1999 (5) TMI 47 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the revisional order of the CIT under section 263.
2. Date when the liability on account of damages accrues.

Issue-wise Detailed Analysis:

1. Validity of the Revisional Order of the CIT under Section 263:

The assessee argued that the essential conditions for the assumption of jurisdiction by the CIT under section 263 were not fulfilled. The assessee contended that the issue of admissibility of damages for breach of contract had been duly considered by the Assessing Officer (AO) in the original assessment, and the conclusion arrived at by the AO could not be construed as erroneous. The assessee's counsel cited the decision of the Bombay High Court in CIT v. Gabriel India Ltd [1993] 203 ITR 108 to support this argument. The department, however, argued that the AO failed to apply his mind to the issue of deduction of damages for breach of contract, which resulted in an erroneous and prejudicial order to the interest of the revenue. The CIT considered the order erroneous because the AO did not make proper enquiries before accepting the claim of deduction made by the assessee. The Tribunal upheld the CIT's order, noting that the AO's failure to make proper enquiries made the assessment erroneous and prejudicial to the interest of the revenue, justifying the assumption of revisional jurisdiction by the CIT under section 263.

2. Date When the Liability on Account of Damages Accrues:

The assessee claimed that the liability on account of damages crystallized on the passing of the arbitration award by GAFTA on 28-5-1987, and therefore, the deduction was rightly claimed in the assessment year 1988-89. The department argued that the liability did not crystallize with the passing of the arbitration award since the assessee did not accept the award and carried the matter to the Board of Appeal, which passed the final order on 22-3-1989, beyond the accounting year for assessment year 1988-89. The Tribunal agreed with the department, holding that the liability for unliquidated damages was inchoate, uncertain, and disputed during the assessment year 1988-89. The Tribunal cited the Supreme Court decision in CIT v. Hindustan Housing & Land Development Trust Ltd [1986] 161 ITR 524, which established that a liability would arise or be crystallized only when it was determined and finally fixed by a Court or any other mutually agreed forum. Since the arbitration award was disputed and the matter was taken to the Board of Appeal, the liability did not accrue during the assessment year 1988-89. Consequently, the Tribunal reversed the CIT(A)'s order and upheld the disallowance made by the AO.

Conclusion:

The Tribunal dismissed the appeal of the assessee and allowed the appeal of the revenue, holding that the revisional order of the CIT under section 263 was valid, and the liability on account of damages did not accrue during the assessment year 1988-89. The Tribunal emphasized the necessity for the AO to make proper enquiries and apply his mind to the facts before arriving at a conclusion regarding the admissibility of deductions.