TMI Blog2007 (3) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to the period falling within the relevant accounting year has imported an accrued liability on the assessee, for which a reasonable provision made in the books of account is deductible, while computing the profit from the said contract works, of the year under appeal, though that liability was to be discharged at a future date. The view we have taken above is further strengthened and supported by the logic or the reasoning that is being applied in holding that the monies retained by the contractee from the bills raised by the contractor till the obligation of satisfactory completion of the contract work is fulfilled would not amount to income of the contractor of the year in which the amount is retained. We may hold that till the assessee discharges its obligation to pay liquidated damages on account of delay caused by the assessee in executing the contract work, sum equal to the estimated liability of liquidated damages payable by the assessee to the contractee would not accrue to the assessee as income in the year in which the bills were raised. This view is further strengthened by the decision in the case of Oil and Natural Gas Corporation Ltd.[ 2003 (4) TMI 438 - SUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f, subject to a maximum of 5 per cent. of the total value of the contract, if the boiler parts of 110 Ata boiler package is not delivered by the end of 18th month. In the case of Chemical and Plastics India Ltd., the provision has been made only of Rs. 27,525, which was subsequently settled between the parties. We, therefore, restore this issue back to the file of the Assessing Officer for a limited purpose with a direction that the Assessing Officer should ascertain and determine the accrued liability pertaining to the year in question, in respect of the liquidated damages in the light of the terms and conditions of the contract agreement, and then to allow the same as a deduction from the profits in the year under consideration. The assessee shall be at liberty to furnish the actuarial valuation in respect of the assessee' s accrued liability on account of liquidated damages for the delay caused by the assessee in erecting or commissioning the contract work as per the terms of the contract agreement. This ground is, thus, decided accordingly. - C. L. Sethi Judicial Member And Ahmad Fareed Accountant Member For the Appellant : H. P. Mahajani and R. D. Onkar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... damages accrued owing to delays/defaults was made as at the balance-sheet date. Copies of such clauses extracted from the concerned four contracts are enclosed herewith. Such a clause is a common practice worldwide vis-a\x7f vis long term contracts of the nature executed by the company for manufacture and supply of large items of equipment. So also, delays in execution of such long terms contracts are a common occurrence and imposition of liquidated damages under contractual terms on that account is a well known incident. Furthermore, in view of the involvement of technical issues on both the sides namely, the manufacturer and the buyer of the large plants/equipments invariably negotiations take place between the company and the parties concerned for eventual crystallisation and settlement of the liquidated damages despite the specific clause relating thereto which prima facie is legally enforceable. Thus very often the amount of liquidated damages determined for final settlement is lower than the amount as quantified in terms of the clause relating thereto. This scaling down of the amount of liquidated damages as quantified on the facile application of the relevant clause in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... With reference to Madras Fertilisers Limited, contract the amount is yet unsettled and negotiations are still on. 3. Cheapest amount of liquidated damages was settled at Rs.27,725. 4. Cochin Refineries agreed in November, 1997 to restrict liquidated damages to Rs. 7,90,000. With this hindsight provided by subsequent years you will kindly appreciate that the provision made in respect of the four contracts in the books of account on account of liquidated damages was reason able and correct in line with the accrual basis of accounting. 5. After considering the submission of the assessee, the Assessing Officer disallowed the assessee' s claim by observing as under : I have considered the submission and found that the same is not acceptable. The assessee has filed no evidence that the provision made is actually payable. There is no certainty even on the quantum of provision made by the assessee in its books of accounts. In the case of Cochin Refineries itself liquidated damages are only Rs. 7,90,000 as against a provision of Rs. 10 lakhs made by the assessee. The pro vision made by the assessee is therefore contingent in nature and may or may not be payable. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iquidated damages due as per terms of the contract which would, of course, be subsequently reduced or waived. If the company were to ask for a letter of confirmation from the buyer to the effect that monies so retained were due to it, the buyer would refuse to do so as to it would then tantamount to immediate waiver of liquidated damages. From the subsequent developments in this regard which are on record you will also appreciate that the provision in each case was reasonable and not extravagant. 