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TMI Blog2003 (1) TMI 269X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 1-4-1987 with the said company, in terms of which M/s. Mysore Lamp Works undertook to supply specified goods as per the requirements of the assessee-company. In its turn, the assessee entered into certain agreements with its stockists and dealers. Those agreements, allegedly, contained in a circular letter dated 25-3-1987, a copy of which may be seen at page-227 of the assessee's paper-book Vol. I, are identically worded, except for the difference in the target fixed by the assessee for each stockist/dealer. As the main controversy in this appeal revolves round the so-called agreements with the stockists, the said circular letter is reproduced hereunder. The letter to one of the stockists, M/s. Vijaya Agencies, Karimnagar, filed before us, reads as under- " Date: 25-3-1987 To M/s. Sri Vijaya Agencies, D. No. 4-1-63, Mahavir Road, Karimnagar-505001. Dear Sirs, We take this opportunity to convey our grateful thanks to you for the unstinted cooperation extended to us in marketing our goods. We are aware of your great enthusiasm and interest in expansion of your market activities which would be possible only on our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court, which fixed the damages alongwith interest at a round sum figure of Rs. 4 crores. We are not concerned in this appeal with either the quantum of damages received by the assessee from M/s. Mysore Lamp Works or the year of its receipt or the year of taxability, except to a very limited extent mentioned in ground No.2 quoted above. We are mainly concerned in this appeal with the claim of the assessee for deduction of an amount of Rs. 3,11,18,213 which was claimed by the assessee as deduction, being the liability for damages incurred by the assessee towards its stockists. 4. So far as ground No. 2 is concerned, the case of the assessee is that out of Rs. 4 crores alongwith interest awarded by the Hon'ble Supreme Court, vide its judgment dated 18-9-1997, the assessee had returned an amount of Rs. 1,15,27,120 in the assessment year 1996-97, and the same was also brought to tax in that year. 5. Written submissions of the assessee on Ground No.2 read as under:-- "As per Supreme Court order (Item No. 14 on pages 217-226 of Paper Book No. 1), Assessee received Rs. 4 crores as full and final settlement of the claim under arbitration for the dispute between assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain letters ostensibly written by the dealers and stockists to the assessee-company claiming losses, and he brushed them aside as of general nature. He has summarised his findings on pages 4 and 5 of his order as follows-- "(i) The only letter of agreement seems to have been designed prior to even anything of a formal agreement with MCW. (ii) These letters have unilaterally fixed targets to be achieved by the stockists and dealers by the assessee himself. (iii) There is no formal contractual agreement on the part of any of the dealers. (iv) As the term goes 'Dealers and Stockists', as is the practice do not deal with any specific product of an exclusive company but would deal with products of various companies in the same line. (v) The letters ostensible written by the dealers intimating losses are general and Vague. They do not relate to specification of business nor quantify the financial losses which the assessee seeks to claim now. (vi) The letters in short are self-serving." He relied mainly upon the decision of the Apex Court in the case of Bharat Earth Movers Ltd. v. CIT [2000] 245 ITR 428 , which lays down the characteristics of accrued liability eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sd/- Proprietor." The above letter is followed up by another letter dated 10-7-1988 which is filed at page-75/8 of the Paper-book, and reads as under-- "Translation from Telugu Date: 10-7-1988 Vijay Agencies 1/128, Main Bazar, Nandyal-518 501 To Coromandel Marketing India, 3-6-155, Liberty Road, Himayath Nagar, Hyderabad. Respected Sir, Till now, we have extended our cooperation to you uninterruptedly, but you are not extending your co-operation to us. We are unable to understand the reason for this. Due to lack of stocks, we are not in a position to move in the market. To ensure sales as per the target fixed by you in sales of Bulbs, we have in reduced schemes in the local market with lot of expenditure. Instead of sending us the Bulbs as per the Target fixed by you, you have not at all sent any Bulbs to us so far. As the time is over, the shopkeepers are demanding for Scheme. Hence, we are put to loss due to this scheme. You will have to shoulder responsibili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a position to supply as per your target, then to put a target to us is waste. We have thought that if you supply as per target fixed to us, but you are not supplied the same. So, due to that we are incurred heavy loss by way of business and reputation. So please we are requesting you to supply sufficient goods in future to avoid further losses and business improvement. If you not supply the sufficient stocks in future you are only responsible for our loss occurred. Thanking you Sir, Yours faithfully, for Sri Vijaya Agencies. Sd/- Manager ...." The above letter is followed up by a further letter dated 20-9-1988, a copy of which filed at page 75/13 reads as under- "..... Date: 20-9-1988 To M/s. Coromandel Marketing (India) Pvt. Ltd., Hyderabad. Dear Sir, We are written several re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- Proprietor..." Subsequent follow-up letter of the said concern, dated 7-7-1988 copy of which is filed at page-75/6 reads as under- ".......... Date: 7-7-1988 To Coromandel Marketing (India), Liberty Road, Himayathnagar, Hyderabad. Greetings to the above Addressee. It is more than six months, since you have sent the stocks. If you do not send the stocks, we will not be in a position to recover our dues from the market. Moreover there is every likelihood of the Market even forgetting name of our Bulbs. Once you have fixed the target, you have not at all sent any Bulbs. We have introduced various Schemes to reach your target. You only will be held responsible for the losses sustained by us on account of the said Schemes. Don't you feel ashamed of yourself to be such irresponsible. Aren't you responsible for the miseries and losses sustained by us. Apart from your business we are doing the business of some other goods also. We are feeling shame to enter in the market. Now please stop dialogues. Please inform us as to when you are sending the Bulbs. If you send t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egularity supply and replacement are accruing more and more on previous supply as quality (fusing immediately particularly 60W, 40W and 100W bulbs) And the outstanding due is high the Agent has not paid and the more over problems he is explaining. 