Income Tax Appellate Tribunal - Ahmedabad
Navjivan Roller Flour & Pulse Mills Ltd. vs Deputy Commissioner Of Income Tax (Dy. ... on 20 May, 1999
Equivalent citations: [2000]73ITD265(AHD)
ORDER
T. N. Chopra, A.M.
1. These two appeals, one filed by the assessee and the other filed by the Revenue involve identical issues and relate to asst. yr. 1988-89. ITA No. 3940/92 is directed against the order of the CIT, Baroda, dt. 31st August, 1992, under s. 263 whereby the assessment originally made by the AO dt. 1st October, 1990, had been set aside. ITA No. 4425/95 filed by the Revenue is directed against the order of the CIT(A) dt. 31st July, 1995, whereby addition made in the fresh assessment by the AO on account of damages amounting to Rs. 7,14,824 for breach of contract has been deleted.
2. The relevant facts may be briefly stated. The assessee-company is engaged in the business of manufacturing of dal, besan, maida, sooji, etc. The assessment year involved in both the appeals before us is 1988-89 for which the previous year ended on 30th September, 1987. The assessee had entered into a contract with M/s. J.K. International (P) Ltd., Australia based company for import of 1,575 metric tonne of yellow gram at the rate of 310 US Dollars per metric tonne from Australia. As per the terms of the contract, the assessee was required to open an irrevocable letter of credit with an Indian bank on or before 14th August, 1986. This date was subsequently extended to 1st October, 1986, by the Australian party. The assessee however, failed to open the letter of credit even by the extended date and in fact repudiated the contract through their letter dt. 29th August, 1986, to the brokers M/s. Vaidehi Spices Agency, Bombay. Arbitration proceedings were initiated by the Australian party before the Grain and Feed Trade Association (GAFTA). However, the assessee objected to the jurisdiction of GAFTA and claimed that no written agreement exist with the Australian party and there was no occasion to refer any dispute between the parties to arbitration within GAFTA and that GAFTA have no competence or jurisdiction to proceed to make any award or decision in the matter. The assessee further submitted that the failure to open the letter of credit is due to the fact that the brokers failed to furnish copies of credit notes duly signed by the Australian party. GAFTA however, passed the award of Arbitration on 28th May, 1987, whereunder the assessee was to pay damages of US $ 51,329 representing the difference between the contract price of US $ 310 per metric tonne and market rate of the goods on the date of default being US $ 277.41. Further interest was also to be paid at the rate of 9 1/2 per cent per annum from 29th August, 1986 (date of default) to 28th May, 1987 (date of the award). The assessee did not accept the award of arbitration and the Board of Appeal under the GAFTA decided the matter against the assessee.
3. For asst. yr. 1988-89 the assessee debited the P&L a/c by a sum of Rs. 7,14,824 on account of damages on arbitration and a further sum of Rs. 1,02,131 as expenditure on account of legal fees, appeal fees, etc., and claimed deduction for the same. Vide assessment order dt. 1st October, 1990, the AO did not make any disallowance with regard to the aforesaid expenditure. There is no discussion regarding the claim either in the assessment order or in any office note. The CIT proceeded to initiate proceedings under s. 263 vide notice dt. 4th August, 1992, on the ground that the AO failed to apply his mind on the issue of deductibility of the aforesaid expenditure. The CIT proceeded to set aside the assessment on the limited issue of deductibility of the damages of Rs. 7,14,824 and the legal expenses of Rs. 1,02,134 with the direction that the AO would examine the facts of the case thoroughly and decide the issue in the light of facts and in accordance with law. The assessee assails the legality of the impugned order of the CIT in ITA No. 3940/92. The AO proceeded to complete the fresh assessment in consequence of the order of the CIT under s. 263 and made an addition of Rs. 7,14,824 on account of damages on breach of contract vide order dt. 22nd March, 1995. The assessee carried the matter in appeal and the CIT(A) vide order dt. 31st July, 1995, has deleted the aforesaid addition of Rs. 7,14,824 on the ground that the assessee follows mercantile system of accounting and the liability on account of damages on breach of contract accrued on 28th March, 1987, when the award of arbitration was passed by GAFTA. The Revenue is aggrieved and filed the appeal in ITA No. 4425/1995.
