RAJAGOPALAN, J.

The question referred to this Court under section 66(2) of the Income-tax Act arises out of the assessment for the year 1944-45, the previous year in relation to which ended on 16th August, 1943. The assessee firm carried on business in coffee among other things. In the relevant accounting year, 1942-43, the assessee entered into contracts with the India Coffee Board, constituted under the Coffee Market Expansion Act VII of 1942, under which the assessee purchased 12, 390 cwt. of coffee, with a contractual obligation to export the whole of that quantity to the Middle East and Australia. In addition, the assessee purchased from others out of their export quotas, 2, 303 cwt. which also he was under an obligation to export. The prices at which the India Coffee Board sold the coffee for export were far less than those at which coffee was sold from the pool by the Board for sales within India. The assessee exported only 8, 784 cwt.; the balance of 5, 959 cwt. it sold within India without the knowledge of the India Coffee Board. The assessee made considerable profits out of these sales. The India Coffee Board came to know of these sales in contravention of the assessee's obligations only in 1946, when it called upon the assessee to explain. The assessee admitted in his letter dated 20th May, 1946, that it had failed to export 5, 959 cwt. of the coffee that it had obtained for export in 1942-43 and the assessee agreed to pay the damages in accordance with one of the alternative terms of the contract it had entered into with the India Coffee Board.

Clause 9 of that contract ra :

"If the buyer fails to ship the coffee purchased for export to a destination outside India, the Board reserves to itself the right to levy liquidated damages or to restore the status quo in any one of the following ways, at the absolute discretion of the Controller of Coffe :(a) To recover a fixed measure of damages at Rs. 20 per cwt. to be paid to the surplus pool. (b) To export an equivalent quantity by weight of coffee purchasing the same from the pool and to recover the loss incurred in the transactions from the buyer. The decision of the Controller in the matter of price at which such coffee is purchased and sold and in the matter of fixing the loss shall be final. (c) To call upon the buyer to restore the stock delivered to him at a price less than the purchase by 2 1/2 per cent. of the price for every month after the expiry of the period for export fixed above and the date when the buyer is called upon to restore the stock provided that a period of fifteen days and over shall be treated as a month and a period less neglected."

"The fixed damages referred to above shall be deemed as liquidated damages and the buyer shall not be entitled to any reduction thereof in any circumstances."

It was apparently the first of these alternatives that it was availed of by the Controller of Coffee, and the damages the assessee was liable to pay for its admitted breach of the contractual obligation was assessed at Rs. 1, 19, 177 on 1st June, 1946. The assessee paid this amount in instalments in the latter part of its year of account 1945-46.

The assessment proceedings for 1944-45 were completed by the Income-tax Officer only on 5th August, 1947. The assessee firm claimed that the sum of Rs. 1, 19, 177 it had paid as liquidated damages should be deducted to arrive at its assessable profits for the accounting year 1942-43 under section 10(2)(xv) of the Income-tax Act. That claim was disallowed by the departmental authorities. The assessee's appeal to the Appellate Tribunal failed.

The question referred to this Court under section 66(2) of the Act ra :

"Whether on the facts and in the circumstances of the case the sum of Rs. 1, 19, 177 paid by the assessee as damages to the Indian Coffee Board for not exporting the coffee seeds outside India is under the terms of agreement allowable as an expenditure under section 10(2)(xv) of the Act in the assessment