2023 (8) TMI 591 - HC - Income Tax

Allowability of provision made for liquidated damages represented an ascertained liability - HELD THAT - Tribunal has made no reference to either the clause relating to liquidated damages or the agreement which was operable between the assessee and BSNL, nor did it clearly formulate as to whether represented the ascertained liability under the head Provision for Liquidated Damages . To our minds, the flaw in the Tribunal s formulation is found in the following part of which reads as follows impugned amount was not only the provision but the actual amount of the liquidated damages pertaining to the period of delay falling within the previous year relating to the assessment year under consideration . It is no one s case, leave alone that of the assessee, that Rs. 17,61,99,672/- represented the actual amount of liquidated damages. It is the respondent/assessee s case that Rs. 17,61,99,672/- represents an ascertained liability, which could change if there are any waivers or remissions. The issue which the Tribunal had to grapple with, and clearly return a finding, one way or the other, was whether the said amount in the given facts and circumstances of the case, represented an ascertained liability. Given this position, both counsels agree that the matter can be remanded to the Tribunal, with a direction to dispose of the matter based on the documents already on record. The impugned order is set aside - Tribunal will reexamine the issue based on the material already on record and return a finding, one way or the other, as to whether such amount represented an ascertained liability.

Summary

Issues Involved:

1. Deletion of addition made by the Assessing Officer on account of provision for warranty.
2. Deletion of addition made by the Assessing Officer on account of provision for liquidated damages claimed in the profit and loss account by the Assessee.

Summary:

Issue 1: Provision for Warranty

The appellant challenged the deletion of Rs. 3,19,98,632/- made by the Assessing Officer on account of provision for warranty. However, the appellant's counsel conceded that this issue is covered against the appellant by the precedent set in Commissioner of Income-tax, Bangalore vs. Nokia Siemens Networks India (P.) Ltd., [2011] 14 taxmann.com 84 (Karnataka).

Issue 2: Provision for Liquidated Damages

The main issue to be considered was whether the Tribunal erred in deleting the addition of Rs. 17,61,99,671/- made by the Assessing Officer on account of provision for liquidated damages. The Tribunal had previously remanded the issue to the Commissioner of Income Tax (Appeals) [CIT(A)] to verify if the parameters laid down by the Supreme Court in Rotork Controls India Pvt. Ltd. v. CIT 314 ITR 62 (SC) were fulfilled. However, a coordinate bench of the High Court modified this remand, directing the Tribunal itself to examine the issue.

Upon re-examination, the Tribunal upheld the CIT(A)'s view that the provision for liquidated damages was an ascertained liability and hence a deductible expenditure. The Tribunal noted that the respondent/assessee consistently followed this methodology, and the figures were not in dispute.

However, the High Court found that the Tribunal did not clearly formulate whether the amount of Rs. 17,61,99,672/- represented an ascertained liability. The Tribunal's statement that the amount was "not only the provision but the actual amount of the liquidated damages" was flawed, as it was not the respondent/assessee's case that this amount represented the actual liquidated damages but an ascertained liability subject to waivers or remissions.

Given this, the High Court remanded the matter back to the Tribunal to reexamine the issue based on the existing record and determine whether Rs. 17,61,99,672/- represented an ascertained liability. The Tribunal was directed to dispose of the matter within eight weeks from the date of receipt of the judgment.

The appeal was disposed of in these terms, with both counsels agreeing to the remand.