8. After considering the assessee' s submissions as well as the Assessing Officer' s order and a number of decisions of the various High Courts and the Supreme Court, the Commissioner of Income-tax (Appeals) has confirmed the Assessing Officer' s order. While deciding the issue against the assessee, the Commissioner of Income-tax (Appeals) has made following observations at : Pages 10 and 11 : I have considered rival submissions. As per the contract between the appellant and its customers, the amounts billed to the customers indicate amounts covered by delivery of goods and rendering of services, up to a pre-determined stage of the total project. Thus, the entire am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted before the Assessing Officer and also during the appellate proceedings. Other wise the appellant would not make a provision but it would book it as expenditure by debiting to profit and loss account and crediting the respective customers' account . . . Pages 19 and 20 : Ordinarily, the appellant receives all the money as per the con tract, inclusive of the so-called liquidated damages against giving the customer, an unconditional guarantee of a bank or a bond. Thus whatever is received in the course of business is undisputedly the part of the turnover. Any profit embedded or hidden in such turnover must necessarily be taxed no sooner the right to receive the same is vested in the appellant or when it is actually received, whichever is earlier. Although the charge of income tax is on accrual and/or receipt basis, the earlier opportunity must be availed of by the Assessing Officer because there is no choice available to the Assessing Officer to tax the income on subsequent receipt basis . . . Pages 23, 24 and 25 : Finally, when the customers of the appellant find, after commissioning/completion or erection of the system or plant and machinery as the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer in respect of the liquidated damages along with the copies of the contracts, correspondence with the customers etc., which are placed at page 20 of the paper book. He has also made a reference to the Accounting Standard, AS-7, issued by the Institute of Chartered Accountants of India and, then contended that the event giving rise to the assessee' s liability to pay liquidated damages for making delay in completing the work had actually taken place in the current accounting year in which the provision for deduction of liquidated damages has been made in the books. It was further contended that all the revenue in respect of the contract work, of which execution was delayed by the assessee, has been booked in the accounts in the year under consideration and, as such, the provision for corresponding liability of damages payable for the delay in completing the work has been accordingly made in the accounts of that year. In support of the assessee' s claim that the deduction for liquidated damages for delay in executing the work is allowable as deduction when a condition regarding date of delivery or executing the work is breached, the assessee has referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) CIT v. Swadeshi Cotton and Flour Mills P. Ltd. [1964] 53 ITR 134 (SC) ; (3) Alembic Chemical Works Ltd. v. Deputy CIT [2004] 266 ITR 47 (Guj) ; (4) CIT v. Ratlam Strawboard P. Ltd. [1985] 152 ITR 425 (MP) ; and (5) CIT v. Phalton Sugar Works Ltd. [1986] 162 ITR 622 (Bom). 13. In a reply to the arguments advanced by the learned Commissioner of Income-tax-Departmental representative, the assessee' s learned authorised representative Shri R. D. Omkar has given notes in writing as under : The Departmental representative has in the note raised two points viz. 1. As per the Contract Act, liquidated damages accrue only when liability is adjudicated upon. The learned Departmental representative has enclosed the photocopy of page No. 678 from the book on Indian Commentary on Contract and Specific Relief Act, J. L. Kapur, 10th edition wherein it is stated as follows : ' A claim for liquidated damages stand on the same footing as a claim for unliquidated damages. A claim for unliquidated damages does not give rise to a debt until the liability is adjudicated upon the damages assessed. A party in breach of contract does not incur eo instanti a pecuniary liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the terms and conditions of the contract entered into by the appellant with its customers are in pari materia and squarely meet the criteria laid down by the hon ble Supreme Court as stated above in the said decision. The said criteria are summarized as follows : 1. there is a stipulation in the agreement as regards delivery to be made within the period and levy of liquidated damages for delay occurred in the supply of material in time on the part of the supplier i.e., the appellant. 2. the customers of the appellant have recovered the amounts towards liquidated damages as per the clause in the contract. 3. the appellant has accepted that the delay has occurred on its part in supplying the material in time and has not denied or disputed its liability thereof to pay the liquidated damages to its customers. 4. the stipulated term as regards liquidated damages does not in any manner suggest that it is by way of penalty or in any way unreasonable. 