TMI Blog2007 (2) TMI 699X X X X Extracts X X X X X X X X Extracts X X X X ..... order reads as under: 3. The 1st ground in appeal No. 784/Pn/2000 is that the learned Commissioner (Appeals) erred in disallowing the proportionate land lease charge of ₹ 46,163 in respect of its long-term lease. In the course of hearing before us, it was pointed to us that this issue is decided against the assessee in its own case in ITA Nos. 1246/Pn/1995, and 157 158/Pn/1997 for assessment years 1992-93 and 1993-94 and these decisions were followed in ITA No. 671 /Pn/1991 for assessment year 1995-96. Respectfully following those decisions, this ground of appeal is dismissed. 2.3 In the light of the arguments advanced by the learned Counsel for the assessee and finding that the issue is already decided against the assessee by this Tribunal in assessee's own case in earlier assessment years, as admitted by the assessee itself, we decide this issue against the assessee. 3.1 Ground Nos. 2 and 3 are as under: 2. The learned Commissioner (Appeals) erred in rejecting the contention of the appellant that the portion of entertainment expenses attributable to the employees of the appellant, as estimated at 50 per cent of business lunch expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No. 1168/Pn/1997 has decided this issue as under: 6. Ground No. 2 of the appeal in ITA No. 1168/Pn/1997, and ground No. 4 of the appeal in ITA No. 784/Pn/2000 are against the finding of the learned Commissioner (Appeals) that provision made for warranty obligations is a contingency liability, not deductible in computing the income. In the course of hearing before us, it was pointed out that in the order for assessment year 1995-96, in ITA No. 1246/Pn/1995, this matter was remitted to the assessing officer with a direction to decide it afresh after examining the facts of the case and considering the order of the Tribunal for assessment year 1992-93, in that order it was inter alia held that the provision for warranty expenditure was not a contingent liability, it was further pointed out that the quantification of the provision will have to be examined by the authorities below by finding out the actual expenditure incurred against the provision or by following some other objective criteria. Respectfully following that decision, the matter is remitted to the file of the assessing officer for fresh adjudication to be made after hearing the assessee. Thus, these grounds are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remental liability arising during the relevant previous year only can be allowed. Since no data in this respect has been furnished, the matter is restored to the file of the assessing officer with a direction to obtain appropriate certificate regarding incremental liability for the previous year ended on 31-3-1996, and allow the same in computing the income. Thus, this ground of appeal is treated as partly allowed. 5.3 In the course of hearing, it was pointed out by the learned Counsel for the assessee that no fresh or different facts were found by the assessing officer compared to earlier year. The learned Departmental Representative has also not been able to point out that the facts of this case for this year are different to that of assessment year 1994-95. Respectfully following the Tribunal's order in the assessment year 1994-95, we decide this issue in line of the terms of the order of the Tribunal order dated 17-3-2006 in ITA No. 1168/Pn/1997 for assessment years 1994-95 by remitting the matter to the file of the assessing officer with a direction to ascertain incremental liability by making actuarial valuation for the previous year ended on 31-3-1997, and allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecuted by the company for manufacture and supply of large items of equipment. So also, delays in execution of such long-terms contract 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, manufacturer and the buyer of the large plants/equipments invariably negotiations take place between the company and the parties concerned for eventual crystallization 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 contract is estimated on careful consideration of the pros and cons of the circumstances of delays/defaults on both sides by the principal engineer-in-charge of respective contract execution and 'provision is eventually made by the accounts department in the books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Cochin Refineries agreed in November, 1997 to restrict liquidated damages to ₹ 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 reasonable and correct in line with the accrual basis of accounting. 6.3 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 ₹ 7,90,000 as against a provision of ₹ 10 lakhs made by the assessee. The provision made by the assessee is therefore contingent in nature and may or may not be payable. These provisions made are therefore not allowed. However, assessee will be entitled to claim liquidated damages paid as and when these are actually paid. Disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refuse to do so as to it would then tantamount to immediate waiver of LD. 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. 