Accrual-based deduction and depreciation consistency upheld where contractual liability, reconciled income, and commercial vehicle use were established.

Liquidated damages under an incomplete contract were treated as deductible on accrual where the liability arose from binding contractual terms, the assessee followed the mercantile system, and the issue had already been settled in the assessee's favour; the revenue challenge failed. An addition for alleged excess rental income was unsustainable because reconciliation showed the difference had already been offered as business income, and no contrary material was produced. Depreciation on cars at the higher commercial vehicle rate could not be restricted in a later year absent fresh material, particularly where the vehicles had earlier been accepted as commercial vehicles and the term was read with the Motor Vehicles Act, 1988. The assessee's claims were sustained on all three issues.

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Issues: (i) Whether liquidated damages relatable to incomplete contracts were allowable as deduction; (ii) Whether the addition made on account of alleged excess rental income was sustainable; (iii) Whether depreciation on cars at the higher commercial vehicle rate could be restricted in the subsequent year.

Issue (i): Whether liquidated damages relatable to incomplete contracts were allowable as deduction.

Analysis: The liability to pay liquidated damages arose from the contractual terms upon expiry of the delivery period and did not depend upon actual delivery or actual payment. The assessee followed the mercantile system of accounting consistently, and the issue had already been decided in the assessee's own case by the Special Bench and the High Court in favour of allowance. The earlier consistent view on the same liability was followed.

Conclusion: The deduction for liquidated damages was allowable and the revenue's challenge failed.

Issue (ii): Whether the addition made on account of alleged excess rental income was sustainable.

Analysis: The appellate authority found on reconciliation that the difference in receipts had already been offered to tax under the head business income in the engineering unit. No material was produced to dislodge that finding. The record therefore did not support any unexplained or untaxed rental receipt.

Conclusion: The addition was unsustainable and deletion of the addition was upheld.

Issue (iii): Whether depreciation on cars at the higher commercial vehicle rate could be restricted in the subsequent year.

Analysis: The cars had been treated as commercial vehicles and depreciation at 50% had been allowed in earlier years. No fresh material was brought to show that the vehicles had ceased to be commercial vehicles or were not used for commercial purposes. The appellate authority also noted that the term commercial vehicles had to be understood with reference to the Motor Vehicles Act, 1988, and not narrowly as vehicles used on hire.

Conclusion: The higher depreciation could not be restricted in the subsequent year and the deletion of the disallowance was upheld.

Final Conclusion: The revenue failed on all the contested grounds, and the assessee's claims for deduction and depreciation were sustained.

Ratio Decidendi: A liability arising under a binding contract and consistently recognised under the mercantile system is deductible on accrual, and an allowance once granted on an asset's eligible depreciation rate cannot be reduced in a later year absent fresh contrary material.

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