5. in certain contracts it is impossible to assess the damages or prove the same and such a situation is taken care of by sections 73 and 74 of the Contract Act and in the present case by specific terms of the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing extent : Name of the client Provision made Chemplast Ltd. 27,525 Cochin Refineries 10,00,000 Kanoria Chemicals Ltd. 13,62,000 Madras Fertilisers Ltd. 16,83,855 17. The question that arises for our consideration in this appeal is as to whether, in the light of the facts and circumstances of the present case, the provision made in the books of account for meeting the liability on account of liquidated damages payable for the delay in erecting and commissioning the work on the part of the assessee is an admissible deduction from the profit of the current year. In other words, the question to be decided in this case is as to whether a business liability on account of liquidated damages payable for the delay in commissioning or erecting the work has definitely arisen in the current year in which the provision is made in the books of account, irrespective of the fact that the liability on account of liquidated damages may have to be discharged at a future date. To decide the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee was a dealer in the landed property and carried on land developing business. During the course of business it bought land, developed it to make it fit for building purposes and sold it at a profit in plots. On sale of plot, the assessee received 25 per cent. of the purchase price in cash and the balance amount as received in 10 annual instalments with certain rate of interest. The debt was secured by creating a charge on the land purchased. It was the responsibility of the assessee to carry out the developments including laying out roads, provision of drainage etc. within a reasonable time. The assessee followed the mercantile system of accounting took into account full sale price of the land sold during the accounting year though only some percentage of the same was received by him. The assessee estimated certain sum as expenditure for the developments to be carried out in respect of the plots which had been sold during the year and debited the same in the books of account on the ground that the liability for the said sum had actually arisen as the assessee was bound to provide the facilities that it had undertaken to do, even though no part of that amount represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or even extinction of the liability, would not have the effect of converting that liability into a contingent liability ; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated. 21. The ratio in the aforesaid decisions of the hon ble Supreme Court in the case of Calcutta Co. Ltd. [1959] 37 ITR 1 and Metal Box Company of India Ltd. [1969] 73 ITR 53 (SC) were applied by the hon ble Supreme Court in its later decision in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC), where it was held thus as under (extracted from the headnote) : If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er year, so that it was also allowable, following the decision of the hon ble Supreme Court in the case of Bharat Earth Movers [2000] 245 ITR 428 which, however, related to a case of leave encashment but the rational of the hon ble Supreme Court decision in the case of Bharat Earth Movers [2000] 245 ITR 428 should have an application for warranty cases as well. As regards the warranty claims, the Kerala High Court followed not only the decision of the hon ble Supreme Court in the case of Bharat Earth Movers [2000] 245 ITR 428, on leave encashment but also a decision of the hon ble Supreme Court in the case of Calcutta Co. Ltd. [1959] 37 ITR 1 (SC) in support of the principle that certain liability in future is not a contingent liability. 24. The Privy Council in the case of IRC v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 specifically on the subject of warranty has also taken a similar view by observing thus (headnote) : The taxpayer' s liability under the warranty for each vehicle sold was contingent on a defect appearing and being notified to the dealer within the warranty period so that no liability was incurred by the taxpayer until those conditions were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore requires that this amount should be brought into account as a deduction from income in estimating the profits or gains of the business in the year in which the vehicles were sold. 26. The aforesaid decision of the Privy Council in the case of Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 was followed by the hon ble Delhi High Court in the case of CIT v. Vinitec Corporation P. Ltd. [2005] 278 ITR 337 where it was observed that when it was not disputed that warranty clause is part of the sale document and imposes a liability upon the assessee to discharge its obligation under that clause for the period of warranty, it is a liability which is capable of being construed in definite terms, which had arisen in the accounting year, may be its actual quantification and discharge is deferred to a future date. Once the assessee is maintaining its accounts on the mercantile system, the liability accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. The hon ble Delhi High Court has also taken note of the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods were sold, the assessee was entitled to deduct from its profit the provision which it had made for the costs of its anticipated liabilities under outstanding warranties in respect of the goods sold in that year, the quantification thereof being based on statistical information. It was further held there that occurrence of the warranty claim has to be viewed from an overall perspective so as to match the costs vis-a-vis the sales revenue of a given period. In this sense and the issue being considered in this background the court held that the warranty liability of the assessee cannot be construed to be a contingent liability in nature. 