloom Bros. Co., New Jersey Inc. as per arbitra-
tor's award dated 1-6-1977 ($ 15,150) 1,21,200
(iv) Balfour Maclaine International Ltd., New York as
per arbitrator's award dated 7-9-1977 11,66,400
The assessee's case before the ITO was that all the four claims mentioned above were settled through arbitration and, hence, constituted the assessee's liability of the year in which the arbitration award was given, viz., the assessment year under consideration. The four claims broadly fell into two categories. The first two claims aggregating to Rs. 7,01,600 were debited in the books of account. They were claimed as deductions in the return of income itself. The latter two claims were not debited in the accounts and they were claimed as deductions only in the course of assessment proceedings. The ITO disallowed the entire claim on the ground that the concerned parties had not obtained decrees against the assessee in pursuance of the arbitration awards. The ITO also observed that no steps had been taken by the assessee to make the payment till the date of assessment. According to the ITO one could only say on the basis of the available evidence that there were certain arbitration awards against the assessee which were yet to take a final shape and there was no concluded liability in respect of such awards, As the Commissioner (Appeals) felt that the matter should be decided only after a more detailed probe and bringing further facts on record regarding the origin of the claim, the reasons for non-fulfilment of contract, the nature of the arbitration, the defence taken by the assessee before the arbitrator, the evidence regarding the acceptance of the arbitration awards, steps taken for remitting the amount, the request from the foreign parties for obtaining the damages, etc., he called for a remand report from the ITO by his order dated 28-8-1984. The ITO submitted his report dated 24-1-1985.
3. The assessee's stand before the ITO was that there were certain contracts with the foreign parties for supplying of cashew kernels which could not be fulfilled. As a result of the assessee's failure to fulfil the contracts, the assessee had to compensate the foreign buyers to the extent the claims, were settled through arbitration. Since the arbitration awards were passed in the previous year relevant to the assessment year 1978-79, the total amount of compensation ordered to be paid to the foreign parties by the assessee as a result of arbitration, had become the assessee's liability for the year of account. It was further stated that the assessee had also accepted the arbitration awards and, hence, there was no question of considering the liability as contingent liability. Based on a decision of the Tribunal, the assessee's counsel contended before the ITO that in view of the acceptance of the arbitration awards the amount payable as per the awards should be allowed as a proper business expenditure for the year of account. It was also contended that the Commissioner (Appeals) had held that the amount payable as compensation was a debt owed by the assessee as on the valuation date which coincided with the last day of the previous year, viz., 31-3-1978. The ITO, who submitted the remand report, had stated that the alleged claim for payment of compensation could itself be stated as not genuine. According to him, it would appear that the claims were collusive. The main reason given for coming to this conclusion is that in respect of three of the four parties for whom compensation was payable, the assessee has been carrying on business even after the non-fulfilment of the contracts in 1977 and no attempt has been made by any of these three foreign buyers to adjust the amount of compensation said to have been payable to them against the purchase price involved in the numerous trading transactions carried on subsequently with the assessee. The ITO felt that the assessee's failure to produce any correspondence from the foreign buyers calling upon the assessee to pay the compensation awarded by the arbitrator or any evidence showing an earnest effort on the part of the assessee in moving the Reserve Bank for getting clearance for remitting the amount to the foreign parties is indicative of the spurious nature of the claim. Before the Commissioner (Appeals) the learned counsel for the assessee reiterated the contentions made before the ITO. His main contention was that the genuineness of the contracts was not doubted, the existence of arbitration awards was not questioned and in such a case the amount of compensation payable became a liability of the year in which the award was rendered. He also contended that the assessee by his conduct accepted the awards and his mere failure to make available certain correspondence or to take up the matter with the Reserve Bank, could not be a reason for disallowing the claim. That the liability towards the compensation had been allowed as a debt owed by the assessee in determining his net wealth, was also strongly relied upon to strengthen his argument that the liability had also arisen and even the department did not doubt the genuineness of the liability or the correctness of the claim. After hearing the learned counsel for the assessee, the Commissioner (Appeals) gave a finding that the genuineness of the awards cannot be doubted though in the later part of his order he observed that the absence of correspondence or the assessee's failure to produce any correspondence arouses anybody's suspicion. Regarding the second and important point whether the liability should be allowed in this assessment year as an admissible deduction, relying upon the decision of the Allahabad High Court in the case of A.P.S. Cold Storage & Ice Factory v. CIT [1979] 119 ITR 709, he held that the existence of a mere award without