Crystallised arbitration damages were deductible when quantified, and RBI remittance approval did not defer accrual.

Damages arising from admitted breach of export contracts were deductible in the year the foreign arbitral award quantified and crystallised the liability. The requirement of Reserve Bank of India permission for remittance affected only the mode of payment and did not defer accrual of the debt. Because the award had legal existence during the relevant accounting year and there was no material to show a colourable device, the disallowance was unsustainable and the assessee was entitled to deduction in that assessment year.

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Issues: Whether damages payable under a foreign arbitration award, arising from breach of export contracts, constituted an allowable deduction in the assessment year in which the award was made, notwithstanding the need for Reserve Bank of India permission for remittance.

Analysis: The liability arose from admitted contractual defaults and was quantified by a foreign arbitral award passed during the relevant accounting year. A liability for unliquidated damages becomes crystallised when the amount is determined by negotiation, arbitration, or adjudication. The regulatory requirement of Reserve Bank of India approval related only to the mode of payment and not to the accrual of the liability. The award had legal existence, and there was no material to treat the transaction as a colourable device. The prohibition relied upon by the Revenue under a different statutory context was not applicable to the accrual of liability in the present case.

Conclusion: The assessee was entitled to deduction of the damages payable under the arbitration award in the relevant assessment year.

Final Conclusion: The disallowance was unsustainable because the assessee's liability had already accrued and been quantified during the accounting year, while foreign exchange approval was relevant only to payment and not to the existence of the debt.

Ratio Decidendi: A liability for damages becomes deductible when it is ascertained and crystallised by an arbitration award during the relevant year, and a later regulatory approval required only for remittance does not postpone the accrual of that liability.

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