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TMI Blog1990 (6) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... contract for the supply of the machinery and a specific clause has been incorporated in the agreements that in case of delay, liquidated damages at a percentage of the total value of the contract had to be paid and, therefore, since admittedly there was a breach of contract by reason of the delay, the assessee had computed the damages payable for the period of the delay falling within the previous year and had made a provision in the accounts. The Income-tax Officer, was, however, of the view that in respect of one of the contracts, the delivery date was beyond the previous year and in the case of the other contract such damages occur only when the delivery was actually completed which was also beyond the previous year and, therefore, the deduction claimed could not be allowed. He also noted that for I the earlier assessment year 1978-79, the deduction had been allowed only after the delivery of the machinery. He was of the further opinion that the calculation of the damages also depended upon negotiation and hence the amount claimed could not be regarded as an accrued liability. 3. On appeal, the Commissioner (A) was of opinion that even though the delay occurred during the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 1/2% per fortnight or pro-rata for part of the work on the total value of the contract including escalation, subject to maximum of 5% of the final total contract price. In this respect you will give us Bank Guarantee immediately of 5% of the value of the contract valid till last consignment is sent from your works." There was also a force majeure condition in clause 11 which provided for extension of time if the assessee makes a claim in writing. An arbitration clause was also provided in the agreement. Even though the agreement stated that the delivery schedules are to be once again looked into and the final confirmation will be sent later, it is now not in dispute that according to the delivery schedule, several machinery parts were to be despatched from 15-12-1980 onwards in several instalments. However, the first crane was to be delivered by April, 1981 and the second by October, 1981 and the total value of the order was Rs. 1,42,82,346. The first machine was actually despatched only in October, 1982 and the second machine in October, 1983. It may be noted that immediately after the contract was entered into, the assessee had according to the terms of the contract extracte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accrual of liability for payment of damages. 7. In this context, we may refer to the situation that arose for the earlier assessment year 1978-79, which corresponds to the previous year ended 30-6-1977. In that year, from gross receipts relating to the supply of machinery by the assessee to M/s .Hindustan Shipyard Ltd. and M/s. Siemens India Ltd. the assessee had made a provision for liquidated damages of Rs. 2,58,630 and claimed deduction of that amount. They claimed that liquidated damages was referred for arbitration and subsequently, in the year ended 30-6-1979, there was an award reducing the liability to Rs. 1,03,647 and the assessee added back the difference of Rs. 1,54,983 to the profit and loss account of the previous year relevant to the assessment year 1980-81. In making the assessment for the assessment year 1978-79, the Income-tax Officer disallowed the deduction on the ground that the claim for damages was subject to dispute but on appeal, the Commissioner (A) granted the deduction of the amount of Rs. 1,03,647 being the finally determined amount of damages. Both the assessee and the Revenue appealed and the Appellate Tribunal held that the liability arose when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bilities, if properly valued on scientific basis, can be taken into account as trading expenses if they are sufficiently certain and capable of valuation and profits cannot be properly estimated without taking them into account [See Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 at 64 (SC)]. But, this is not to accept that the provision made for liquidated damages is a contingent liability. The stipulation in the contract clearly shows that the liability for liquidated damages is certain, accrued and is not to depend upon the happening of any event other than delay in deliveries. The only point in dispute in the present case is whether the liability for payment of damages should be taken at the point of time when the breach occurred or at the point of time when the assessee delivered the goods and raised the bill. The distance between these two points of time would make no difference if they happen to be in the same previous year and would make no difference even if they are in two different previous years, as in the present case of a company, the rate of tax is the same. The Revenue insists on the liability being accounted for only at the point of delivery on the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tipulated for." This shows that the claim for damages arises at the point of breach but the quantification of damages is subject to negotiation, though the ceiling of the amount is stipulated in the contract. As far as the assessee is concerned, the liability to pay damages arose at the point of time when the breach occurred i.e., when it failed to deliver on the due date, and at that point of time the liability accrued which as a prudent trader it could quantify and take into account by means of a provision. Since the agreements have already stipulated the amount, there was nothing wrong in adopting the same formula for computing the amount. All that has happened is since the delay stretched beyond the previous year, the assessee has apportioned the damages and has taken into account only that amount which is relatable to the delay that has occurred in the previous year in question. This is perhaps proper and rational and we can see nothing wrong in this method of accounting either in law or as a matter of method of accounting which has been consistently followed by the assessee, to which no