any further legal formality creates only a contingent liability and the liability would fructify only in the event of the award being made a rule of the Court. He observed that there is not enough evidence regarding the acceptance of the awards by the assessee. He took support for the aforesaid view on the fact that the assessee has hotly contested in the suit filed by one of the parties, namely, Gibbs Nathaniel (Canada), in the sub-court of Quilon though ultimately the suit had been decreed in favour of that party. Regarding the finding given by the Commissioner (Appeals) that the amount payable as compensation was a debt owed by the assessee as on the valuation date, the Commissioner (Appeals) observed that even in respect of a contingent liability it is possible to estimate its value as on a date prior to the liability becoming an ascertained liability and to allow such an estimated value as a deduction being a debt owed as on the valuation date. He, therefore, concluded that there is absolutely no material on record to show that the assessee had accepted the arbitration awards in any of the four cases and held that the amount of compensation of Rs. 19,89,200 said to have been payable to the foreign buyers did not constitute admissible foreign business expenditure for the year of account. Regarding the disallowance by the ITO of Rs. 20,000 out of car expenses, the Commissioner (Appeals) agreed with the finding of the ITO on the ground that the use of the car for personal purposes was not denied by the assessee. Regarding the weighted deduction claimed by the assessee under Section 35B in respect of a number of items of expenditure, the Commissioner (Appeals) following the decisions of the Tribunal in a number of cases, held that the commission paid to Kasturi Nagesh Pai amounting to Rs. 2,44,760 is an allowable deduction. As against this order of the Commissioner (Appeals) both the assessee and the revenue are in appeal before us.
4. Shri C.K. Nair, the learned counsel for the assessee, contended before us that since the genuineness of the contracts is not doubted, the amount of compensation payable becomes a liability of the year in which the award is rendered. He contended that foreign awards have practically no value prior to the passing of the Arbitration (Protocol and Convention) Act, 1937. But after passing of the aforesaid Act and the Foreign Awards (Recognition and Enforcement) Act, 1961 the position has completely changed as, according to him, under Section 4 of the Foreign Awards (Recognition and Enforcement) Act, a foreign award is enforceable in India as if an award made on a matter referred to arbitration in India and it shall be binding for all purposes on the persons as between whom it was made. He contended that the decision relied upon by the Commissioner (Appeals) has no application to the facts of this case as it was rendered under the Indian Arbitration Act, 1940. Even assuming that the aforesaid decision is applicable to the facts of the case on hand, he contended that in the aforesaid case the matter was referred to the arbitrators when the matter was pending in the Court and, therefore, it is distinguishable on facts. He relied upon the decision of the Supreme Court in Satish Kumar v. Surinder Kumar AIR 1970 SC 833 wherein in para 13 of the judgment their Lordships have referred to para 7 of the Schedule 1 to the Indian Arbitration Act and observed that if the award is final and binding on the parties, it can hardly be said that it is a waste paper unless it is made a rule of the Court. He contended that when once on passing of the award a liability is created, questioning of the award will not absolve the assessee from the liability. He took us through Section 7 of the aforesaid Act wherein the pleas available to the party contesting the award are limited and it is not open for the party to challenge the award on merits. Commenting upon clause 5 of the conditions of sale wherein it is mentioned that the parties agree that judgment may be entered upon an arbitration award in any Court of competent jurisdiction he contended before us that the aforesaid clause is only to enable the Indian citizens to submit to the jurisdiction of foreign Courts so that an award may be enforced in New York or elsewhere. He contended that the aforesaid clause is only a formal clause which finds place in the conditions of sale. In support of the aforesaid fact, he relied upon the decision of the Supreme Court in Badat & Co. v. East India Trading Co. AIR 1964 SC 538 at page 551. In the aforesaid case also the parties had expressly agreed that judgment might be entered on any award that might be made on any question, controversy or claim between the parties arising under or out of the said contracts in accordance with the practice of any Court having jurisdiction. He vehemently contended before us that when once the liability is created and is binding between the parties under Section 4 it is not permissible for the parties to contract against the statute and, therefore, the presence of clause 5 in the conditions of sale cannot be taken as an advantage by the revenue to say that the liability arose only when the award is made a rule of the Court. The learned counsel did not press ground No. 2. Regarding ground No. 3 he contended that following the decision of the Special Bench of the Tribunal in J.H. & Co. v. Second ITO [1982] 1 SOT 150 (Bom.) the ITO should have allowed 75 per cent of the expenditure for salary and 50 per cent of the expenditure out stationery. He, therefore, pleaded that the same may be allowed. Regarding the commission of Rs. 2,44,760 paid to Kasturi Nagesh Pai and allowed by the Commissioner (Appeals), the counsel supported the order of the Commissioner (Appeals) in the appeal filed by the revenue.