5. Kakinada--Here also I faced the same problem and outstanding due is high and replacement goods are laying there. The electrical dealers asking the explanation for the quality defects as we had having very good quality of product comparing with other competitor brands even. 6. Rajahmundry--The Agent is refused to pay dues as the replacements are there, to settle--And market is suffering due to irregular supply and ultimately competitions took advantage. Please this is the situation which very use never found ever. And kindly see that primary orders must be despatched of all waltages, and ensure the stock position properly. And please follow up with in manufactures as quality is very bad. And the suppliers are like this we will loose complete market. And agents are not willing to continue further. Thanking Yours faithfully, Sd/-... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods, CMI could not honour its own commitment to third parties and the good reputation built up in the market over the years was damaged (vide Exs. C-670 to 687). The credibility of CMI slowly but steadily got eroded. Stockists claimed damages consequent upon CMI's failure to supply the goods. The direct effect of it was that CMI could not enforce and recover the amounts due to it from its stockists. Since the stockists failed to pay back their dues to CMI, payments by CMI to its creditors also got stifled. This damaged the reputation of CMI with its creditors. The Companies like HMT, APLL which had earlier given clean credit facility in supplying stocks to CMI, began to have reservations, Clean credit facility which was forthcoming till then was discontinued and several conditions were placed on CMI for receiving supplies. Consequently CMI's image in the eyes of its creditors and suppliers got tarnished." In the light of the above discussion by the arbitrator about the claims made by the stockists on the assessee-company, it is claimed that there is an accrued liability for the payment of Rs. 3,11,18,213 by way of damages, and so, it deserves to be allowed. The learned counsel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in the circular letters spelt out nothing of that sort. The circular letters only contained the targets unilaterally fixed by the assessee, for being achieved by the stockists/dealers, though they are agreed to by the stockists. The assessee cannot claim any damages if the corresponding stockists failed in reaching the targets, and vice versa the stockists cannot claim any damages if the supplies are not made by the assessee-company. The so called agreements contained in the circular letters do not even stipulate for the arbitration proceedings in case of disputes. The assessee has not committed himself to anything apart from expression of a vague hope that the supplies would be made. The learned DR pleaded that only liquidated damages or damages that can be quantified with some definiteness can be allowed as a deduction under section 37 of the Income-tax Act, even when the system of accounting followed by the assessee is mercantile system, as in the present case. In support of this proposition, he relied upon the decision of the Apex Court in Bharat Earth Movers Ltd.'s case and the decision of the Hon'ble Kerala High Court in N. Sundareswaran v. CIT [1997] 226 ITR 142 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of losses incurred by the concerned parties. No legal proceedings have been undertaken by these parties against the assessee, and so, there is no ascertained liability on the part of the assessee towards its stockists. With regard to the credit notes allegedly sent by the assessee, we have specifically enquired of the learned counsel for the assessee whether the postal acknowledgements in support of the action of sending the credit notes are available. He has mentioned that no such acknowledgements are available. In the circumstances, the claim of having sent the credit notes is also not established. In the year of account relevant for the assessment year 1998-99, what was paid was only an amount of Rs. 31,48,048. There is a huge gap of almost a decade between the receipt of letters from the stockists, which took place in 1988, and the so-called sending of credit notes in 1997. There is an yawning gap of almost a decade between the unquantified claims of stockists and alleged entertainment of those claims by way of sending credit notes, which, as already mentioned, is not established. 16. The evidence tendered by the assessee, in the form of letters received by it from stockists/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re date on which the liability shall have to be discharged is not certain." We are of the view that in the present case, the liability has not definitely arisen in the accounting year relevant to the assessment year 1998-99. It is not a case where merely the quantification has been postponed. There are no parameters obtaining in the accounting year relevant for assessment year 1998-99, for effecting quantification of the claims of the stockists. The claims must have been settled through mutual negotiations, and it must by held that the claims were settled in the year of payment. In the year of account relevant for assessment year 1998-99, only an amount of Rs. 31,48,048 has been paid. The learned Departmental Representative conceded in principle, the claim for deduction of Rs. 31,48,048 being the payments made in the year of account relevant for the assessment year 1998-99, but at the same time, wanted the matter to be remanded to the Assessing Officer for verification of the genuineness of the claim of payment of Rs. 31,48,048. We do not see any reason for acceding to this part of the request. Assessee's accounts are audited, and the Assessing Officer has not doubted the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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