7.2 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 Supreme Court, the Commissioner (Appeals) has confirmed the assessing officer's order. While deciding the issue against the assessee, the Commissioner (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 delivered of goods and rendering of services, upto a pre-determined stage of the total project. Thus, the entire amount inclusive of liquidated damages becomes due to the appellant. At this stage, there is no claim created against the appellant by way of any liquidated damages on the basis of the terms of the contract. At this stage, therefore, there is no cause of action in the hands of the custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19 and 20: Ordinarily, the appellant receives all the money as per the contract, 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 by the assessing officer because there is no choice available to 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 may be, that the Clause relating to liquidated damages is to be invoked as the performance of the appellant company was not completed within the agreed timeframe, the customer may foreclose the bank-guarantee or the bond issued by the appellant company, representing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 and relied upon the following decisions : 1. K.C.P. Ltd. v. ITO (SB); 2. F.F.E Minerals India (P) Ltd. v. Jt. CIT; 3. Kaveri Engg. Industries Ltd. v. Dy. CIT (1992) 43 ITD 527 (Mad). 10.1 The learned Commissioner Departmental Representative, Shri Pradeep Sharma, on the other hand, submitted that the claim for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly when liability is adjudicated upon. The learned Departmental Representative has enclosed the photocopy of the page No. 678 from the book on Indian Contract and Specific Relief Act. J.L. Kapur, 10th Edn. wherein it is stated as follows: 'A claim for liquidated damages stands 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 liability nor does the injured party becomes entitled to claim a debt. He is only entitled to sue for damages and have adjudicated upon'. 2. In case of an assessee following the mercantile method of accounting a liability is said to be incurred when the dispute between the parties is amicably settled or finally adjudicated when the liability in question is not a statutory liability. Our reply: The undersigned quoted the decision of Hon'ble Supreme Court in the case of Oil Natural Gas Corporation Ltd. v. SAW Pipes Ltd. Civil Appeal No. 7419 of 2001 (photocopy enclosed) in the course of the hearing before Your Honours on 15th Decembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 suggests 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 by Sections 73 and 74 of the Contract Act and in the present case by specific terms of the contract. (6) genuine pre-estimate due to delay in supply can be made as per the Clause in the contract and is not unliquidated damages or penalty which given right to sue for the damages and therefore there is no time lag in the ascertainment of liability of the appellant to pay liquidated damages to its customers. (7) the appellant has accounted for and offered to tax the entire sale income and therefore provided for the liquidated damages on occurrence of delay on its part in supplying the material to the customer. In the light of the aforesaid facts and circumstances it is submitted that the liability is incurred by the appellant in the ordinary course of its business and is cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 controversy arising in this appeal, we find it necessary to have a look to the settled position of law laid down by various courts in this behalf. 14.1 The Hon'ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT has taken a view as under (Extracted from headnote). Held (i) that the undertaking to carry out the developments within six months from the dates of the deeds of sale (which, in view of the fact that time was not of the essence of the contract, means a reasonable time) was unconditional, the appellant binding itself absolutely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 represented any expenditure actually made during the year. It was, thus, concluded by the Hon'ble Apex Court that if a certain act or event has imported a definite and absolute liability on the assessee, that liability would be an accrued liability and would not convert into conditional one merely because the liability was to be discharged at a future date. It was further observed by the Hon'ble Apex Court that there might be some difficulty in estimating the liability but that would not convert an accrued liability into a conditional one, and it is always open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company of India Ltd. (supra) was applied by the Hon'ble Supreme Court in its later decision in the case of Bharat Earth Movers v. CIT, where it was held thus as under (Extracted from 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 satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 17. The principles laid down by the Hon'ble Supreme Court in the case of Metal Box Company of India Ltd. (supra) have been applied by the Hon'ble Gujarat High Court in the case of Amrish Co. v. CIT where some of the principles laid down by the Hon'ble Supreme Court in the case of Metal Box Company of India Ltd. (supra) were discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of the principle that certain liability in future is not a contingent liability. 