objection was taken by the regular audit as well as by the tax audit. The department does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the clause in the agreements, the damages, though am with reference to the total contract price which obviously should include escalation, nevertheless, the provision for damages being an estimate, it should be in conformity with the rights accrued between the parties under the agreement. We may also add that the view we are now taking is not in conflict with the view taken by the Tribunal in the earlier years and is broadly in agreement with it. In these circumstances, we accept the claim of the assessee that the provision for liquidated damages must be allowed as a deduction but only upon verification of quantification as no one had gone into it, and if any waiver or rebate is allowed by the purchaser subsequently, the corresponding amount has to be brought to tax under section 41(1) in the assessment for the concerned assessment year. We direct accordingly. 10. The next item in dispute is with reference to the claim for weighted deduction under section 35C of the Income-tax Act, 1961. The assessee claimed this deduction in respect of three items :--- i. Contributions to Cane Development Council Fund ... Rs. 2,77,515. ii. Cash subsidy paid to cane growers for purchase of seeds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the provisions of this section, be allowed a deduction of a sum equal to one and one-fifth times the amount of such expenditure incurred during the previous year. (b) The goods, services or facilities referred to in clause (a) are the following:--- (i) fertilisers, seeds, concentrates for cattle and poultry feed, tools or implements, for use by such cultivators, grower or producer; (ii) dissemination of information on, or demonstration of, techniques or method of agriculture, animal husbandry or dairy or poultry farming, or advice on such techniques or methods; (iii) such other goods, services or facilities as may be prescribed. Explanation: In computing the expenditure with reference to which deduction under this section is to be allowed, the amount, if any, received by the company or co-operative society in consideration of or as compensation for, such goods, services or facilities shall be deducted. (2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure of the nature specified in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agriculturists. Different modes of incurring of expenditure can be adopted by an assessee depending upon its convenience and economies. Since the assessee was not paying the full price of the goods but was only paying the difference in the prices between the ordinary seed and the superior seed, the only practicable method of incurring that expenditure was by way of paying the difference in prices to the agriculturists on production of the bill for the purchase of the superior seed. We are convinced that such payment fell within the terms of section 35C and was eligible for the weighted deduction. We direct the Income-tax Officer to grant this deduction in respect of this expenditure also. 12. In respect of the third item of expenditure, the Income-tax Officer was of the opinion that only the supply of articles would be eligible for the deduction and not the expenditure incurred for the repair of the articles. The Commissioner (A) was, however, of the opinion that when a machinery or equipment is provided, it was an intrinsic part of the provision of such machinery to see that such equipment was in good repair and, therefore, expenditure for repairing it would also be eligible fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory site by the new road, that the acreage may also be increased and it would also help the assessee to receive fresher cane. The assessee accordingly made the contribution. The Income-tax Officer was of the view that the expenditure was a capital expenditure and could not be allowed as deduction in computing the profits and would also be ineligible for weighted deduction under section 35C because the body concerned was not an approved body under that section. On appeal, the Commissioner (A) agreed with the Income-tax Officer that the formation of the road did not afford any exclusive benefit to the assessee and, therefore, it was not an expenditure laid out for the purposes of business. 14. In the further appeal, the contention of the assessee is that the expenditure was laid out for the purposes of business and reliance was placed on the decision of the Supreme Court in L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293/4 Taxman 5 as well as that of the Karnataka High Court in Hindustan Machine Tools Ltd. (No.3) v. CIT [1989] 175 ITR 220. On the other hand, the revenue supported the orders of the authorities below and relied on the decision of the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Moreover, we find that the parenthetical clause in the test formulated by Lord Cave L.C. in Atherton's case [1925] 10 TC 155 (HL) was not brought to the attention of this Court in Travancore-Cochin Chemicals' case with the result that this Court was persuaded to apply that test as if it were an absolute and universal test regardless of the question applicable in all cases irrespective of whether the advantage secured for the business was in the capital field or not. We would, therefore, prefer to follow the decision in Lakshmiji Sugar Mills' case and hold on the analogy of that decision that the amount of Rs. 50,000 contributed by the assessee represented expenditure on the revenue account." In the case before us, it is not in dispute that the road did not belong to the assessee and the expenditure was not in the capital field. But, at the same time, the road facilitated the business operations of the assessee and, therefore, the expenditure must be held to be laid out for the purpose of business within the meaning of section 37. With reference to the claim for weighted deduction under section 35C, even though the expenditure facilitated the transport of seeds, since it was not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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