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Issues Involved:
1. Deductibility of damages claimed by the Food Corporation of India (FCI) against the assessee-company for non-fulfillment of contractual obligations. 2. Timing of liability recognition under mercantile accounting system. 3. Distinction between statutory and contractual liabilities. 4. Applicability of specific contractual clauses to the breach of contract. 5. Legal precedents regarding contingent liabilities and their deductibility. Detailed Analysis: 1. Deductibility of Damages Claimed by FCI: The primary issue in this appeal is whether the damages claimed by FCI against the assessee-company for non-fulfillment of its contractual obligations under the contract dated 5-2-1977 are deductible during the accounting year relevant to the assessment year 1981-82. The assessee failed to lift the rice bran and germs stocks within the stipulated period, leading to a breach of contract. FCI retendered the stocks and claimed damages amounting to Rs. 11,07,176.33 from the assessee. 2. Timing of Liability Recognition: The assessee claimed the damages as a liability against the profits for the accounting year relevant to the assessment year 1981-82. The Income Tax Officer (ITO) rejected this claim, stating that the liability was in the nature of a non-statutory liability and arises only on the date of adjudication of the award by the arbitrator. The ITO relied on the Calcutta High Court's decision in CIT v. Soorajmull Nagarmull, which held that claims relating to breach of contracts and the liabilities flowing from it are crystallized only on the date of the arbitration award or the date of admission of the claim, but not on the date of receipt of demand by the assessee. 3. Distinction Between Statutory and Contractual Liabilities: The learned Departmental Representative argued that there is a well-marked distinction between statutory and contractual liabilities. Statutory liabilities arise out of the provisions of the statute itself and do not depend on whether a provision is made in the account books. In contrast, contractual liabilities are crystallized either in the accounting year in which the liability is admitted by the assessee or by a decree or award which becomes final and enforceable. Until then, the liability remains contingent. 4. Applicability of Specific Contractual Clauses: The assessee's counsel argued that clause 1(c) of the agreement obliges the assessee to make good the deficient demand made by FCI. However, the Tribunal found that clause 1(c) applies to liquidated damages for breach of a specific term, not for a wholesale breach of the contract. The relevant clause for a wholesale breach is clause 1(n), which provides for arbitration. The Tribunal concluded that the terms of the contract did not provide for the contingency of damages for a wholesale breach and that the FCI's demand was not admitted by the assessee. 5. Legal Precedents Regarding Contingent Liabilities: The Tribunal referred to several legal precedents to support its conclusion. In CIT v. Soorajmull Nagarmull, it was held that a claim based on breach of contract does not come within the meaning of "contract settled" and that the cause of action is based on the breach, not the contract itself. In the case of Oriental Motor Car Co. (P.) Ltd., the Allahabad High Court held that a contractual liability crystallizes only when the liability is admitted or settled, not earlier. Similarly, in A. P. S. Cold Storage & Ice Factory, the Allahabad High Court held that a contingent liability is not deductible until it becomes an actual liability. Conclusion: The Tribunal concluded that the lower authorities were justified in rejecting the assessee's claim for deduction of the damages as it represented a contingent liability. The liability was not admitted by the assessee, and the arbitration proceedings were still pending. Therefore, the deduction sought by the assessee was not allowable for the accounting year relevant to the assessment year 1981-82. The appeal was dismissed as devoid of merits.
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