5. The standing counsel for the revenue took us through Section 3 of the Indian Arbitration Act which reads as under :
An arbitration agreement, unless a different intention is expressed therein, shall be deemed to include the provisions set out in the First Schedule insofar as they are applicable to the reference.
He then took us through clause 5 of the conditions of sale which reads that-
The parties agree that judgment may be entered upon an arbitration award in any Court of competent jurisdiction and further agree that any arbitration notice as well as any process or notice of motion or any application to a Court, including application for judgment upon an award, may be served within or outside of Ontario Canada by main or personal service, provided a reasonable time for appearing is allowed.
He laid stress on the sentence :
that the parties agree that judgment may be entered upon an arbitration award in any Court of competent jurisdiction.
He contended that if Section 3 is read with clause 5 of the conditions of sale mentioned above, it is clear that the parties have agreed that only after a judgment is passed by a Court having competent jurisdiction the award becomes efficacious. He, therefore, tried to distinguish the decision of the Supreme Court in Satish Kumar's case (supra) that the observation made by their Lordships at para 13 of the judgment making a reference to para 7 of the First Schedule of the Indian Arbitration Act will hold good only if no contrary intention is expressed by the parties which is evident from Section 3. To controvert the argument of Shri C.K. Nair, the learned counsel for the assessee, that the decision relied upon by the Commissioner (Appeals), namely, A.P.S. Cold Storage & Ice Factory's case (supra) is a case where when the matter was pending in the Court it was referred to the arbitrators and the facts of the case are not applicable to the facts of the case in question, the standing counsel contended that Indian Arbitration Act provides only three kinds of references to arbitrators namely, (i) arbitration without intervention of Court (Chapter 2), (ii) arbitration with intervention of Court where no suit is pending (Chapter 3), and (iii) arbitration in suits (Chapter 4). He, therefore, contended that the decision relied upon will equally apply to the case of the assessee as the case of the assessee also falls under Chapter 4 of the Arbitration Act mentioned supra. He next contended that since the parties have agreed that the award would be binding on them only when it is made a rule of the Court, the award becomes a pucca award and the liability in praesenti is created. In the present case the liability created by the award is only a contingent liability, i.e., liability infuturo. For the aforesaid proposition he relied upon the decision of the Supreme Court in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 at p. 598. He then drew our attention to the last sentence of para 9 of the Commissioner (Appeals)'s order and contended that since no definite finding is given by the Commissioner (Appeals) regarding the genuineness of the award, the matter may be remitted back to the file of the Commissioner (Appeals) to give a finding on this aspect. With regard to the third ground taken by the assessee relating to the payment of commission made to East European Export Agency and Har Krishna Rao, Bombay, the learned counsel contended before us that they are not commission payments and they were only trade discounts. He relied upon the decision of the Kerala High Court in the case of CIT v. Quilon Marine Produce Co. 1985 Tax LR 1005 wherein their Lordships of the Kerala High Court held that relief under Section 35B is not allowable in respect of trade discounts.
6. We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both sides. The standing counsel's reliance on Section 3 of the Indian Arbitration Act and his argument that if Section 3 is read with clause 5 of the conditions of sale, it is clear that the parties have agreed that only after a judgment is passed by a Court having competent jurisdiction the award becomes efficacious will not hold much water as the case of the assessee is not governed by the provisions of the Indian Arbitration Act, but by the Foreign Awards (Recognition and Enforcement) Act. His reliance on the decision of the Allahabad High Court in the case of A.P.S. Cold Storage & Ice Factory (supra) will not help the stand taken by the revenue, inasmuch as, the aforesaid decision is rendered under the Indian Arbitration Act. We are now concerned with the question whether the amount of compensation payable became a liability of the year in which the foreign award is passed. We are not concerned with the enforceability of the award. Section 4 of the Foreign Awards (Recognition and Enforcement) Act reads as under :
(1) A foreign award shall, subject to the provisions of this Act, be enforceable in India as if it were an award made on a matter referred to arbitration in India.
(2) Any foreign award which would be enforceable under this Act shall be treated as binding for all purposes on the persons as between whom it was made . . . .
