1989 (6) TMI 28 - HC - Income Tax

Deduction, Export Market Development Allowance, Liability For Unliquidated Damages, Weighted Deduction

Summary

Issues:
1. Liability of the assessee in respect of damages accrued on passing of arbitration award.
2. Entitlement to weighted deduction under section 35B of the Income-tax Act.

Analysis:

Issue 1:
The case involved the liability of the assessee for damages due to breach of contracts, as determined by arbitration awards. The Tribunal held that liability for damages crystallized upon acceptance of the awards, even before court decree. The High Court affirmed this, stating that in cases of unliquidated damages, liability arises upon determination of the amount, either by negotiation, arbitration, or court. The court cited precedents to support that an enforceable liability arises when damages are adjudicated, creating a debt for the assessee. The court rejected the argument that a court decree was necessary for liability to accrue, emphasizing that the award itself creates rights and liabilities. The court upheld the Tribunal's decision, allowing deduction for the damages as per the awards.

Issue 2:
Regarding the entitlement to weighted deduction under section 35B of the Income-tax Act, the Income-tax Officer initially disallowed the deduction, claiming the payments were made in India. The Commissioner of Income-tax (Appeals) allowed the deduction, but the Appellate Tribunal misinterpreted the Commissioner's decision. The High Court found that the matter had not been properly adjudicated and directed the Tribunal to reconsider whether the assessee was entitled to the deduction under section 35B. The court emphasized the need for a thorough examination of the payment details and eligibility for the deduction. The High Court declined to answer this question directly but instructed the Tribunal to review the issue in light of specific directions provided in similar cases. The matter was remanded to the Tribunal for a proper determination of the entitlement to weighted deduction under section 35B of the Income-tax Act.

In conclusion, the High Court upheld the deduction for damages as per arbitration awards but directed the Tribunal to reassess the entitlement to weighted deduction under section 35B of the Income-tax Act.