4. The twin issues involved in the two appeals relating to asst. yr. 1988-89 are regarding the validity of revisional order of the CIT and the date when the liability on account of damages accrues.
5. Assailing the impugned order of the CIT, Shri A. C. Shah, the learned counsel for the assessee argued that the essential conditions for the assumption of jurisdiction by the CIT under s. 263 are not fulfilled in the instant case since the issue of admissibility of damages for breach of contract has been duly considered by the AO while making the original assessment and the conclusion arrived at by the AO cannot be construed as erroneous. The learned counsel further submitted that during the course of assessment proceedings a brief factual note regarding the damages paid by the assessee was submitted and the deduction was duly allowed by the AO after proper consideration of the facts contained therein. The learned counsel argued that the CIT cannot revise the order of the AO merely because he disagrees with the conclusion arrived in the assessment order. The learned counsel placed reliance on the decision of Bombay High Court in CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom). Further reliance is placed on the decision of Pune Bench of the Tribunal in the case of Fattechand Rajmal Jain (1997) 57 TTJ (Pune) 341 : (1997) 60 ITD 47 (Pune). Arguing the case on merits of the claim, the learned counsel urged that the assessee followed mercantile system of accounting and since the liability on account of damages amounting to Rs. 7,14,824 crystallised on the passing of the arbitration award by the GAFTA on 28th May, 1987, the deduction has been rightly claimed in the asst. yr. 1988-89. In support of his arguments regarding the year of accrual of liability the learned counsel placed reliance on the following decisions of various High Courts and Tribunal :
(i) CIT vs. Lachhman Das Mathura Das (1980) 124 ITR 411 (All);
(ii) Asuma Cashew Co. vs. CIT (1990) 182 ITR 175 (Ker);
(iii) Mediwala & Co. vs. CIT (1987) 161 ITR 74 (MP);
(iv) CIT vs. Sohanlal Kunwar & Sons (1987) 164 ITR 129 (Raj); and
(v) Dy. CIT vs. Jayant Paper Mills (1992) 44 TTJ (Ahd) 241 : (1992) 41 ITD 153 (Ahd).
6. On behalf of the Department Shri P. N. Dixit, the learned Departmental Representative, strongly supporting the order of the CIT under s. 263 argued that the AO while making the original assessment dt. 1st October, 1990, failed to apply his mind to the issue of deduction of damages for breach of contract. The learned Departmental Representative submitted that non-application of mind by the AO to the issue of deduction is writ large on the face of the assessment order. There is no mention in the assessment order or in the office note below regarding the damages claimed by the assessee. With regard to the note claimed to have been submitted by the assessee during the assessment proceedings, which appears at pp. 1 and 2 of the paper book, Shri Dixit submitted that no such note appears to have been submitted during the assessment proceedings and there is no reference to such note during the revisional proceedings under s. 263 before the CIT or even in the appellate proceedings before the CIT(A). The learned Departmental Representative argued that the AO has in any case failed to consider any such note claimed to have been placed on record by the assessee. Referring to the decision of Gujarat High Court in Addl. CIT vs. Mukur Corpn. (1978) 111 ITR 312 (Guj) the learned Departmental Representative argued that the AO had committed an error in not making enquiry into the details as regards the deduction of damages for breach of contract and also that want of such enquiry had resulted in prejudice to the interest of the Revenue. According to the learned Departmental Representative the damages of Rs. 7,14,824 did not crystallise into an ascertained final liability with the passing of the arbitration award by the GAFTA since the assessee did not accept the said award and carried the matter to the Board of Appeal and the appellate order of the Board of Appeal has been passed on 22nd March, 1989, which is well beyond the accounting year for asst. yr. 1988-89 under reference. The learned Departmental Representative further submitted that the liability arisen from breach of contract would crystallise as final liability only when both the parties accept the liability or else the protracted litigation is concluded finally after arbitration and adjudication. The learned Departmental Representative argued that the order of the CIT under s. 263 is within jurisdiction and that the liability of Rs. 7,14,824 by way of damages has not accrued for asst. yr. 1988-89 and has therefore been rightly disallowed by the AO vide order dt. 22nd March, 1995, and the order of the CIT(A), dt. 31st July, 1995, deleting the disallowance is liable to be reversed on the issue.