On a careful reading of Section 4 mentioned supra, it is clear that unlike the position which stood earlier to 1937, with the passing of Arbitration (Protocol and Convention) Act and Foreign Awards (Recognition and Enforcement) Act, a foreign award is made enforceable in India, as if it were an award passed in India, such an award shall be treated as binding for all purposes on the persons as between whom it was made. Section 5 of the Foreign Awards (Recognition and Enforcement) Act lays down the procedure for filing an award in a Court having competent jurisdiction and Section 6 of the Foreign Awards (Recognition and Enforcement) Act provides that if the Court is satisfied that the foreign award is enforceable under the Act, the Court shall order the award to be filed and shall proceed to pronounce judgment according to the award. Sub-section (2) of Section 6 provides that on a judgment so pronounced a decree shall follow and no appeal shall lie from such decree except insofar as the decree is in excess of or not in accordance with the award. As pointed out earlier one may have to execute a decree for collecting the amount awarded by arbitration in a Court of law. In our opinion, Sections 5 and 6 are the provisions prescribing the procedure for filing a foreign award in a Court of competent jurisdiction and obtaining a decree for enforcing the same. On a reading of Section 7 of the Foreign Awards (Recognition and Enforcement) Act, it is seen that the pleas available to the defendant that is the person against whom the award is passed are very limited, inasmuch as he cannot question the award on merits. On a reading of the aforesaid provisions of the Foreign Awards (Recognition and Enforcement) Act, it is very clear that a liability accrued the moment a foreign award is passed and it shall be binding on the persons as between whom it was made. Sections 5 and 6 are only the provisions for obtaining a decree in order to execute the same against the person against whom the award is passed. Another important factor which prompted the Commissioner (Appeals) in not agreeing with the contention of the assessee's counsel is that there is not enough evidence regarding the acceptance of the award by the assessee. He took support for the aforesaid view on the fact that the assessee has hotly contested in the suit filed by one of the parties, viz., Gibbs Nathaniel (Canada), in the sub-court of Quilon, though ultimately the suit had been decreed in favour of that party. This view of the Commissioner (Appeals) in our opinion, is incorrect as according to us when once a statutory liability is created by the passing of an award, the questioning of the award by the aggrieved party will not absolve him of the liability. The learned standing counsel placed much reliance on clause 5 of the conditions of sale and he vehemently contended before us that since the parties agreed that judgment may be entered upon an award in any Court of competent jurisdiction, the liability becomes a liability in praesenti only when it is made a rule of Court and not otherwise. We do not agree with this contention of the learned standing counsel as, in our opinion, it is a formal clause appearing in every agreement for enabling the Indian citizen to submit to the jurisdiction of foreign Court so that an award may be enforced in foreign Courts. We are, therefore, of the opinion that under Section 4 a liability is created and it shall be binding for all purposes on the persons as between whom it was made and it is an allowable deduction.
7. The second ground taken by the assessee relates to the disallowance of Rs. 20,000 out of car expenses, sustained by the Commissioner (Appeals). Since the assessee has not pressed this ground, the appeal filed by the assessee on this ground is dismissed.
8. The third ground taken by the assessee relates to the claim under Section 35B. The assessee has claimed salary paid to the extent of Rs. 26,100 and stationery amounting to Rs. 10,708, which were disallowed by the ITO. The order of the ITO is confirmed by the Commissioner (Appeals). Following the Special Bench decision in the case of J.H. & Co. (supra) we arc of the opinion that 75 per cent of the salary paid and 50 per cent of the stationery should have been allowed as a deduction by the lower authorities. The same is, therefore, allowed.
9. One more item of disallowance is the commission paid to Kasturi Nagesh Pai, amounting to Rs. 2,44,760. This amount was allowed by the Commissioner (Appeals) against which the department is in appeal. The learned departmental representative contended before us that the payment made to Kasturi Nagesh Pai, amounting to Rs. 2,44,760 is not a commission payment and since it is only a trade discount it cannot be allowed in view of the Kerala High Court decision in the case of Quilon Marine Produce Co. (supra). A perusal of the order of the ITO shows that the ITO has not disallowed the aforesaid payment as it was not a commission payment as contended by the departmental representative, but it was disallowed by the ITO on the ground that it was paid in India. Further, it is seen from the ITO's order that the ITO has not given any finding that it is a trade discount. Since this Bench of the Tribunal has been consistently following in a number of cases that the payment to Kasturi Nagesh Pai is an expenditure incurred for collecting information, etc., for the purposes of export business, we hold that the commission payment made to Kasturi Nagesh Pai amounting to Rs. 2,44,760 is an allowable deduction under Section 35B.
10. In the result, the appeal filed by the assessee is allowed in part and the appeal filed by the revenue is dismissed.