2019 (4) TMI 1675 - HC - Income Tax

Disallowing the expenses of liquidated damages - contingent contract - allowability in year of execution of contract or fulfillment of conditions mentioned in contracts - HELD THAT - A perusal of clauses of the agreement indicates that the said agreement dated 5th March, 2010 entered into between the Assessee and M/s. Timblo Minerals Pvt. Ltd. was a contingent contract u/s 32 of the Contract Act and could be enforced only when the conditions prescribed therein would have been complied with and not on the date of execution of the agreement. In our view, the Tribunal was thus right in holding that the Assessee was entitled to seek deductions in respect of the said amount in the Assessment Year 2011-12. We do not find any infirmity in the order passed by the Tribunal. Since the rate of income tax in the Assessment Years 2010-11 and 2011-12 being uniform, it was of no consequence to the Revenue whether to allow the said expenditure in the Assessment Year 2010-11 or 2011-12. The issue raised by the Revenue in these Appeals is thus academic and does not give rise to any substantial question of law. Disallowance of the deferred revenue expenditure - Assessee had claimed deduction at the rate of 1/17th of the said expenditure while filing the return of income in the impugned assessment year - Tribunal held that since the liability was as per interpretation of the accrual towards the said expenditure in the Assessment Year 2011-12 and since the Assessees had made payment on 5th March, 2010, and held that the said sum was also not hit by the provisions of Section 40(a)(ia) - HELD THAT - Tribunal held that following the rule of consistency, deduction to the Assessee amounting to ₹ 9,87,993/- being 1/17th of ₹ 1,67,95,982/- was allowed. These findings of fact rendered by the Tribunal in the impugned order are admittedly not impugned by the Revenue and have attained finality. In our view, the issue raised by the Revenue recorded in paragraph 3(D) aforesaid is also academic and does not raise any substantial question of law.

Issues Involved:

1. Whether the ITAT erred in deleting the action of the Assessing Officer disallowing the expenses of ?6,96,00,000/- for payment of liquidated damages for contract cancellation during F.Y. 2009-10.
2. Whether the ITAT was unjustified in allowing the claim made by the appellant at the time of the appeal hearing regarding the allowance of liquidated damages of ?6,96,00,000/- paid for the cancellation of the contract accrued during F.Y. 2009-10.
3. Whether the ITAT erred in allowing the expenditure of ?6,96,00,000/- (pertaining to liquidated damages) accrued in the earlier year (Assessment Year 2010-11) and thus cannot be allowed for the year under consideration.
4. Whether the ITAT erred in deleting the action of the Assessing Officer disallowing the deferred revenue expenditure of ?50,82,117/- claimed by the respondent in the return of income filed for the year.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses for Liquidated Damages:

The Revenue contended that the ITAT erred in deleting the action of the Assessing Officer disallowing the expenses of ?6,96,00,000/- for liquidated damages paid for contract cancellation during F.Y. 2009-10. The Tribunal interpreted the agreement between the Assessees and M/s. Timblo Minerals Pvt. Ltd., noting that the agreement would only terminate upon the full payment of ?6,96,00,000/-, which was made in installments during the Assessment Year 2011-12. The Tribunal concluded that the liability accrued in the Assessment Year 2011-12, not in 2010-11, as the agreement was contingent under Section 32 of the Contract Act and enforceable only upon the fulfillment of the specified conditions.

2. Justification of Allowance of Liquidated Damages:

The Revenue argued that the ITAT was unjustified in allowing the claim for liquidated damages of ?6,96,00,000/- paid for contract cancellation accrued during F.Y. 2009-10. The Tribunal found that the agreement dated 5th March 2010 was contingent and became effective only upon the payment of the last installment in May 2010, falling within the Assessment Year 2011-12. The Tribunal's interpretation indicated that the liability arose in 2011-12, making the Assessees eligible to claim the deduction in that year.

3. Allowance of Expenditure Accrued in Earlier Year:

The Revenue contended that the ITAT erred in allowing the expenditure of ?6,96,00,000/- accrued in the earlier year (Assessment Year 2010-11). The Tribunal held that the agreement's terms specified that the liability would only be effective upon full payment, which occurred in the Assessment Year 2011-12. Thus, the Tribunal concluded that the expenditure was rightly claimed in 2011-12.

4. Disallowance of Deferred Revenue Expenditure:

The Revenue challenged the ITAT's decision to delete the action of the Assessing Officer disallowing the deferred revenue expenditure of ?50,82,117/- claimed by the Assessee. The Tribunal noted that the Assessee had deducted the tax on the payments made in installments during the Assessment Year 2011-12 and 2012-13. The Tribunal found that the deductions for the second and third installments were made during the Assessment Year 2011-12, and thus no disallowance under Section 40(a)(ia) could be made. The Tribunal also considered the rule of consistency and allowed the deduction of ?9,87,993/- being 1/17th of ?1,67,95,982/-.

Conclusion:

The Tribunal's findings were based on the interpretation of the agreement and the timing of the payments, concluding that the liability for liquidated damages accrued in the Assessment Year 2011-12. The Tribunal's decision to allow the deferred revenue expenditure was also upheld, considering the tax deductions made during the relevant assessment years. The appeals were dismissed, and the Tribunal's order was found to be without any infirmity, raising no substantial question of law.

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