2011 (6) TMI 14 - HC - Income Tax

Disallowance - Liability to pay interest on damages awarded for breach of agreement - The appellant is a registered society primarily formed with the object to market agriculture produce for the benefit of producers/farmers - The appellant entered into contract with Alimenta for export of 5,000 MT HPS groundnut during the period February to April, 1980 subject to certain terms and conditions - On account of ban imposed by Government of India, the assessee was prohibited from exporting balance quantity of HPS groundnuts - Alimenta initiated arbitration proceedings, wherein the assessee was directed to make payment of US 46,81,000 as damages with interest at the rate of 10.5 per cent from 13-2-1981 to the date of the award i.e., 15-11-1989. Held that the liability on account of interest was to be deductable only when it gets crystallized into a certain liability and that took place only on this court passing a decree and awarding interest after the date of the award till the date of realization - Thus, the liability did not crystallize in the three assessment years 1996-97, 1997-98 and 1998-99, but only came to be crystallized in the year 2000-2001, when this court passed decree on 28-1-2000 and, therefore, the assessee could not claim deduction for the same in the assessment years 1996-97, 1997-98 and 1998-99 - Thus, answer question in affirmative in favour of the revenue and against the assessee and consequently dismissed the appeal.

Issues Involved:
1. Allowability of deduction for interest on damages awarded for breach of agreement.
2. Accrual and crystallization of liability for interest on damages.

Issue-wise Detailed Analysis:

1. Allowability of Deduction for Interest on Damages:

The primary issue revolves around whether the Tribunal was correct in disallowing the deduction of interest on damages awarded for breach of the agreement dated 12-1-1980 between the appellant and M/s. Alimenta SA Switzerland. The appellant argued that the interest on the damages awarded should be a deductible expense. The Assessing Officer, CIT(A), and the Tribunal all rejected this claim, stating that the liability to pay interest was not a continuing liability and only crystallized when the decree was passed by the Delhi High Court on 28-1-2000.

2. Accrual and Crystallization of Liability for Interest on Damages:

The appellant contended that the liability to pay interest on the damages awarded was a continuing liability and should be deductible for the assessment years 1996-97, 1997-98, and 1998-99. The Tribunal, however, held that the liability only crystallized when the Delhi High Court made the award a rule of the court on 28-1-2000. The Tribunal's decision was based on the fact that the interest was only payable up to the date of the award by the appellate authority on 14-9-1990, and any further interest was uncertain until the High Court's decree.

Detailed Analysis:

Allowability of Deduction for Interest on Damages:

The appellant is a registered society formed to market agricultural produce and entered into a contract with Alimenta for the export of groundnuts. Due to a government ban, the appellant could not fulfill the contract, leading to arbitration and an award of damages with interest. The appellant claimed a deduction for the interest on these damages in its tax returns, which was disallowed by the Assessing Officer and upheld by the CIT(A) and the Tribunal. The Tribunal noted that the interest liability was not a continuing liability and only crystallized when the High Court passed the decree on 28-1-2000.

Accrual and Crystallization of Liability for Interest on Damages:

The appellant argued that the liability to pay interest accrued year after year and should be deductible annually. They cited various cases, including Rama Bai v. CIT, where interest on enhanced compensation under the Land Acquisition Act was held to accrue year after year. However, the Tribunal distinguished these cases, noting that the interest in the present case was not statutory but arose from an arbitration award. The Tribunal emphasized that the liability for interest was uncertain until the High Court's decree, which made the award enforceable and specified the interest rate.

The Tribunal relied on several judgments, including Central India Electric Supply Co. v. CIT and P. Mariappa Gounder v. CIT, which held that liability becomes crystallized when a court passes a decree. The Tribunal concluded that the liability for interest only crystallized when the Delhi High Court made the award a rule of the court on 28-1-2000. Therefore, the appellant could not claim a deduction for the interest in the assessment years 1996-97, 1997-98, and 1998-99.

Conclusion:

The Delhi High Court upheld the Tribunal's decision, stating that the liability for interest on damages did not crystallize in the assessment years 1996-97, 1997-98, and 1998-99. The liability only became certain when the High Court passed the decree on 28-1-2000. Consequently, the appellant's claim for deduction of interest was disallowed for the relevant assessment years, and the appeal was dismissed.

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