1992 (7) TMI 131 - AT - Income Tax

Summary

Issues Involved:
1. Whether the penalty for delayed delivery under the delayed delivery clause is an enforceable present liability or a contingent liability.
2. Taxability of cash compensatory support received by the assessee.

Summary:

1. Penalty for Delayed Delivery:

Arguments by Assessee:
- The assessee contended that the penalty under the delayed delivery clause is an enforceable present liability. The mere factum of delay entails penalty, and the quantum of penalty is specified in the contracts. Thus, the liability accrues when the delay occurs, not when the penalty is waived.
- The assessee argued that the penalty should be accounted for on an accrual basis, and any subsequent waiver by customers should be accounted for in the year of waiver.

Arguments by Assessing Officer:
- The Assessing Officer held that the delayed delivery clause does not state that the entire amount of the contract will not accrue to the assessee if there is a delay. It only states that the customer has a right to impose a penalty for delay.
- The Allahabad High Court case of Lachhman Das Mathura Das was cited, which held that the provision for reduction in contract price due to delay is not a liability in praesenti.

Tribunal's Findings:
- The Tribunal held that the penalty for delayed delivery is a liability in praesenti because the assessee did not dispute its liability to pay the penalty. The liability accrues when the delay occurs, and the plea for waiver is contingent upon the customers' acceptance.
- The Tribunal noted that the assessee's method of accounting for the penalty was consistent with the mercantile system of accounting, which recognizes income and expenses on an accrual basis.
- The Tribunal directed the Assessing Officer to allow the assessee's claim for revenue deduction in respect of the penalty payable under the delayed delivery clauses, subject to verification of the arithmetical accuracy of the claim.

2. Taxability of Cash Compensatory Support:

Arguments by Assessee:
- The assessee contended that the cash compensatory support received was a capital receipt and hence not liable to tax, relying on the ITAT Delhi Bench (Special Bench) decision in Gedore Tools (India) (P.) Ltd. v. IAC.

Tribunal's Findings:
- The Tribunal noted that with the 1990 amendment to sections 2(24) and 28 of the Income-tax Act, 1961, the decision in Gedore Tools (India) (P.) Ltd. is no longer good law. The amendments are retroactive in effect.
- The Tribunal upheld the decision of the lower authorities to tax the cash compensatory support received by the assessee.

Conclusion:
- The assessee's appeals were partly allowed. The Tribunal directed the Assessing Officer to allow the assessee's claim for revenue deduction in respect of the penalty payable under the delayed delivery clauses, subject to verification. The Tribunal upheld the taxability of cash compensatory support received by the assessee.