2018 (9) TMI 357 - HC - Income Tax

Claim of Liquidated damages in respect of delay in delivery - Held that - The documents placed before the Court will clearly show that there has been negotiations, discussions before the liquidated damages was arrived at, which was much after the subject assessment years. These documents are in fact strengthening the case of the Revenue and the findings rendered by the CIT(A) as well as the Tribunal, which had held that there is no ascertained liability. A past event that leads to a present obligation is called an obligating event and the obligating event is an event that creates an obligation, which results in an outflow of resources. Thus, only those obligations arisen for past event existing independently on the future contract of the enterprise is recognised provision. Admittedly, in the instant case, no such past events have been placed before the Assessing Officer to show that there is every probability that the expenditure will be incurred. At best, the assessee can pitch their case as a case of possibility but, not a case of probability. Thus, the assessee having failed to fulfil the triple test prescribed in Rotork Controls India (P) Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA), is not entitled to the deduction as claimed by them. As assessee submitted that the assessee should be entitled to claim the same in the year when the damages had been recovered. Needless to state that it is for the assessee to disclose the same in the return of income to the relevant year, which will obviously be considered by the Assessing Officer in accordance with law. Accordingly, the second substantial question of law framed in these appeals is answered in favour of the Revenue and against the assessee.

Summary

Issues Involved:
1. Entitlement to deduction of liquidated damages.
2. Tribunal's power to entertain a second application for rectification.
3. Conditions for recognizing a provision under Section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Entitlement to Deduction of Liquidated Damages:
The primary issue revolves around whether the assessee is entitled to claim deductions for liquidated damages for the assessment years 1997-98 and 1998-99. The Tribunal initially denied the deduction, stating the damages were provisional. However, upon filing a second miscellaneous petition, the Tribunal allowed the deduction, considering the damages as ascertained liabilities under the contract terms. The Tribunal's decision was based on precedents set by the Supreme Court, which recognized liabilities arising from binding contracts as deductible.

2. Tribunal's Power to Entertain a Second Application for Rectification:
The Revenue challenged the Tribunal's authority to entertain a second rectification application after dismissing an identical one earlier. The Tribunal's rectification was questioned on the grounds that it amounted to a review, which it is not empowered to do. The High Court was required to determine if the Tribunal's actions were justified and whether the facts warranted such rectification.

3. Conditions for Recognizing a Provision under Section 37(1) of the Income Tax Act:
The court examined whether the assessee satisfied the conditions laid out by the Supreme Court in Rotork Controls India (P) Ltd. for recognizing a provision. These conditions, known as the "triple test," include:
- A present obligation as a result of a past event.
- A probable outflow of resources to settle the obligation.
- A reliable estimate of the obligation amount.

The court found that while the assessee met the first and third conditions, it failed to demonstrate a probable outflow of resources, as the damages were subject to future negotiations and not definite at the time of assessment. Thus, the liability was deemed contingent rather than ascertained, disqualifying it from deduction under Section 37(1).

Conclusion:
The High Court concluded that the assessee did not fulfill the "triple test" for recognizing the provision for liquidated damages as an allowable deduction. Consequently, the appeals filed by the Revenue were allowed, and the assessee's appeals were dismissed. The court left the first substantial question of law open for future consideration, as it had become academic in this case.