1992 (6) TMI 75 - AT - Income Tax

Summary

Issues:
1. Determination of the liability to pay liquidated damages.
2. Classification of the liability as revenue or capital expenditure for the purpose of deduction.

Detailed Analysis:

Issue 1: Determination of the liability to pay liquidated damages
The case involved a dispute where two U.K. firms transferred their business connections to a new firm, leading to a lawsuit by the original firm, resulting in an award of liquidated damages by the High Court. The question was when the liability to pay the damages arose. The Tribunal differentiated between statutory liability and liability arising from breach of contract or faith. It emphasized that in cases of breach of contract, liability arises when the claim is accepted, not merely when the claim is made. The Tribunal noted that a memo of compromise signed by the parties indicated the acceptance of liability on a later date, contrary to the initial judgment. The Tribunal held that the liability for the liquidated damages arose on the date of the compromise, not the initial judgment date.

Issue 2: Classification of the liability as revenue or capital expenditure
Regarding the classification of the liability, the Assessing Officer had denied the revenue deduction claimed by the assessee. The CIT (Appeals) upheld this decision, stating that the expenditure did not have a direct connection with the business as required by law. The Tribunal further explained that the liability did not arise in the normal course of business but from events predating the business setup. Therefore, the expenditure could not be considered as for the preservation of assets and was not allowable under the Income Tax Act. The Tribunal concluded that the liability was not on revenue account, and thus, the revenue deduction was disallowed.

In conclusion, the Tribunal dismissed the appeal of the assessee, holding that the liability to pay the damages arose on the date of the compromise and not the initial judgment date. It directed that the liability be dealt with in the assessment year relevant to the date of the compromise and clarified that the Assessing Officer could examine the question of revenue deduction based on the merits of the case. Additionally, the appeals filed by the partners of the firm were also dismissed on the grounds that partners are not entitled to appeal on matters related to the firm's assessment, and the firm's appeal had already been dismissed.