Madras High Court
Commissioner Of Income-Tax vs Seshasayee Industries Ltd. on 16 December, 1998
Equivalent citations: [2000]242ITR691(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT R. Jayasimha Babu, J.
1. The following two questions have been referred to us at the instance of the Revenue.
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provision of Section 40A(5)(b) would be applicable while making the disallowance under Section 40(c) in respect of the director, foreign technician of the assessee-company and the exempted remuneration of the foreign technicians under Section 10(6)(viia) of the Income-tax Act should not be taken for computing the quantum of remuneration on which the limit of Rs. 72,000 is to be applied ?
(2) Whether, on the facts and in the circumstances of the case, the liability to pay the liquidated damages for breach of contract was an accrued liability and properly taken into account in computing the income of the assessee ?"
2. At the instance of the assessee, the following question has been referred to us :
"Whether, the Tribunal was right in law in holding that the assessee is not entitled for deduction of the sum of Rs. 9,92,945 being the surtax paid by the assessee under the provisions of the Companies Profits (Surtax) Act, 1964, in computing the total income of the assessee under the Income-tax Act ?"
3. The year of assessment involved is 1983-84.
4. The first question referred to us, at the instance of the Revenue, is required to be and is answered in favour of the assessee in the light of the decision of this court in the case of CIT v. Lucas TVS Ltd. [1997] 226 ITR 281, wherein it was held that a director who is also an employee and a foreign technician is entitled to exemption under Section 10(6)(viia) and that the amount so exempt is not to be taken into account for fixing the ceiling under Section 40(c) read with Section 40A(5) of the Income-tax Act.
5. As regards the second question referred to us at the instance of the Revenue, the facts as recorded by the Assessing Officer in his order of assessment are required to be noticed. In the assessment order at paragraph 5, the Assessing Officer has noted as under :
"5. As regards compensation payable, it is seen that in respect of various contracts entered into by the assessee with the Electricity Boards for supply of insulators, one of the conditions is that the company will be liable for paying the compensation for any possible delay in supplying the materials by the company to such boards. The assessee estimated the compensation payable and provided for in the account by deducting such notional compensation outright from the sales. The assessee-company has not paid such amounts by way of compensation to the various Electricity Boards nor did it indicate such compensation in the sale bills or other records. The bills issued to the Electricity Boards were for the entire sale amount deducted and carried to compensation payable account which amounted to Rs. 12,85,647 in the accounts relating to the assessment year 1983-84. Even the Inspecting Assistant Commissioner observed on examination of evidence and records that while the actual penalty or compensation paid by the assessee to the Electricity Board will be allowed as business expenditure in the year in which it is paid, the proposed compensation not having been actually incurred, such expenditure claim is not allowable. He also ruled that Section 41(1) applies to the facts of the case."
6. The Tribunal, however, has held that the assessee became liable for payment of damages as clause 27 in the contract provided reduction in the price. In so holding the Tribunal has not properly looked into the language of the relevant clause. That clause deals with the price reduction. Clause 27 reads as under :
"27. Price reduction clause :
If the contractor shall fail in the due performance of his contract within the time fixed by the contract or any extension thereof, the contractor agrees to accept a reduction of the contract price by half per cent, per week reckoned on the contract value of such portion only if the plant cannot in consequence of the delay be used commercially and efficiently during each week between the appointed or extended time, as the case may be, and the actual time of acceptance under clause 29 and such reduction shall be in full satisfaction of the contractor's liability for delay but shall not in any case exceed 10 per cent, of the contract value of such portion of the plant."
7. That clause in so far provides that price reduction is to be effected only when the delay referred to therein is a consequence of the assessee's failure to perform the contract within the time fixed by the contract or any extension thereof. As to whether the delay that had occurred was due to. the assessee's failure, was purely a question of fact. The assessee had not admitted before the Assessing Officer or to the other party to the contract that the delay was due to its failure and that it had as a consequence become liable for payment of damages.
8. As noticed by the Assessing Officer, the assessee had made entries in its books of account but in the bill sent by the other party to the contract, namely, the Electricity Board, it had claimed the entire sale amount. Clearly the assessee did not regard itself as being responsible for the delay that had occurred. The bill sent by it is wholly inconsistent with the entries made by it in its books of account.
9. It is well-settled that it is not the mere entry made in the books of account that is determinative of the nature of a transaction or of the character of the receipt or the payment. The true nature of the same is required to be determined for the purpose of treating it as its income or its expenditure.
10. The assessee's liability for damages, if any, can be regarded as having been settled finally only after a settlement award or a judgment in the event of a dispute. The assessee clearly disputed its liability and there was no determination of the damages payable by it by any adjudicatory forum nor had the assessee given up or waived its stand that it was not liable for payment of damages.
11. In the circumstances, the amount entered in the books of account of the assessee as compensation payable to the Electricity Board was not a liability which had accrued and which could be claimed as a deduction on the ground that the assessee was following the mercantile system of accounting. The liability for damages, if any, was wholly inchoate and was not a sum presently due during the year of account. It could hardly be said during that year that the assessee would be liable for compensation for the delay. The other party to the contract had not claimed any compensation from the assessee. There was no demand against the assessee, on this ground that it was responsible for such delay and there was no adjudication that the assessee was to be held liable in any specified amount for damages on the ground of delay caused by it.
12. The Supreme Court in the case of Union of India v. Roman Iron Foundry, , considered the scope of Sections 73 and 74 of the Contract Act and held having regard to the clauses in the contract considered by them in that case, that a claim for damages for breach of contract is not a claim for a sum presently due and payable and even where a purchaser is entitled to deduct the amount of damages from the monies of the other parties, such purchaser could be injuncted from effecting such recovery.
13. Counsel for the Revenue also relied on the decision of the Allahabad High Court in the case of CIT v. Lachhman Das Mathura Das [1980] 124 ITR 411, wherein it was held that before a claim for damages can be allowed even in cases where the assessee follows the mercantile system of accounting, the liability must be in praesenti, and not one which may arise in future and further that a contingent liability which may or may not arise cannot be allowed as deduction. We are in respectful agreement with those observations.
14. Counsel for the assessee, however, submitted that the assessee had followed that method of account consistently over the years and, therefore, the method should not be disturbed. The fact that its action was not questioned in earlier years does not entitle the assessee to contend that the law should not be applied during the current assessment year. The assessee clearly had not incurred the liability and consequently had no right to claim the amount shown in its books of account as compensation being the amount of the accrued liability to be deducted from its income for the purpose of determining its liability for income-tax for the assessment year.
15. We, therefore, answer the second question referred to us at the instance of the Revenue, in favour of the Revenue and against the assessee.
16. With regard to the third question referred to us at the instance of the assessee the same is required to be answered in favour of the Revenue and against the assessee in the light of the decision rendered by the Supreme Court in the case of Smith Kline and French (India) Ltd. v. CIT[1996] 219 ITR 581, wherein it was held that the surtax paid by the assessee under the provisions of the Companies (Profits) Surtax Act, 1964, is not required to be deducted while computing the total income of the assessee under the Income-tax Act, 1961. This question is, therefore, answered in favour of the Revenue and against the assessee.