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1980 Supreme(All) 59
IN THE HIGH COURT OF ALLAHABAD
C. S. P. Singh and R. R. Rastogi, JJ.
COMMISSIONER OF INCOME-TAX - Appellant
Versus
LACHHMAN DAS MATHURA DAS - Respondents
Income-tax Reference 54 Of 1978
Decided On : 01/28/1980
A.Gupta, K.B.Bhatnagar, R.K.GULATI
Liability for damages must be in praesenti and not contingent to be allowable as a deduction.
Headnote:
INCOME TAX - Deduction - Interest on arrears of sales tax and outstanding balance of sales tax - Not allowable - Damages for breach of contract - Not an allowable deduction - Liability must be in praesenti and not contingent - Clause in contract providing for reduction of contract price for delay in performance - Liability not ascertained till period of deficient commercial and efficient working of plant determined - Waiver clause in contract - Liability not crystallizing till waiver matter disposed of.
Fact of the Case:
The assessee entered into a contract to supply A. C. S. R. Weasel conductor to the U. P. Electricity Board. The supplies were to be completed by July 1969, but the assessee failed to supply the contracted quantity and sought an extension of six months, which was refused. The contract contained a provision for reduction of the contract price by half per cent. per week for delay in performance, but not exceeding 10% of the contract value. The Electricity Board made a demand for Rs. 69,383 for breach of contract on 14th June 1972, which the assessee did not pay. The assessee claimed deduction of this amount for the previous year relevant to the assessment year 1974-75, but the ITO and AAC rejected the claim. On appeal, the Tribunal allowed the deduction.
Finding of the Court:
The court held that the interest on arrears of sales tax and outstanding balance of sales tax was not an allowable deduction. The court also held that the damages for breach of contract were not an allowable deduction as the liability had not crystallized in the accounting period relevant to the assessment year in question. The court further held that the liability under the clause in the contract providing for reduction of the contract price for delay in performance did not arise till the period of deficient commercial and efficient working of the plant was determined. The court also held that the waiver clause in the contract meant that the liability did not crystallize till the waiver matter was disposed of.
Issues: 1. Whether interest on arrears of sales tax and outstanding balance of sales tax was an allowable deduction? 2. Whether damages for breach of contract were an allowable deduction?
Ratio Decidendi: 1. Interest on arrears of sales tax and outstanding balance of sales tax was not an allowable deduction as it was not a revenue expenditure. 2. Damages for breach of contract were not an allowable deduction as the liability had not crystallized in the accounting period relevant to the assessment year in question.
Final Decision: The court answered the first and third questions in the negative, and the second question by saying that the interest on outstanding balance of sales tax was not an allowable deduction. The fourth question was answered by saying that the assessee's claim for damages was not an allowable deduction in computing the assessee's income for the assessment year under consideration.
( 1 ) THE Income-tax Appellate Tribunal, Delhi Bench, Delhi, has referred the following four questions for the opinion of this court.
"1. Whether the Tribunal was in law justified in allowing the assessees claim in respect of interest on the arrears of sales tax in computing the assessees income for the year under consideration ? 2. Whether the interest on the outstanding balance of sales tax was an allowable deduction under the Income-tax Act ? 3. Whether there was material on record justifying the Tribunals finding that the liability of Rs. 69,383 for damages had crystallised in the accounting period relevant to the assessment year under consideration ? 4. Whether the claim of the assessee for damages could be held to be an allowable deduction in computing the assessees income liable to assessment for the year under consideration ? "
( 2 ) SO far as the first two questions are concerned, they are clearly covered by the decision of this court in the case of Saraya Sugar Mills P. Ltd, v. CIT [1972] 116 ITR 387 (FB) and in view of that decision the assessees claim for interest on the arrears of sales tax and interest on the outstanding balance of the sales tax was not an allowable deduction. Coming now to the facts relevant for answering the third and fourth questions.
( 3 ) THE assessee entered into a contract on the 21st of September, 1968, for the supply of 5,000 kms. of A. C. S. R. Weasel conductor with the U. P. Electricity Board. The supplies were to be completed by July, 1969, but as the raw material, according to the assessee, was not available, it did not supply the contracted quantity, and sought extension for a period of six months, which was refused by the U. P. Electricity Board. Under the agreement entered into between the assessee and the Electricity Board in respect of this supply, Clause 27 thereof contained a provision for reduction of the contract price. This clause of the contract ran as under :
"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 sueh portion only of the plant as 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 contractors liability for delay but shall not in any case exceed 10 per cent. of the contract value of such portion of the plant. "
( 4 ) NOTHING appears to have been done by the Electricity Board in pursuance of this clause in the relevant previous year which began on the Dasahara of 1970, and ended on the Dasahara of 1971. Subsequently on 14th June, 1972, the Superintending Engineer, Electricity Stores procurement Circle, U. P. State Electricity Board, Lucknow, by letter No. 6286-SP (T)/i/ceh-315/67 (L. M.) made a demand for Rs. 69,383 for breach of the contract. The letter sont is to the following effect :
"a contract No. SP/433/68 dated 21-9-68 was executed by you with the Board. . . . . . . . . In accordance with the terms of the contract the supplies were to be completed by July, 1969. . . . . . . . . Out of 5,000 only 3,976. 649 Km. supplied so far. For the balance you have expressed your inability to execute the order. You are, therefore, guilty of breach of contract and are liable to pay damages on the material unsupplied to the extent of 10% value of such material which comes to Rs. 69,383. A bank draft for Rs. 69,383 be sent within 15 days. . . . . . . . . "
( 5 ) THE assessee did not pay this amount, but when he took a second contract, the Electricity board deducted the amount. It appears that the assessee pressed for waiver of the amount, which was ultimately acceded to by the Electricity Board, and the assessee included this amount in his return for t
