Contingent contract damages were not deductible where liability had not crystallised and the dispute remained under arbitration.

Damages claimed for breach of contract were not allowable as a deduction in the assessee's assessment year 1981-82 because the liability had not crystallised during that year. The assessee did not admit liability, the contract did not provide automatic quantification of damages for wholesale breach, and the dispute remained unresolved and subject to arbitration. On those facts, the claim was only a contingent liability and not an existing liability in praesenti, so the deduction was rightly disallowed.

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Issues: Whether the damages claimed by the Food Corporation of India for breach of contract constituted an allowable deduction in the assessee's assessment year 1981-82.

Analysis: The claim arose from a contractual dispute in which the assessee never admitted liability for the amount demanded. The agreement did not provide for automatic quantification of damages for wholesale breach of the contract, and the matter remained under dispute and subject to arbitration. The liability therefore had not crystallised in the relevant accounting year and, on the facts, represented only a contingent liability rather than an existing liability in praesenti.

Conclusion: The deduction was not allowable in assessment year 1981-82 and the claim was rightly disallowed.

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