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Issues:
1. Deductibility of damages awarded in arbitration proceedings for breach of contract. 2. Impact of Foreign Exchange Regulation Act and Reserve Bank of India approval on the accrual of liability. Analysis: Issue 1: The appeal involved the deductibility of damages awarded in arbitration proceedings due to the assessee's failure to fulfill contractual obligations for the supply of cashewnuts. The Income-tax Officer and the Commissioner of Income-tax (Appeals) disallowed the deduction, questioning the genuineness of the liability. The assessee argued that the liability accrued when the arbitration award was passed and was binding. The Tribunal held that the liability for unliquidated damages crystallized upon the award, and the assessee's acceptance of the award was not indicative of a contrived situation. Citing precedents, the Tribunal allowed the deduction, emphasizing that the liability accrued when the damages were determined by the award. Issue 2: The CIT(Appeals) contended that the liability to pay damages required compliance with the Foreign Exchange Regulation Act and approval from the Reserve Bank of India. The Tribunal disagreed, stating that the accrual of liability was not contingent upon obtaining such approvals, which only affected the discharge of the liability. The Tribunal distinguished the case from precedents involving different statutory provisions, emphasizing that the regulatory requirements did not alter the liability already established by the arbitration award. Consequently, the Tribunal directed the allowance of the deduction for damages payable to the foreign customers based on the arbitration award.
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