19. The Privy Council in the case of IRC v. Mitsubishi Motors New Zealand Ltd. (1996) 222 ITR 697 (PC) specifically on the subject of warranty has also taken a similar view by observing thus: 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 satisfied, regard could be had to its estimation of warranty claims based on statistical information, which showed that as a matter of existing fact not future contingency 63 per cent of all vehicles sold by the taxpayer contained defects likely to be manifested within the warranty period and require work under warranty; that since theoretical contingencies could be disregarded, the taxpayer was in the year of sale under an accrued legal obligation to make payments under those warranties and even though it might not be required to do so until the following year, it was definitely committed in the year of sale to that expenditure; and that accordingly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 principles laid down by the Hon'ble Supreme Court in the cases of Calcutta Co. Ltd. (supra) and Bharat Earth Movers (supra). 22. On the question of allowing the deduction towards warranty liability, the fact that the assessee has been following mercantile system of accounting where actual liability which accrues or arises during the previous year can be considered as an expenditure deductible for income-tax purposes has been emphasized. It has also taken into consideration that a liability which is dependent on fulfilment of a condition cannot be allowed as a deduction unless the dependent condition is fulfilled during the previous year. In the case of warranty liability, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 liability already accrued in a year signifies that a business liability must have definitely arisen in that accounting year. In other words, for allowing the deduction of a liability while working out the profits and gains of business, a business liability should have definitely arisen in that accounting year. What should be certain is the incurring of the liability. The definite liability must be in praesenti and not de futuro. The liability must have arisen under a definite obligation. The obligation of the trader must not be of purely contingent in nature for it to be a permissible outgoing or allowance or deduction in the year of account. It is further clear that the putting aside of money, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces 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 (Appeals) in his order (Refer page No. 25 of Commissioner (Appeals)'s order). The dispute is only with regard to the treatment given by the assessee to its outstanding liability of liquidated damages payable to its customers for causing delay in erecting or commissioning or executing the concerned work, regard being made to the matching principles of liability against the corresponding revenue booked in the accounts. 24.3 The assessing officer has rejected the assessee's claim of liquidated damages for the following reasons: (1) The assessee has filed no evidence, that the provision made is actually payable, (2) There is no certainty even on the quantum of provision made by the assessee in its books of account. He has given an instance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uidated 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 executing the works had first occurred and continued till the work was fully completed, though that liability was to be quantified precisely and discharged at a future date. On this aspect, we may again usefully refer to a decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT (supra) where the assessee's liability towards undertaking to carry out development work within six months from the date of the deeds of sale was held to have been accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. In this case, the Hon'ble Supreme Court further held that it was an accrued liability, and the estimated expenditure which would be incurred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in the cases of Calcutta Co. Ltd. v. CIT (supra), Metal Box Co. of India Ltd. v. Their Workmen (supra) and Bharat Earth Movers v. CIT (supra). In this view of the matter, we may, therefore, say that the reasons given by the assessing officer as well as by the Commissioner (Appeals) for rejecting the assessee's claim are not in consonance with the principles laid down by Hon'ble Supreme Court in the cases of Calcutta Co. Ltd. v. CIT (supra) and Bharat Earth Movers v. CIT (supra). The very principles laid down by the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT (supra) were also followed by the Kerala High Court in the case of CIT v. Indian Transformers Ltd. (supra) and the Hon'ble Delhi High Court in CIT v. Vinitec Corporation (P) Ltd. (supra) while deciding the assessee's claim for liability towards warranty Clause provided in the sale agreement itself. In this case, it was held that the taxpayer was in the year of sale under an accrued legal obligation to make payments under warranty claims, even though it might not be required to do so until the following year. It was further held therein that in computing the profits or gains derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 upto the date of completion of the work, and thus, in computing the profit and gains derived by the taxpayer from such contract works in the present year, the assessee taxpayer is entitled to deduct from the profits from the aforesaid contract works a provision, for the cost of the anticipated liquidated damages insofar as the same is related to the period of delay falling within the year under consideration. 