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TMI Blog1992 (7) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company prepares various designs and drawings and sends them on to its customers for their approval. On the said drawings and designs being approved, fabrication work starts. This task entails, inter alia, the purchase of raw materials locally. At times, the raw materials are imported by the assessee from abroad. 3. The terms and conditions on which the purchase orders are to be executed are in some cases contained in the purchase orders themselves. In certain other cases, the terms and conditions are incorporated in a separate document. It is unnecessary to notice in detail the various terms and conditions under which the purchase orders are executed by the assessee for its customers. It would suffice if we note one particular condition which has given rise to the controversy before us ; and that condition relates to " delayed delivery " of the machinery concerned. In all the contracts, the stipulated delivery period is guaranteed, the delay in the delivery inviting a penalty calculated at a certain percentage for each week of delay, subject to the maximum of the stipulated percentage of the value of either the undelivered portion of the machinery or even in some cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it transferred the penalty amounts payable under the delayed delivery clause to sundry debtors' account. 6. Later on, another variation was tried. Under this method, it raised bills against its customers in respect of only 95 per cent of the value of the job done. This obviously meant that the assessee had left out of reckoning the penalty of the maximum of 5 per cent leviable under the delayed delivery clauses. 7. In some other cases, on the assessee's giving a bank guarantee to the required extent, the customers used to pay the invoice amount in full, leaving the penalty matter to be decided separately. 8. In the context of its assessment to income-tax, the assessee was naturally faced with the problem of the treatment to be given to the penalty that it had rendered itself liable to pay, owing to the delay in the delivery of the machinery. Initially, it would appear, the assessee was claiming revenue deduction in respect of the penalty payable under the delayed delivery clause only in the year in which the waiver was determined. Subsequently, the assessee set up a claim that, the penalty payable under the delayed delivery clause being automatic and, what was more, the waiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t liability to pay the penalty had accrued, and that, consequently, the assessee was entitled to leave the said sum out of reckoning for purpose of computing its taxable income. 15. The aforesaid arguments did not find favour with the Assessing Officer who was in this regard impelled by the following considerations : (a) The delayed delivery clause in the agreement 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 if the assessee fails to execute the order by the specified date, the customer shall have the right to recover from the assessee as penalty 1/2 per cent of the order value per week of delay, subject to a maximum of 5 per cent of the order value/total price. Thus, the clause only states that the customer has a right to impose a penalty for delay in delivery. Any delay in delivery of the goods does not automatically mean that the assessee will have to forego 5 per cent of the contract value. (b) The assessee's contention that 100 per cent of the order value does not accrue to the assessee, is not correct. The assessee itself used to raise invoice for 100 per cent value of the contract. For Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts in the present case are identical...In view of the decision of the Allahabad High Court, the appellant is not entitled to deduct the sum.... ". (iii) All along it was the practice of the assessee to credit the contract billings account with the full invoice value of equipments supplied to parties. But during the previous year relevant to the two assessment years under consideration, the assessee made a departure from the said practice. In some instances, having credited the contract billings account with the full invoice value, the assessee subsequently transferred 5 per cent of the invoice value to sundry debtors account. In some cases, it credited the contract billings account with 95 per cent of the invoice value only. In certain other cases, having credited the contract billings account with the full invoice value, the assessee debited, on accrual basis, 5 per cent of the value of the invoices to the P. L. A/c. The said departure from the practice followed all along by the assessee could not be explained otherwise than by the fact that, in the relevant years of account, the assessee's income had gone up considerably. Hence, the departure could not be countenanced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the supply of the items concerned. A plain reading of the provisions of the delayed delivery clauses will indicate that the mere factum of delay entails penalty. What is more, the quantum of penalty is particularised or specified in the contracts. With the result, the moment the assessee delayed the delivery of the goods contracted to be supplied, the assessee's customers got a right to enforce the penalty clause. And concomitantly the assessee became liable to pay the penalty. This, taken in conjunction with the fact that the assessee did not at any time dispute its liability to pay the penalty, would mean that, by reason of the delay on its part, it lost its right to receive 100 per cent of the invoice value. Consequently, the assessee was justified in taking into account, on accrual basis, the penalty payable under the delayed delivery clauses. Further, in the year in which the assessee's customers actually waived, wholly or in part, the penalty imposable, the assessee had offered the sum in question for taxation. 22. No doubt, continued Shri Ramamani, the customers could extend the stipulated delivery period, or waive, wholly or in part, the penalty stipulated under the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce in that case (as in the case before us) the agreements stipulated the damages payable for delayed delivery, there was nothing wrong in the assessee's accounting for, on accrual basis, the damages stipulated in the said clauses. According to Shri Ramamani, the said decision squarely applies to the case before us. 25. Continuing his arguments, Shri drew our attention to the fact that the Allahabad case of Lachhman Das Mathura Das, referred to and relied upon by the lower authorities, was distinguishable. There, the mere failure of the contractor to perform his part of the contract by the time fixed by the contract or any extension thereof, did not automatically entail the levy of penalty. The significant requirement in that case was that the failure on the part of the contractor must have had the consequence of rendering the plant incapable of being used commercially and efficiently. This naturally entailed inquiries into the attendant circumstances with a view to ascertaining whether the failure on the part of the contractor had the direct consequence of rendering the plant incapable of being used commercially and efficiently. In the case before us, on the contrary, the mere f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... athura Das. In this regard, he also referred to and relied upon the following cases : (i) Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC) (ii) CIT v. Gemini Cashew Sales Corprn. [1967] 65 ITR 643 (SC) (iii) CIT v. Roberts McLean Co. Ltd. [1978] 111 ITR 489 (Cal.). 