28. On analysis of the judgments referred to above, the position of law emerging therefrom is that once the assessee is maintaining its accounts on the mercantile system, the liability already accrued in a year, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid. The expression the liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime. 30. On perusal of the orders of the authorities below and having regard to the submissions advanced by both the parties, there is no dispute as to the fact that there exists a stipulation in the contract agreement entered into by the assessee with its customers that liquidated damages would be paid by either party for causing delay in executing or erecting or commissioning the work. It is also not in dispute that there was a delay caused by the assessee in executing or erecting or commissioning the concerned work. It is also beyond any dispute that since the assessee is maintaining its books on the mercantile basis, it has to credit the entire amount billed by it as per invoices issued to its customers for the charges for executing the concerned works, to the sales account even if the billed amount is not received in that year. However, we do not find any controversy as to the fact that the entire amount billed to the assessee' s customers on account of work executed and completed in the year has been taken by the assessee to the sales account as rightly observed by the Commissioner of Income-tax (Appeals) in his order. (refer page No. 25 of the Commissioner of Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is to bear the cost of its performance inadequacies or after the assessee' s admission to that effect, such amount would become for the first time, due from the assessee to its customers, and only at such time the liability to pay such liquidated damages would arise and not any time before. 33. Having regard to the facts and circumstances of the case and submissions of both the parties, there is no dispute as to the fact that the stipulation providing the payment of liquidated damages to the other party for delay in completing the work, is a part of the contract agreement entered into by both the parties for executing and completing the work. In other words, the condition for payment of liquidated damages for delay in work is in-built in the contract agreement itself. Therefore, there exists an undertaking given by the parties to execute the work within specified time, and if any delay is caused in completing the work within the specified time, the defaulter has agreed to pay damages on account thereof. This undertaking is not found to be conditional. Thus, this undertaking imported a definite liability on the assessee which accrued as soon as the delay in executi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, we find that the assessee has imported a liability on itself to pay liquidated damages for the delay in completing the work within the specified time, and as such, the estimated expenditure which would be incurred towards liquidated damages would be deductible from the receipts of the year. This certain act or event of not completing the work within stipulated time has imported a definite and absolute liability on the assessee and merely because of the fact that liability would be discharged at a future date and, there is a difficulty in estimating the correct amount thereof would not convert this definite and absolute liability into conditional one as has been held by the hon ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) and Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC). In this view of the matter, we may, therefore, say that the reasons given by the Assessing Officer as well as by the Commissioner of Income-tax (Appeals) for rejecting the assessee' s claim is not in consonance with the principle laid down by the hon ble Supreme Court in the case of Calcutta Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as applied in the case of warranty by the hon ble Kerala High Court, the Delhi High Court and the Privy Council in the cases of (i) CIT v. Indian Transformers Ltd. [2004] 270 ITR 259, (ii) CIT v. Vinitec Corporation P. Ltd. [2005] 278 ITR 337 and (iii)IRC v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 respectively, the dispute in the present case can be easily resolved in favour of the assessee. In the present case, the works have been executed after the expiry of the stipulated period. The stipulation as to the payment of liquidated damages towards delay in executing the contract work is related to the contract works, revenue thereof has been accounted for in the year under consideration. Although exact quantification of the claim of liquidated damages may be made at a future date, the assessee payer was, in the year of completing the work, under an accrued legal obligation to make payments under the liquidated damages clause, inasmuch as the assessee' s obligation to pay liquidated damages for the delay in work did accrue on the date when the delay was first occurred