24.6 Insofar as the contention advanced for and on behalf of the department that the assessee's liability to pay liquidated damages would arise only when it is finally decided that the assessee has to bear the cost of its performance inadequacies by paying liquidated damages and after the assessee's admission to that effect such amount would become for the first time due from the assessee to its customers is concerned, we find that this contention of the department is not based on the correct facts of the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 to pay liquidated damages for delay in completing the work. 24.7 In this respect, a useful reference may also be made to a decision of the Tribunal, Special Bench, Hyderabad in the case of K.C.P. Ltd. v. ITO (supra). In this case, the Clause relating to late delivery was to the effect that if the delivery period as mentioned in the progress chart is exceeded, the supplier will be entitled to bear the liquidated damages to the extent of 1/2 per cent per fortnight or pro rata for part of the work on the total value of the contract including escalation, subject to a maximum of 5 per cent of the final total contract price. In this case, it was not in dispute that in terms of the agreement of the assessee for supply of the goods, time was the essence of the contract and any delay in the delivery of the goods would result in the liability to pay damages. In the light of this Clause of damages for de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puting 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 books was based on the terms of the contract between the parties and, therefore, the liability has definitely arisen and is crystallized as a result of binding contract between the parties and the same is allowable. It was further held in that case that the allowability of the claim did not postpone till the plea was rejected or considered by the customer. 25. As to the proposition that taxpayer should make a provision for all known liabilities and losses in the books and even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information, a reference may be made to the Notification No. S.O. 69(E), dated 25-1-1996 issued by the CBDT under Section 145(2) prescribing accounting standards to be followed by all assessees following mercantile system of accounting where it is provided as under: (i) Prudence. - Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to all the circumstances of the case. Therefore, in the present case if the assessing officer were of the view that the assessee has not made a proper estimate of its liability on account of liquidated damages for causing the delay in erecting or commissioning the work it was always open to him to arrive and to determine the proper estimate thereof in the light of the facts and circumstances of the present case, but that by itself would not convert the assessee's accrued liability into a conditional one. 27.1 Another contention of the learned Commissioner Departmental Representative is that as per the Contract Act, liquidated damages accrue only when the liability is adjudicated upon and, in support thereof, he has stated that the claim for liquidated damages stands on the same footing as a claim for unliquidated damages. In this connection, he has made a reference to p. 678 of a Commentary on Indian Contract and Specific Relief Act, by Mr. J.L. Kapur (10th Edn.). The commentary referred to above reads as under: A claim for liquidated damages stands on the same footing as a claim for unliquidated damages. A claim for unliquidated damages does not give rise to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m that there was no necessity for final adjudication for appropriating any sum then due or which at any time may become due to the contractor from Oil Natural Gas Corporation Ltd. Similarly, in the present case, the terms of the contract provide for paying liquidated damages for delay in erecting or commissioning the work without any ambiguity, and breach thereof the assessee was required to pay such compensation, and that is what is provided under Section 73 of the Contract Act. In the present case, the department has not made out any case at any stage of the proceeding that there was no specific stipulation in the agreement for paying liquidated damages in the case of making delay in erecting or commissioning the work, and the assessee's customer was not entitled to recover from the assessee the liquidated damages as agreed. The Hon'ble Supreme Court in the case of Oil Natural Gas Corporation Ltd. (supra) has taken the following factors into account while deciding the issue in favour of the ONGC: (i) there is a specific stipulation in the agreement that the time and date of delivery of the goods was the essence of the contract; (ii) in case of failur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, inasmuch as these decisions were rendered in the context of the fact that there were disputes arising between the parties as to their respective rights and obligations arising from the transactions entered into by them. 28.2 In the case of CIT v. Ashwin Vanaspati Industrial (P) Ltd. (supra), a demand raised by the other party against the assessee on account of breach of the terms of the contract was disputed by the assessee, and the matter was pending adjudication before the sole arbitrator, and in that context, the court has taken a view that the loss was not allowable in the year in which the demand was raised, but would be allowed in the year in which the final settlement would be made. 28.3 Similarly in the case of Alembic Chemical Works Ltd. v. Dy. CIT (supra), there arose a dispute regarding contractual liability, and thus it was so held that in case of an assessee following mercantile system of accounting the liability is said to be properly incurred when the dispute between the parties is amicably settled or finally adjudicated, where the liability in question is not a statutory liability. 