7. We have carefully considered the rival submissions, perused the facts on record presented to us and also gone through the string of judicial authorities cited before us. From the facts on record it clearly emerges that the AO, while making the original assessment failed to apply his mind to the issue of deductibility of damages of Rs. 7,14,824 for breach of contract. The CIT has considered the order as erroneous on the ground that in the circumstances of the case the AO should have made proper enquiries before accepting the claim of deduction made by the assessee in his return. Unlike the Civil Court, which is neutral, the AO under the IT Act is endowed with the dual role of an adjudicator as well as an investigator. He does not simply give his decision on the basis of the facts and claims which come before him during the assessment proceedings. The AO cannot remain passive in the face of a return which calls for further enquiry. It is his duty to ascertain the truth of the facts stated in a return when the circumstances of the case are such as to provoke an enquiry. It is in the backdrop of these facts that the failure of the AO to make an enquiry makes the order 'erroneous' for the purposes of s. 263. In support of this proposition reliance is placed on the decisions of Supreme Court in Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal vs. CIT (1973) 88 ITR 323 (SC). Relying upon these Supreme Court decisions, the same view has been taken by the High Courts of Karnataka, Delhi, Gujarat and Allahabad in the following cases :
1. Thalibai F. Jain vs. ITO (1975) 101 ITR 1 (Kar);
2. Swarup Vegetable Products Industries Ltd. vs. CIT (1991) 187 ITR 412 (All);
3. Gee Vee Enterprises vs. Addl. CIT (1975) 99 ITR 378 (Del); and
4. Addl. CIT vs. Mukur Corpn. (supra).
In the light of the aforesaid judicial authorities it is amply established that the failure of the AO to carry out proper enquiries into the facts and details concerning the claim of damages before arriving at a conclusion regarding the admissibility of deduction in respect thereof makes the assessment erroneous and prejudicial to the interest of Revenue thus justifying the assumption of revisional jurisdiction by the CIT under s. 263. Apart from the lack of proper enquiries by the AO we find that even on merits, the liability on account of damages was inchoate and contingent in nature during the asst. yr. 1988-89 inasmuch as the assessee challenged the arbitration award on substantial grounds and the protracted litigation had not concluded during the year under appeal. For the detailed reasons, which we shall presently discuss, the liability on account of damages did not accrue or arise during the asst. yr. 1988-89, and therefore, the original order of the AO was not in accordance with law and was patently erroneous and prejudicial to the interest of Revenue. The CIT has, therefore, rightly exercised his jurisdiction under s. 263 and set aside the order of the AO on the limited issue of deduction of Rs. 7,14,824.
8. The decision of Bombay High Court in Gabrial India Ltd., (supra) relied upon by the learned counsel in support of his contentions is entirely distinguishable on facts. In that case detailed enquiries had been made by the AO in regard to the nature of the expenditure incurred by the assessee and the claim was allowed after proper application of mind to the facts and material brought on record as well as the detailed explanation furnished by the assessee. In the instant case no such enquiries have been made by the AO and there is no application of mind on the part of the AO to the issue of deductibility of the expenditure on account of damages claimed by the assessee. The Bombay High Court decision, therefore, renders no assistance to the assessee's case.