and continued up to the date of completion of the work, and thus, in computing the profit and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be claimed in the year to which the transaction relates, provided it can be fairly ascertained or estimated on agreed and admitted terms of the contract. The three decisions of the hon ble Supreme Court in Calcutta Co. Ltd. [1959] 37 ITR 1, Bharat Earth Movers [2000] 245 ITR 428 and Metal Box Company of India Ltd. [1969] 73 ITR 53 are examples of that situation where the assessee had imported a liability by giving an undertaking to do certain acts at a future date. However, where a dispute as to the liability itself is raised by any party, it would be allowable only on its final outcome of the dispute, either in the year of amicable settlement by the parties or in the year of final determination thereof by judicial process. The present case before us is not a case where a dispute as to liability to pay liquidated damages has been raised by the assessee. Therefore, the Department' s contention that the assessee' s liability to pay liquidated damages would arise only when the dispute between the parties was amicably settled or was finally adjudicated is found to be not applicable to the present case, where no dispute has ever been raised by the assessee as to its liability t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f waiver does not alter the aforesaid position. This is because the acceptance of the assessee' s plea was contingent upon the customers\q good sense, their pleasure. In other words, the mere fact that the assessee had made a plea for waiver or even the further fact that in some instances the customers had accepted the plea, 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. 36. The aforesaid decision of the Income-tax Appellate Tribunal, Madras Bench in the case of Kaveri Engg. Industries Ltd. [1992] 43 ITD 527 was referred to by the Income-tax Appellate Tribunal, Madras Bench in the case of F. F. E. Minerals India (P.) Ltd. v. Joint CIT [2004] 84 TTJ 907 (Chennai) along with the hon ble Supreme Court' s decisions in the case of Calcutta Co. Ltd. [1959] 37 ITR 1, Bharat Earth Movers [2000] 245 ITR 428. It was held herein that the assessee' s claim for damages as a deduction in computing its income as soon as the delay in supply is noticed and the case of under performance was made out and the claim in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in nature cannot be accepted, inasmuch as the hon ble apex court in the cases of Calcutta Co. Ltd. [1959] 37 ITR 1 and in Metal Box Company of India Ltd. [1969] 73 ITR 53, which has been followed in a later decision of Bharat Earth Movers [2000] 245 ITR 428 (SC), has categorically laid down a law that what should be certain is the incurring of the liability, which should be capable of being estimated with reasonable certainty, though the actual quantification may not be possible and it does not make any difference if the liability may have to be discharged at a future date and the future date on which the liability shall have to be discharged is not certain, and a condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that definite liability into a contingent one. The hon ble Supreme Court has also clarified that the difficulty in the estimation of the accrued liability did not convert that liability into a conditional one, because it was always open to the income tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision rendered by three-judge Bench in Maula Bux v. Union of India [1969] 2 SCC 554. It was further observed by the hon ble Supreme Court that further in H. M. Kamaluddin Ansari and Co. v. Union of India [1983] 4 SCC 417 (MANU/ SC/0002/1983), the three judge Bench of the hon ble Supreme Court has overruled the decision in Raman Iron Foundry' s case AIR 1974 SC 1265, and the court, while interpreting similar term of the contract observed that it gives wider power to Union of India to recover the amount claimed by appropriating any sum then due or which at any time may become due to the contractors under other contracts, and clause 18 of the Standard Contract confers ample powers on the Union of India to withhold the amount and no injunction order could be passed restraining the Union of India from withholding the amount. 43. In the light of the aforesaid decisions and observations laid down by the hon ble Supreme Court, the hon ble Supreme Court found much force in the contention raised by learned counsel for Oil and Natural Gas Corporation Ltd. [2003] 5 SCC 705 that the petitioner is entitled to recover the amount claimed on account of breach of contract by appropriating an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion, the contention of the learned Commissioner of Income-tax-Departmental representative that the assessee' s liability to pay liquidated damages for causing delay in erecting or commissioning work can be said to have actually incurred only when the dispute between the party is amicably settled or finally adjudicated, is devoid of any merit. 