28.4 In both these cases of Hon'ble Gujarat High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Union of India v. Raman Iron Foundry (supra) has not been considered to be a good law by the Hon'ble Supreme Court, as would be clear from the observation made by the Hon'ble Supreme Court in the case of Oil Natural Gas Corporation Ltd. (supra). 28.8 Thus, in the present case, where the assessee had taken the undertaking to carry out the work within the stipulated time, in default thereof the assessee was under an obligation to pay damages specified in the work agreement, and the assessee has not denied or disputed its obligation to pay liquidated damages for breach of the contract by not executing or erecting the work within specified time, and the assessee's customer was entitled to deduct the amount of damages from the monies payable to the assessee as held by the Hon'ble Supreme Court in the case of Oil Natural Gas Corporation Ltd. (supra), and all the revenue towards contract work executed by the assessee in the year has been taken into the account for determining the profit, the assessee's obligations to pay corresponding damages relating to the period falling within the relevant accounting year has imported an accrued liability on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the retention money, became legally due to the assessee on the completion of the work. Only after the assessee fulfils the obligation under the contract, that the retention money would be released and the assessee would acquire the right to receive such retention money. Therefore, on the date when the bills were submitted, having regard to the nature of the contract, no enforceable liability has accrued or arisen and, accordingly, it cannot be said that the assessee had any right to receive the entire amount on the completion of the work or on the submission of bills. The assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. 28.11 The aforesaid decision of Hon'ble Calcutta High Court in the case of CIT v. Simplex Concrete Piles (India) (P) Ltd. (supra) has been followed by the Hon'ble Madras High Court in the case of CIT v. East Coast Constructions Industries Ltd., where it was held that the assessee was entitled to receive the retention money only after completion of the work, and on the date of the bills, no enforceable liability had accrued or arisen to the assessee, and when the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that could be allowed as a deduction in the year under consideration. In the light of the decision of the Hon'ble Supreme Court in the cases of Calcutta Co. Ltd. v. CIT (supra), Metal Box Co. of India Ltd. v. Their Workmen (supra) and as well as Bharat Earth Movers v. CIT (supra), the assessee's liability to pay liquidated damages can be estimated with reasonable certainty, though actual quantification may not be possible. The assessing officer has not done this exercise to ascertain the estimated liability of the assessee on account of liquidated damages with reasonable certainty. The assessee has quantified its liability of liquidated damages payable to the contractee in its books of account. Whether the estimated liability provided by the assessee in the books of account can be said to be a proper estimation with reasonable certainty has not been deliberated upon by the assessing officer or by the Commissioner (Appeals). It is not in dispute that the allowable liability on account of liquidated damages payable by the assessee should be only in relation to the period of delay falling within the relevant year in dispute. 29.2 In the contract agreement entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his ground is, thus, decided accordingly. 30.1 The general issue raised in ground No. 7 is that the learned Commissioner (Appeals) has erred in restricting the assessee's claim under Section 80HHC to ₹ 15,38,030 as against deduction quantified by the assessee at ₹ 59,52,000. The various specific items relevant for the purpose of determining the assessee's claim of deduction under Section 80HHC have been separately stated in ground Nos. 7(1), (2) and 2(c). 30.2 Ground No. 7(1) is directed against the Commissioner (Appeals)'s order in confirming the action of the assessing officer in reducing 90 per cent of the excise duty refund of ₹ 24,94,740 on account of deemed export despite the assessee's contention that it is covered under Section 28(iiic) since the materials have not been despatched outside India. 30.3 In the course of hearing, the learned Counsel for the assessee has pointed out that this issue has already been decided in favour of the assessee in assessee's own case by this Tribunal, Pune Bench, Pune in assessment year 1994-95 vide ITA No. 1168/Pn/1997, consolidated order being dated 17-3-2006. The learned Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------- Less: Service charges 1,86,12,362 --------------------------------------------------- Net increase in turnover 11,29,43,699 --------------------------------------------------- 31.2 We have heard both the parties and have gone through the orders of the authorities below. 