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TMI Blog1986 (5) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Pai. 2. The assessee is a cashew exporter. Certain liabilities towards foreign claims had been incurred in the accounting year relevant to the assessment year in question. There were four such claims in all. They are as follows: Rs. (i) Hollander Trading Corporation as per arbitrator's award dated 23-8-1977 and 28-8-1977 2,48,400 (ii) Gibbs Nathaniel as per arbitrator's award dated 28-2-1978 &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for a remand report from the ITO by his order dated 28-8-1984. The ITO submitted his report dated 24-1-1985. 3. The assessee's stand before the ITO was that there were certain contracts with the foreign parties for supplying of cashew kernels which could not be fulfilled. As a result of the assessee's failure to fulfil the contracts, the assessee had to compensate the foreign buyers to the extent the claims were settled through arbitration. Since the arbitration awards were passed in the previous year relevant to the assessment year 1978-79, the total amount of compensation ordered to be paid to the foreign parties by the assessee as a result of arbitration, had become the assessee's liability for the year of account. It was further stated that the assessee had also accepted the arbitration awards and, hence, there was no question of considering the liability as contingent liability. Based on a decision of the Tribunal, the assessee's counsel contended before the ITO that in view of the acceptance of the arbitration awards the amount payable as per the awards should be allowed as a proper business expenditure for the year of account. It was also contended that the Commissioner ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sence of correspondence or the assessee's failure to produce any correspondence arouses anybody's suspicion. Regarding the second and important point whether the liability should be allowed in this assessment year as an admissible deduction, relying upon the decision of the Allahabad High Court in the case of A.P.S. Cold Storage & Ice Factory v. CIT [1979] 119 ITR 709, he held that the existence of a mere award without any further legal formality creates only a contingent liability and the liability would fructify only in the event of the award being made a rule of the Court. He observed that there is not enough evidence regarding the acceptance of the awards by the assessee. He took support for the aforesaid view on the fact that the assessee has hotly contested in the suit filed by one of the parties, namely, Gibbs Nathaniel (Canada), in the sub-court of Quilon though ultimately the suit had been decreed in favour of that party. Regarding the finding given by the Commissioner (Appeals) that the amount payable as compensation was a debt owed by the assessee as on the valuation date, the Commissioner (Appeals) observed that even in respect of a contingent liability it is possible t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinguishable on facts. He relied upon the decision of the Supreme Court in Satish Kumar v. Surinder Kumar AIR 1970 SC 833 wherein in para 13 of the judgment their Lordships have referred to para 7 of the Schedule 1 to the Indian Arbitration Act and observed that if the award is final and binding on the parties, it can hardly be said that it is a waste paper unless it is made a rule of the Court. He contended that when once on passing of the award a liability is created, questioning of the award will not absolve the assessee from the liability. He took us through section 7 of the aforesaid Act wherein the pleas available to the party contesting the award are limited and it is not open for the party to challenge the award on merits. Commenting upon clause 5 of the conditions of sale wherein it is mentioned that the parties agree that judgment may be entered upon an arbitration award in any Court of competent jurisdiction he contended before us that the aforesaid clause is only to enable the Indian citizens to submit to the jurisdiction of foreign Courts so that an award may be enforced in New York or elsewhere. He contended that the aforesaid clause is only a formal clause which f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... competent jurisdiction." He contended that if section 3 is read with clause 5 of the conditions of sale mentioned above, it is clear that the parties have agreed that only after a judgment is passed by a Court having competent jurisdiction the award becomes efficacious. He, therefore, tried to distinguish the decision of the Supreme Court in Satish Kumar's case that the observation made by their Lordships at para 13 of the judgment making a reference to para 7 of the First Schedule of the Indian Arbitration Act will hold good only if no contrary intention is expressed by the parties which is evident from section 3. To controvert the argument of Shri C.K. Nair, the learned counsel for the assessee, that the decision relied upon by the Commissioner (Appeals), namely, A.P.S. Cold Storage & Ice Factory's case is a case where when the matter was pending in the Court it was referred to the arbitrators and the facts of the case are not applicable to the facts of the case in question, the standing counsel contended that Indian Arbitration Act provides only three kinds of references to arbitrators namely, (i) arbitration without intervention of Court (Chapter 2), (ii) arbitration with inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as, the aforesaid decision is rendered under the Indian Arbitration Act. We are now concerned with the question whether the amount of compensation payable became a liability of the year in which the foreign award is passed. We are not concerned with the enforceability of the award. Section 4 of the Foreign Awards (Recognition and Enforcement) Act reads as under: "(1) A foreign award shall, subject to the provisions of this Act, be enforceable in India as if it were an award made on a matter referred to arbitration in India. (2) Any foreign award which would be enforceable under this Act shall be treated as binding for all purposes on the persons as between whom it was made...." On a careful reading of section 4 mentioned supra, it is clear that unlike the position which stood earlier to 1937, with the passing of Arbitration (Protocol and Convention) Act and Foreign Awards (Recognition and Enforcement) Act, a foreign award is made enforceable in India, as if it were an award passed in India, such an award shall be treated as binding for all purposes on the persons as between whom it was made. Section 5 of the Foreign Awards (Recognition and Enforcement) Act lays down the procedur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at judgment may be entered upon an award in any Court of competent jurisdiction, the liability becomes a liability in praesenti only when it is made a rule of Court and not otherwise. We do not agree with this contention of the learned standing counsel as, in our opinion, it is a formal clause appearing in every agreement for enabling the Indian citizen to submit to the jurisdiction of foreign Court so that an award may be enforced in foreign Courts. We are, therefore, of the opinion that under section 4 a liability is created and it shall be binding for all purposes on the persons as between whom it was made and it is an allowable deduction. 7. The second ground taken by the assessee relates to the disallowance of Rs. 20,000 out of car expenses, sustained by the Commissioner (Appeals). Since the assessee has not pressed this ground, the appeal filed by the assessee on this ground is dismissed. 8. The third ground taken by the assessee relates to the claim under section 35B. The assessee has claimed salary paid to the extent of Rs. 26,100 and stationery amounting to Rs. 10,708, which were disallowed by the ITO. The order of the ITO is confirmed by the Commissioner (Appeals). Foll ..... X X X X Extracts X X X X X X X X Extracts X X X X
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