2004 (7) TMI 331 - AT - Income Tax

Tribunal Amends Order for Liquidated Damages, Aligning with Supreme Court Precedents on Contractual Liabilities.

FFE. Minerals India (P) Limited. Versus Joint Commissioner Of Income-tax.

The Tribunal rectified its previous order by amending paragraphs 11 to 16 to align with Supreme Court precedents, acknowledging the binding nature of ... Disallowance of claim for warranty, guarantee, and liquidated damages - Rectification of errors in the Tribunal's order - HELD THAT:- It is settled law that contractual liability should be allowed on the basis of the contract and the obligation incurred by the assessee is binding in nature. There have been any number of cases in support of this proposition. The issue of allowability of a liability is laid to rest by the decision of the Hon’ble Supreme Court in Calcutta Co. Ltd. vs. CIT [1959 (5) TMI 3 - SUPREME COURT] has not been applied in deciding the appeal by the Tribunal. In this case the order of the Tribunal is contrary to the existing position of law as outlined above. Hence, there is a mistake by the Tribunal which is apparent from the record. Under s. 254(2) of the Act it is mandatory for the Tribunal to rectify all mistakes which are apparent on record. The Tribunal has sufficient jurisdiction to rectify such mistakes as held in[1997 (7) TMI 53 - HIMACHAL PRADESH HIGH COURT], Mrs. K.T.M.S. Umma Salma vs. CIT [1981 (12) TMI 12 - MADRAS HIGH COURT] as well as the decision of the Delhi ‘D’ Bench reported in [2003 (12) TMI 287 - ITAT DELHI-D]. The Tribunal rectified its order dated 12th Dec., 2002, by deleting paras 11 to 16 and substituting them with new paragraphs that aligned with the Supreme Court's decisions. The Tribunal acknowledged the binding nature of contractual liabilities and allowed the claims for liquidated damages, thereby rectifying the earlier mistake and preventing a miscarriage of justice. Issues Involved:1. Disallowance of claim for warranty, guarantee, and liquidated damages.2. Rectification of errors in the Tribunal's order.3. Application of Supreme Court and High Court decisions.4. Method of accounting and its impact on the case.Summary:1. Disallowance of Claim for Warranty, Guarantee, and Liquidated Damages:The assessee appealed against the disallowance of claims for warranty, guarantee, and liquidated damages for the assessment years 1997-98 and 1998-99, amounting to Rs. 74,43,308 and Rs. 3,14,77,555, respectively. The Tribunal upheld the disallowance, stating that the liability for liquidated damages was not finalized and remained provisional.2. Rectification of Errors in the Tribunal's Order:The assessee filed a miscellaneous petition seeking rectification of the Tribunal's order dated 12th Dec., 2002, read with the order dated 24th Sept., 2003. The Tribunal initially dismissed the petition, considering it a review rather than a rectification. However, the assessee argued that the Tribunal overlooked the Supreme Court's decisions in Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC) and Bharat Earth Movers vs. CIT (2000) 162 CTR (SC) 325, which allow for the deduction of contractual liabilities.3. Application of Supreme Court and High Court Decisions:The Tribunal's decision was challenged for not conforming to the Supreme Court's rulings, which state that a contractual liability should be allowed as soon as it arises, even if the exact amount is determined later. The Tribunal also failed to consider the method of accounting regularly followed by the assessee and the relevant accounting standards. The Tribunal's oversight of these legal precedents was deemed a mistake apparent from the record, warranting rectification u/s 254(2) of the IT Act.4. Method of Accounting and Its Impact on the Case:The Tribunal did not address the method of accounting followed by the assessee, which was the mercantile system. The Supreme Court in CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 182 CTR (SC) 291 emphasized that the method of accounting should be consistent with accepted principles of accountancy. The Tribunal's failure to consider this aspect and the concept of real income led to an error of non-consideration of relevant issues.Conclusion:The Tribunal rectified its order dated 12th Dec., 2002, by deleting paras 11 to 16 and substituting them with new paragraphs that aligned with the Supreme Court's decisions. The Tribunal acknowledged the binding nature of contractual liabilities and allowed the claims for liquidated damages, thereby rectifying the earlier mistake and preventing a miscarriage of justice.