1996 (6) TMI 38 - HC - Income Tax

Court denies deduction for unliquidated damages, allows weighted deduction for commission paid in India.

N. Sundareswaran Versus Commissioner Of Income-Tax

The court held that the claim for deduction of damages payable by the assessee to foreign companies was not allowable as the damages were unliquidated and ... Accounting Year, Assessment Year, Development Allowance, Weighted Deduction Issues Involved:1. Deduction of damages payable by the assessee to foreign companies.2. Claim of 'weighted deduction' u/s 35B of the Income-tax Act, 1961.Summary:1. Deduction of Damages Payable by the Assessee to Foreign Companies:- Crystallization of Claim: The Tribunal held that the claim for deduction of damages payable by the assessee to foreign companies for breach of contracts was allowable only if the claim had been crystallized during the relevant accounting period. The claim for damages will be crystallized only when a claim is actually made by the foreign company and the same is either accepted or determined by negotiation, arbitration, or suit. - Unliquidated Damages: The Tribunal concluded that the claim advanced by the assessee was for unliquidated damages. The court agreed, stating that only when damages are determined by arbitration or legal process can they be considered liquidated damages. Without finalization and quantification of damages, the claim remains for unliquidated damages.- Accrued Liability: The court emphasized that a liability must be accrued to be deductible. The mere entry of liability in the accounts does not constitute an accrued liability. The court rejected the assessee's contention that there was an incurred liability, noting that the liability must be crystallized by a legal process.- Section 73 of the Contract Act: The court clarified that section 73 provides for compensation to the injured party, not the party who breached the contract. The liability to pay damages must be adjudicated and cannot be considered an accrued liability merely based on the breach of contract.- Supreme Court Precedents: The court referred to the Supreme Court's observations in Calcutta Co. Ltd. v. CIT and Union of India v. Raman Iron Foundry, emphasizing that a claim for unliquidated damages does not give rise to a debt until adjudicated.- Tribunal's Findings: The Tribunal found that the assessee failed to establish that the claim for damages had crystallized during the accounting period. The Tribunal also noted that the claim cannot be allowed merely because the breach occurred in the accounting period.- Letters and Evidence: The court noted that the letters produced by the assessee to substantiate the claim were not presented before the Income-tax Officer or the Commissioner of Income-tax (Appeals) and were produced for the first time before the Tribunal. The Tribunal was justified in not relying on these letters.- Conclusion: The court answered the questions referred at the instance of the assessee in the affirmative, in favor of the Revenue, and against the assessee.2. Claim of 'Weighted Deduction' u/s 35B of the Income-tax Act, 1961:- Commission Paid in India: The assessee claimed 'weighted deduction' of Rs. 66,747 u/s 35B(1)(b) of the Act, representing the commission paid to Nut Meat Trading Co. Ltd., Bombay, for export of goods. The Income-tax Officer disallowed this claim, but the Commissioner of Income-tax allowed it, stating that the expenditure incurred for gathering information regarding markets outside India is an allowable weighted deduction.- Tribunal's View: The Tribunal held that weighted deduction can be allowed on commission paid in India if it qualifies under one or the other clauses of section 35B(1)(b). The Tribunal noted that the assessee received information about foreign markets through agents in India.- High Court's Decision: The court referred to the Division Bench decision in CIT v. Kerala Nut Food Co., which held that commission payments for services related to marketing goods outside India qualify for weighted deduction u/s 35B(1)(b)(i) and (ii). Accordingly, the court answered the question in favor of the assessee and against the Revenue.Disposition: The references were disposed of as above, with the court forwarding a copy of the judgment to the Income-tax Appellate Tribunal, Cochin Bench.