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TMI Blog1999 (5) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... 1984-85 ?" The assessee, Todi Tea Co. Ltd., has entered into a contract with Taurus Foundry Private Ltd. During the course of assessment, the Income-tax Officer found that the assessee has created a liability of Rs. 10 lakhs in the previous year, relevant to the assessment year 1984-85. The assessee-company claimed that the assessee has a liability to pay, by way of damages to Taurus Foundry Pvt. Ltd., of 33A, J. L. Nehru Road, Calcutta. It was submitted before the Income-tax Officer that the assessee-company had entered into an agreement with Taurus Foundry Pvt. Ltd., by a letter dated December 15, 1982. As per that letter, the assessee agreed to supply three lakhs Ps. of made tea from its garden during the period July to December, 1983, to Taurus Foundry Pvt. Ltd. By a letter dated December 20, 1982, signed by the director, Sri B. M. Beriwal, Taurus Foundry Pvt. Ltd., agreed upon the stipulation laid down in the said letter dated December 15, 1982. Subsequently, Taurus Foundry Pvt. Ltd., reminded the assessee by various letters of its commitment, but the assessee-company in spite of various reminders by Taurus Foundry Pvt. Ltd., did not respond and could not keep its commitment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered that if the assessee has not debited the anticipated loss then the loss will be allowed on the basis of the mercantile system of accounting. He also drew our attention to the observations of this court where it is observed that in case the assessee admits part of the loss or liability and entries made in the books of account to that effect, to that extent the liability can be allowed if the assessee is following the mercantile system of accounting. Whether the transaction for sale of tea was genuine or not the Commissioner of Income-tax (Appeals) has considered the matter in his order. Though for the purpose of resisting Taurus's claim of damages of Rs. 30 lakhs, the appellant as per its letter dated November 7, 1983, had claimed that the agreement dated December 15, 1982, was not a final or concluded contract, I find that the relevant agreement in fact amounted to a valid enforceable contract. As per its letter dated December 15, 1982, the appellant had offered to supply three lakhs kilograms of CTC tea during the period from July to December 1983, as requested for by Taurus, subject to various conditions mentioned in clauses 1 to 15 of that letter. A concluded contract had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leted." The facts are not in dispute that the Commissioner of Income-tax (Appeals) as well as the Tribunal found that there was a contract between the assessee and Taurus Foundry Pvt. Ltd. Under that contract, the assessee agreed to supply 3,00,000 kgs. of made tea from its garden during the period from July to December, 1983. The assessee has failed to supply that tea and sold its tea in the open market. On account of breach of contract, Taurus Foundry Pvt. Ltd., claimed compensation of Rs. 30,00,000. In arbitration the arbitrator allowed Rs. 17,00,000 as and by way of damages and/or compensation to Taurus Foundry Pvt. Ltd. During the course of hearing before the arbitrator in arbitration proceedings, the assessee offered Rs. 10,00,000 as compensation but the compensation awarded was Rs. 17,00,000. That award was challenged before this High Court. Meanwhile the matter was settled out of court on payment of Rs. 10,00,000 to Taurus Foundry Pvt. Ltd. That settlement was also reduced into writing after payment was made, though it is not in the normal course that payment was made and thereafter the settlement is reduced into writing after 6/7 months. But when there is no dispute betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oundry Pvt. Ltd., and on breach of contract the assessee has created liability of Rs. 10 lakhs and ultimately paid that amount, the amount of compensation which is payable by the assessee to Taurus Foundry Pvt. Ltd., should be allowed as deduction when the amount has been paid for the purpose of business or in due course of business. Lastly, learned counsel for the Revenue, Sri Mallik, argued that the amount of Rs. 10 lakhs liability cannot be allowed in this year as the amount has not been settled finally for the year under consideration nor the payment has been made in the previous year relevant to the assessment year in question. The facts are not in dispute that the year ending in this case is March 31, 1984, and payment has been made thereafter. But we cannot ignore the fact brought to our notice, by learned counsel for the assessee, that the assessee is following the mercantile system of accounting. Therefore, on the basis of admission of liability the assessee can claim the deduction of the liability created in its books. The liability is not only created but finally the amount has been paid by the assessee under the settlement, out of court. In CIT v. Shewbux Jahurila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs but in cases where the part of the liability is admitted that can be allowed in that year itself and the balance can be allowed when the dispute is finally settled. In the light of the above discussions, question No. 1 pertains to the finding of the Tribunal whether there was a full and final settlement regarding payment of Rs. 10,00,000 between the parties in March, 1984. We perused the order of the Tribunal. There is no such finding of the Tribunal. On March 14, 1984, is the date of the award. The Tribunal found that after executing the memorandum of settlement on March 26, 1984, it was agreed that the assessee-company would apply to the High Court for setting aside the arbitrator's award in so far as it related to payment of the balance amount of Rs. 7,00,500. Therefore, this question is misconceived. Question No. 2 relates to the fact whether the finding of the Tribunal regarding the fact that the assessee moved the Calcutta High Court in Matter No. 338 of 1986 for setting aside the arbitrator's award dated March 14, 1984, in so far as it relates to payment of the balance amount of Rs. 7,00,000 only. Counsel for the assessee brought to our notice the memorandum of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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