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TMI Blog1996 (6) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue and it relates to the claim of " weighted deduction " under section 35B of the Income-tax Act, 1961 (hereinafter referred to as " the Act "). The questions referred at the instance of the assessee are the following : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the claim for deduction of the damages payable by the assessee to foreign companies for breach of contracts was allowable only if the claim had been crystallised during the relevant accounting period ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim for damages will be crystallised only when a claim is actually made by the foreign company and the same is either accepted or determined by negotiation or by arbitration or by suit ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim for damages to the extent of Rs. 12,51,625 had not crystallised during the accounting period relevant to the assessment year 1978-79 ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in not relying upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, California, through agents Messrs. Richard Franco Agency, New York, at $ 1.30 per pound and the assessee defaulted to fulfil the contract for the reason that it could not procure raw nuts as the price of raw nuts has risen considerably. It further discloses that the agreement of contract provided for arbitration in case of breach and by letter dated January 31, 1978, Messrs. Los Angles Nut House referred the case for initiating arbitration proceedings against the exporter. It appears that the assessee on receipt of the copy of the reference made by the above foreign company without waiting for the outcome of the arbitration proceedings, made a provision in the accounts for the claim of damages of Rs. 10,49,750 being the value of the 2,600 cases of kernels. Likewise the assessee claimed deduction of Rs. 2,01,875 being the damages arising out of the default made by it in fulfilment of the contract for sale of 950 cases of cashew kernels to Messrs. International Emporium, West Germany. The said foreign company claimed damages for the aforesaid breach of contract as per its letter dated March 1, 1978. However, the Income-tax Officer has observed that the aforesaid claims are inadmi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed only when there is an accrued liability. It cannot be said that when the liability is shown in the accounts it has accrued eo instanti. In channelising the above argument, counsel for the assessee placed reliance on section 73 of the Contract Act. The first paragraph of the said section is thus : " When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. The above provision provides that where a party suffers a loss or damage in consequence of a breach of contract, he is entitled to recover compensation from the party breaking the contract. It is a protection available to the injured party and not to the party who has broken the contract. The assessee who has broken the contract cannot argue that a liability has accrued against it for the reason that the right to recover compensation from the assessee is recognised in the said provision. Therefore, under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts compensation as a result of the fiat of the court. Therefore, no pecuniary liability arises till the court has determined that the party complaining of the breach is entitled to damages. " The Division Bench of this court while considering exactly a similar claim by an exporter-assessee observed in Asuma Cashew Co. v. CIT [1990] 182 ITR 175 thus : " On these facts, the Tribunal held that the liability of the assessee to pay compensation will arise or be crystallised only when the liability to pay damages is adjudicated and the liability itself is determined and accepted by private negotiation or is determined by an arbitrator or by a court. In other words, it was held that an enforceable liability will spring into existence only when it was determined and fixed by the arbitrators and not when the breach occurred as contended by the assessee. We see no error in the said reasoning and conclusion of the Tribunal. " In view of the above decisions, it is arduous for this court to countenance the contention of the assessee that there is an incurred liability in this case. The said contention is, therefore, rejected. As pointed out earlier, the assessee did not wait for the out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue points out that there is a factual error in so far as the payment of compensation to the foreign company is concerned in the order of the Tribunal and hence is liable to be clarified. What the Tribunal observed in the order is this : " He took note of the fact that the amount has not been actually paid and that it was adjusted against amounts receivable against subsequent shipments." Counsel for the Revenue submits that what the Tribunal observed above is a mistake and the correct position is stated by the Commissioner of Income-tax thus : " The compensation has not been paid yet because according to learned counsel trade with the U. S. A. is slack and no export has taken place subsequently. He points out that the claim will be adjusted against the amount receivable by the appellant in respect of the subsequent shipments." Therefore, it is clear that the Tribunal has misunderstood the statements contained in the order of the Commissioner. Thus, it is crystalline that the compensation claimed by the foreign companies has not been paid by the assessee. In view of the discussion hereinabove, we answer questions Nos. 1 to 4 referred to us at the instance of the assessee in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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