2009 (3) TMI 132 - HC - Income Tax

Liability on account of arbitration award - Whether the liability of Rs. 7, 14, 824 arising under the arbitration award against the appellant declared in the assessment year 1988-89 had not accrued in that year only because the award was challenged in appeal by the assessee and therefore was not allowable in the assessment year 1988-89? Held that - Admittedly the assessee is following the mercantile system of accounting. On May 28 1987 when the Trade Association made an award for damages for breach of contract the liability to pay such damages had already been incurred by the assessee. Merely because the award was challenged in appeal by the assessee cannot be a ground for holding that the liability had not been incurred ITAT has committed an error - the liability arose in the hands of the assessee and merely because the award was challenged that fact did not make the award unenforceable in law. The assessee was accordingly held entitled to claim deduction in the said case decided in favor of assessee

Summary

Issues:
1. Accrual of liability under an arbitration award in the assessment year 1988-89.
2. Interpretation of liability under the mercantile system of accounting.
3. Dispute regarding the year in which the liability was incurred.

Analysis:
1. The case involved the question of whether the liability of Rs. 7,14,824 arising under an arbitration award against the appellant in the assessment year 1988-89 had accrued in that year, despite being challenged in appeal by the assessee. The Tribunal had disallowed the deduction of damages based on the arbitration award, stating that no liability had been incurred in the relevant period. The appellant argued that under the mercantile system of accounting, the liability was incurred on the day the award was made, regardless of any subsequent challenges. Case laws were cited to support the contention that the liability had indeed accrued in the assessment year in question.

2. The Tribunal found that the contract did not specify a particular amount for damages in case of breach, leading to a dispute over the nature of the liability. However, under the mercantile system of accounting, both receipt and liability accrue at the earliest point of time. The court emphasized that the liability to pay damages had been incurred by the appellant when the award was made, and challenging the award did not negate the existence of the liability. The Tribunal's reliance on a decision related to land acquisition compensation was deemed erroneous, as the issues were not similar.

3. Referring to a similar case precedent, the court held that the liability to make payment under an award had arisen and become enforceable for the relevant assessment year, even if the award was challenged. The appellant was entitled to claim the deduction for the liability arising under the arbitration award in the assessment year 1988-89. Consequently, the court ruled in favor of the appellant, allowing the appeal with no order as to costs.