9. The next decision referred by the learned counsel is Fattechand Rajmal Jain vs. IAC (supra). The facts in this decision are that the AO made the assessment after examining the accounts, making enquiries and applying his mind to the facts of the case. The CIT revised the order under s. 263 on the sole ground that the gains on the silver utensils were not capital receipts and represented income in the nature of casual and non-recurring receipts. The Pune Bench of the Tribunal cancelled the order of the CIT passed on mere change of opinion. In the instant case the facts are entirely different inasmuch as there is patent lack of enquiries as well as non-application of mind by the AO to the facts of the case. Furthermore even on facts it is evidently clear that the liability on account of damages for breach of contract did not accrue or arise during the year and was therefore, not allowable as deduction. The decision of Pune Bench thus renders no assistance to the assessee's case.
Having regard to the aforesaid discussion we uphold the order of the CIT under s. 263 and dismiss the appeal of the assessee.
10. Now we take up the Departmental appeal involving the issue of deduction of Rs. 7,14,824 on account of damages for breach of contract. The CIT(A) has deleted the disallowance on the ground that the assessee followed mercantile system of accounting and the liability on account of damages has arisen with the passing of the arbitration award which falls during the asst. yr. 1988-89 under appeal. The main thrust of the Department's case is that the arbitration award has not been accepted by the assessee and the assessee preferred an appeal against the said award before the Board of Appeal constituted by the GAFTA and the appeal award which finally concluded the litigation was given on 22nd March, 1989, which falls in the asst. yr. 1989-90. On these grounds the Department took up the plea that the liability on account of damages for breach of contract did not accrue during the period relevant for asst. yr. 1988-89 under appeal.
11. On perusal of facts on record, we find that the contracts dt. 23rd July, 1986, for the supply of 1,575 metric tonne of Australian yellow gram at the rate of US $ 310 per metric tonne were acknowledged by the assessee on 24th July, 1986. Under the contract letter of credits were to be opened latest by 14th August, 1986. The Australian party agreed to extend the date for opening of the letters of credit until 1st October, 1986. The assessee however, failed to open the letters of credit. Protracted litigation ensued. The Australian party claimed damages for breach of contract by the assessee. The assessee disputed the claim on the ground that the letters of credit could not be opened due to the failure of the Australian party to forward duly signed contracts for obtaining registration with the National Agricultural Co-operative Marketing Federation of India. There is no stipulation in the contract notes regarding the damages to be paid by the party breaching the terms of the contract. The damages amounting to Rs. 7,14,824 awarded by the GAFTA under the arbitration award were therefore, unliquidated damages for breach of contract. As indicated earlier the assessee challenged the legality of the arbitration award and preferred appeal before the Board of Appeal constituted by GAFTA. From these facts the conclusion is irresistible that the liability for the unliquidated damages is inchoate, uncertain and disputed liability and the ambit of the dispute is not merely confined to quantification of the damages. The dispute in fact involves the very liability of the assessee to pay any damages to the Australian party. Unless the dispute is finally settled, it cannot be said that any liability for payment of damages has accrued or arisen during the year. The decision of Hon'ble Supreme Court in CIT vs. Hindustan Housing & Land Development Trust Ltd. (1987) 161 ITR 524 (SC) is a direct authority in support of the view being taken by us. In the said decision the enhanced compensation became payable to the assessee pursuant to the arbitration award dt. 29th July, 1955. Approving the view taken by the Calcutta High Court, the Hon'ble Supreme Court observed that the amount of enhanced compensation was in dispute in the appeal filed by the State Government and, therefore, there was no absolute right accruing to the assessee to receive the amount at that stage. The enhanced compensation was, therefore, held as not income arisen or accruing to the assessee for asst. yr. 1956-57. The Hon'ble Supreme Court approved the decisions of Hon'ble Gujarat High Court in Topandas Kundanmal vs. CIT (1978) 114 ITR 237 (Guj) and Addl. CIT vs. New Jehangir Vakil Mills Co. Ltd. (1979) 117 ITR 849 (Guj). The Supreme Court observed at p. 530 as under :
"There is a clear distinction between cases such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles."