31.3 The issue whether element of sales-tax and excise duty are to be included in the total turnover and as well as the export turnover for the purpose of computing deduction under Section 80HHC, is covered by the decision of Hon'ble jurisdictional Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd., which has been followed by this Tribunal in assessee's own case in assessment years 1994-95 and 1996-97 in the above referred appeal Nos. 1168/Pn/1997 and 784/Pn/2000. Respectfully following this decision, we hold that sales-tax and excise duty are not to be included in the total turnover as well as in the export turnover for the purpose of computing deduction under Section 80HHC. 31.4 Coming to the item of client balances written back amounting to ₹ 2,47,706, we are of the considered view that since these balances have been written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are made by the assessee, are debited in the Profit and Loss a/c, these corresponding recoveries shall accordingly be taken into Profit and Loss a/c. The assessing officer shall examine this issue in the light of the observation made above and shall decide the matter accordingly. 31.10. Coming to the service charges whether to be included in the total turnover or not, it was pointed out at the time of hearing that identical nature of engineering fees has been held to be included in the total turnover by this Tribunal in the assessee's own case for assessment year 1994-95 in ITA No 784/Pn/2000 vide para 9.4 of the consolidated order being dated 17-3-2006. 31.11 Respectfully following the Tribunal's order, we, therefore, hold that the services charges being directly related to the operational activities of the assessee's business will have to be included in the total turnover of the assessee. 32.1 Ground No. 7(2)(c) is directed against the Commissioner (Appeals)'s order in confirming the deduction to the extent of 90 per cent of profit element in the following items while computing the adjusted profit for the purpose of deduction under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessing officer or by the assessee, it is difficult to ascertain as to whether the receipts like warehouse charges received by the assessee were a part of the main business activity or whether they accrue out of incidental business. It is also very difficult to ascertain as to whether warehouse charges are in the nature of recovery of corresponding cost. We, therefore, restore this issue back to the file of the assessing officer for fresh adjudication and to ascertain as to whether these receipts were recovery of corresponding cost and connected to the main business activity of the assessee and/or whether they are merely received by the assessee out of incidental activity. The decision of the Hon'ble jurisdictional High Court in the case of CIT v. Bangalore Clothing Co. shall be taken as a trendsetter for deciding this issue. The assessing officer shall provide reasonable opportunity of being heard to the assessee. 33. The next issue is with regard to the service charges received by the assessee. 33.1 The learned Counsel for the assessee submitted that these service charges would be includible in the total turnover and, thus, they being in the nature of op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of hearing of this appeal, it was also pointed out that this issue has been decided against the assessee in the assessment year 1994-95, vide Tribunal's consolidated order dated 17-3-2006 in ITA No. 1168/Pn/1997, vide para 10.3 where the Tribunal has held that the commission of ₹ 23,97,720 could not be, by any stretch of imagination, said to have been derived from the business of industrial undertaking engaged in production or manufacture of any article or thing, and thus, held that the commission income was not from manufacturing or commissioning of the boilers and, as such, the assessee was not entitled to deduction under Section 80-IA of the Act. This ground is thus dismissed and decided against the assessee. 36.3 Ground No. 9(c) is as to whether cash discount and warehousing charges amounting to ₹ 13,37,323 and ₹ 27,55,000 are to be included in the business profit for the purpose of computing deduction under Section 80-1A of the Act. 36.4 The issue relating to cash discount has been decided against the assessee for the purpose of computing deduction under Section 80HHC of the Act meaning thereby that the cash discount is not di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms on account of refund of customs duty on imported raw material or excise duty claim cannot be said to be derived from industrial undertaking. They are not directly connected to the assessee's business of manufacturing and commissioning of the boilers. For the purpose of claiming deduction under Section 80-IA, it is necessary to establish and prove that any income has been derived from the business of industrial undertaking. If the income is merely incidental to the business of industrial undertaking, that would not be sufficient to claim the same as a deduction under Section 80-IA. The assessee has not been able to give any iota of evidence that the DGFT claims are derived from the business of industrial undertaking, or in other words, they are directly related to the assessee's main activity of manufacturing or commissioning of boilers. Therefore, this ground raised by the assessee is decided against the assessee. 37.6 The last item 9(d) is with regard to excise duty claim. In the light of our reasoning given in respect of DGFT claim, this claim of the assessee is also not found to be acceptable for the purpose of computing deduction under Section 80-IA of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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