45. Further, we find that the learned Commissioner of Income-tax-Departmental representative has also made a reference to the decision of the hon ble Gujarat High Court in the case of CIT v. Ashwin Vanaspati Industrial P. Ltd. [2006] 283 ITR 439, and the decision of the hon ble Supreme Court in the case of CIT v. Swadeshi Cotton and Flour Mills P. Ltd. [1964] 53 ITR 134 and as well as the decision of the hon ble Gujarat High Court in the case of Alembic Chemical Works Ltd. v. Deputy CIT [2004] 266 ITR 47. A reference has also been made by the learned Commissioner of Incometax-Departmental representative to the decision of the hon ble Madhya Pradesh High Court in the case of CIT v. Ratlam Strawboard P. Ltd. [1985] 152 ITR 425 and of the hon ble jurisdictional Bombay High Court in the case of CIT v. Phalton Sugar Works Ltd. [1986] 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim is finally settled. 51. In the case of CIT v. Phalton Sugar Works Ltd. [1986] 162 ITR 622 (Bom), the hon ble High Court has held that where a liability arising out of contractual obligation is disputed, the assessee is entitled, in the assessment year relevant to the previous year in which the dispute is finally adjudicated upon or settled, to claim a deduction in that behalf. Thus, it is also a case where the liability to pay damages arising out of contractual obligation was disputed by the assessee. 52. Further, the decision in the case of CIT v. Seshasayee Industries Ltd. [2000] 242 ITR 691 (Mad) where the decision of the hon ble Supreme Court in the case of Union of India v. Raman Iron Foundry, AIR 1974 SC 1265, and the decision of the hon ble Allahabad High Court in the case of CIT v. Lachhman Das Mathura Das [1980] 124 ITR 411 has been referred to in support of the conclusion that the claim for damages for breach of contract is not a claim for which a sum is presently due and payable and even where a purchaser is entitled to deduct the amount of damages from the monies of the other parties, such purchaser could be injuncted from effecting such recovery, is also o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion rendered by the hon ble Calcutta High Court in the case of CIT v. Simplex Concrete Piles (India) P. Ltd. [1989] 179 ITR 8. In this case, the assessee, a contractor, carried on the business of concrete piling for building. The assessee credited only 90 per cent. of the contract value as income in the accounts by deducting the retention money retained by the contractee, which resulted in reduction of income. 10 per cent. of the bill value was withheld by the payer till a certificate of satisfactory completion of contract work is obtained. In these facts, it was held by the hon ble High Court that the retention money became legally due to the assessee on the satisfactory completion of the contract only, inasmuch as the payment of retention money is contingent on satisfactory completion of contract work and, thus, the assessee' s right to receive retention money accrued only after the obligations under contract were fulfilled. From this decision, it is thus clear that unless the obligations under the contract are satisfactorily discharged, the retention money would not be taken into account in computing the profit from the contract works. The operative part of the aforesaid or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not amount to income of the assessee in the year in which the amount is retained. In this decision of the hon ble Bombay High Court, a reference has also been made to a judgment of the Tribunal in Associated Cables P. Ltd. v. Deputy CIT [1994] 206 ITR (AT) 48 (Bom). 59. From these decisions, it is, thus, clear that the right to receive the whole money on account of the contract work executed by the assessee accrues only after all the obligations under the contract are fulfilled. Applying the same analogy to the present case, we may, therefore, hold that till the assessee discharges its obligation to pay liquidated damages on account of delay caused by the assessee in executing the contract work, sum equal to the estimated liability of liquidated damages payable by the assessee to the contractee would not accrue to the assessee as income in the year in which the bills were raised. This view is further strengthened by the decision of the hon ble Supreme Court in the case of Oil and Natural Gas Corporation Ltd. [2003] 5 SCC 705, where it has been categorically held that the contractee is entitled to recover the liquidated damages for delay in supply of goods, from the bills for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. 63. In the case of Madras Fertilizers Ltd., liquidated damages are leviable at the rate of 0.5 per cent. per week or part thereof, subject to a maximum of 5 per cent. of the total value of the contract, if the boiler parts of 110 Ata boiler package is not delivered by the end of 18th month. 64. In the case of Chemical and Plastics India Ltd., the provision has been made only of Rs. 27,525, which was subsequently settled between the parties. 65. We, therefore, restore this issue back to the file of the Assessing Officer for a limited purpose with a direction that the Assessing Officer should ascertain and determine the accrued liability pertaining to the year in question, in respect of the liquidated damages in the light of the terms and conditions of the contract agreement, and then to allow the same as a deduction from the profits in the year under consideration. The assessee shall be at liberty to furnish the actuarial valuation in respect of the assessee' s accrued liability on account of liquidated damages for the delay caused by the assessee in erecting or commissioning the contract work as per the terms of the contract agreement. Needless to mention that if o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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