The basic proposition enunciated by the Supreme Court is that the liability of the assessee to pay compensation will arise or be crystallised only when the liability to pay the damages is finally adjudicated and the liability itself is determined and accepted by private negotiation or is determined by a Court. In other words an enforceable liability will spring into existence only when it was determined and finally fixed by a Court or any other mutually agreed forum. In the instant case on the basis of available materials it is clear that the contract did not provide for payment of any particular amount as damages in case of breach of the contract and the claim by the Australian party was for unliquidated damages. It was not the case where the quantum of damages alone was referred to the arbitrator by the GAFTA but it was a case where the very question as to whether the assessee is liable to pay damages was referred to arbitration. Arbitration award dt. 25th August, 1987, was not accepted by the assessee inasmuch as the very jurisdiction of GAFTA was challenged by the assessee and the assessee declined to nominate an arbitrator. The entire dispute ultimately travelled to the Board of Appeal which gave its decision finally on 20th March, 1989, concluding the litigation. It is in the backdrop of these facts that we have held that the liability for the damages is not a liability in praesenti during the assessment year under question.
12. We have carefully gone through the various judicial authorities cited by the learned counsel and find that these decisions do not in any manner support the case of the assessee. The learned counsel has cited the decision of Allahabad. High Court in CIT vs. Lachmandas Mathurdas (supra). In this decision the High Court observed that before a claim for damages can be allowed in cases where the assessee follows the mercantile system of accounting, the liability must be in praesenti i.e. it must be an actual liability and not a contingent liability. In this case since the assessee requested for waiver of the amount of damages, the Court held that the liability could not be said to have crystallised till such time as the waiver was decided by the electricity board. The decision rather supports the case of the Department that the liability has not crystallised as an actual liability with the arbitration award since the award has been disputed and challenged by the assessee.
13. The next decision relied upon by the learned counsel is Asuma Cashew Co. Ltd. vs. CIT (supra). In this case it was held that the liability to pay damages to the foreign party accrued on the passing of the award by the arbitrator. In this case the arbitrator's award has been accepted by the assessee and resulted in the final determination of the liability. In the instant case before us as already mentioned the liability did not crystallise as finally determined liability since the arbitration award was disputed and challenged by the assessee and the matter was taken to the Board of Appeal. The Kerala High Court decision, therefore, does not help the assessee.
14. The learned counsel has next relied upon CIT vs. Sohanlal Kanwar & Sons (1987) 164 ITR 129 (Raj). In this decision the issue involved was whether the damages for breach of contract constituted speculation loss or business loss. The decision is clearly distinguishable.
15. The learned counsel has next relied upon Mediwala & Co. (supra). This decision involved an entirely different legal issue whether the damages paid under a contract constituted admissible business expenditure or not. The decision renders no assistance to the assessee's case.
16. Regarding the decision of Ahmedabad Bench of the Tribunal in the Dy. CIT vs. Jayant Paper Mills (supra), relied upon by the learned counsel, the issue involved deduction of increased purchase price and royalty payment by the assessee in respect of supply of gas received from Oil & Natural Gas Commission. The Tribunal held that the liability for payment of purchase price and royalty on gas received from ONGC arose during the year as and when the supply of gas was received and the issue involved only the quantification of the liability which has been settled by the Supreme Court. The facts and issues involve in this case were entirely different. There was no dispute regarding the payment of purchase price as well as royalty by the assessee and the dispute was confined only to the matter of quantification of the purchase price as well as the royalty. The decision does not help the assessee.
17. For the reasons discussed above, we hold that the liability on account of damages for breach of contract amounting to Rs. 7,14,824 did not arise or accrue during the period relevant for asst. yr. 1988-89 under appeal and, therefore, the learned CIT(A) is not justified in deleting the disallowance made by the AO on this ground. The order of the CIT(A) on this issue is, therefore, reversed and the appeal of the Revenue is allowed.
18. Before parting with this order we may note that we have considered the various judicial authorities cited before us by both the sides even if these are not specifically mentioned in the order.
19. In the result, the appeal of the assessee is dismissed and the appeal of the Revenue is allowed.