29. The second limb of Shri Alam's argument was that the case before us was one of change in the method of accounting - a change not supported by valid reasons. It is a matter of record that initially, the assessee was crediting to the contract billing account with the 100 per cent of the invoice value. Subsequently, it adopted different methods of accounting. In some cases, having credited the contract billing account with 100 per cent of the invoice value, the assessee transferred 5 per cent of the value to sundry creditors. In certain other cases, it credit the contract billing account with only 95 per cent of the invoice value. In some other cases, it debited the P L A/c with 5 per cent of the invoice value. According to the learned departmental Representative, the aforesaid departures from the method of accounting regularly followed by the assessee were resorted to only with a view to reducing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to succeed. 33. We have looked into the facts of the case. We have considered the rival submissions. 34. We may clear the decks as it were by dealing first with the eligibility issue relating to the cash compensatory support received by the assessee. With the 1990 amendment to sections 2(24), and 28 of the Income-tax Act, 1961, the decision of the Special Bench of the ITAT Delhi, in the case of Gedore Tools (India) (P.) Ltd., is no longer good law. The amendments are retroactive in effect. We, therefore, decline to interfere in the matter and dismiss the related grounds. 35. To turn now to the main issue of the case. In the case before us, the contracts for supply of machinery entered into by the assessee-company with its customers contained a delayed delivery clause. Obviously, time was the essence of the contract and hence the inclusion of the delayed delivery clauses. These clauses clearly stipulated not only the penalty payable for every week of delay in the delivery of the machinery contracted to be supplied by the assessee but also fixed a ceiling on the penalty that could be levied. It is a matter of record that the assessee did fail, in quite a few instan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase orders placed by the assessee's customers for supply of machinery invariably contain a delayed delivery clause. In certain cases, the said clause talks of penalty ; while in others, it talks of liquidated damages. For a fact, the lower authorities also have used both the terms. The use of these two different expressions, as we see it, does not have a material bearing on the issues involved before us, because section 74 of the Contract Act has done away with the troublesome distinction between 'penalty' and 'liquidated damages', by simple expedient of encompassing both 'penalty' and 'liquidated damages'. 41. The case before us is one of breach of contract. A contract may provide for unliquidated damages in the event of its breach, or again it may provide for liquidated damages for its breach. It is well-settled that a claim for liquidated damages stands on the same footing as a claim for unliquidated damages. The only difference is that, in the former case, should a dispute arise, the injured party can get reasonable compensation not exceeding the stipulated maximum. This is by virtue of the provisions of section 74 of the Contract Act. It is equally well-settled that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lauses, the assessee and its customers had assessed the damages at which they rate the breach of the delivery schedule, and had incorporated their assessment into the contracts. And the assessee did delay the delivery of the goods on some occasions. But the basic fact and indeed the one that holds the key to the issue before us is that the assessee did not dispute its liability to pay liquidated damages under the delayed delivery clauses. It did not go to the court of law, invoking the provisions of section 74 of the Contract Act ; nor did it seek a reference of the matter to an arbitrator. All that it did was to approach its customers with a plea for waiver, citing various extenuating circumstances such as : (i) prolonged and progressively increasing power cut during the relevant period ; (ii) delay occasioned by those who were to execute sub-orders ; (iii) labour absenteeism ; (iv) change in Government policy, necessitating the obtaining of N.O.Cs. from SAIL/MMTC ; (v) force majeure such as floods, and the like. As we see it, the very plea for waiver is itself an admission on its part that it had committed breach of contract, by failing to stick to the delivery schedule, thereb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, wholly or in part, does not have the effect of postponing the accrual of the liability of the assessee to pay liquidated damages to the point of time when its plea was accepted, wholly or in part, by its customers. 47. We, therefore, hold that the assessee is entitled to succeed in its claim. 48. One of the points urged by the learned Departmental Representative, it may be recalled, was that in the case before us, the assessee had changed its method of accounting without sufficient cause and that consequently, it was not entitled to its claim. As we see it, this argument, missing as it does the essence of the mercantile system of accounting, is without force. The method of accounting does not determine the ambit of taxation. This idea was elucidated by the Madras High Court in the case of CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 thus : " In the mercantile system of accounting credit entries are made in respect of amounts as soon as they became legally due and even before they are actually received and similarly the expenditure for which legal liability has been incurred, are immediately debited even before the amounts in question are actually disbursed. The poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances. And the enforcement of the guarantee was contingent upon the happening of many events. It was, therefore, held in that case that the assessee could not rely merely on the factum of its having furnished a bank guarantee either to claim that no income had accrued to it, or to contend that a liability in prasenti had accrued. The said decision, therefore, cannot avail the department. 51. In view of the foregoing, therefore, we hold that the assessee is entitled to succeed in its claim. We accordingly direct the Assessing Officer to allow the assessee's claim. He is, of course, free to verify the arithmetical accuracy of the claim made by the assessee. Again, needless to add, as respects the assessment year 1985-86, in the view that we have taken of the matter, there will be no need to make the adjustments that the Assessing Officer had made in a sum of Rs. 4,45,286 ; and the quantum of the revenue deduction admissible to the assessee would be determined strictly in accordance with the liability in respect of the liquidated damages that had accrued during the previous year relevant to that assessment year. 52. In the result, both the assessee's appeals are partly all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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