TaxTMI 
TaxTMI 
TaxTMI 
2003 (1) TMI 269
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....The assessee entered into a contract dated 1-4-1987 with the said company, in terms of which M/s. Mysore Lamp Works undertook to supply specified goods as per the requirements of the assessee-company. In its turn, the assessee entered into certain agreements with its stockists and dealers. Those agreements, allegedly, contained in a circular letter dated 25-3-1987, a copy of which may be seen at page-227 of the assessee's paper-book Vol. I, are identically worded, except for the difference in the target fixed by the assessee for each stockist/dealer. As the main controversy in this appeal revolves round the so-called agreements with the stockists, the said circular letter is reproduced hereunder. The letter to one of the stockists, M/s. Vijaya Agencies, Karimnagar, filed before us, reads as under- " Date: 25-3-1987 To M/s. Sri Vijaya Agencies, D. No. 4-1-63, Mahavir Road, Karimnagar-505001. Dear Sirs, We take this opportunity to convey our grateful thanks to you for the unstinted cooperation extended to us in marketing our goods. We are aware of your great enthusiasm and interest in expansion of your market activities which would be possible only on our capacity to provide ....
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....ed extent mentioned in ground No.2 quoted above. We are mainly concerned in this appeal with the claim of the assessee for deduction of an amount of Rs. 3,11,18,213 which was claimed by the assessee as deduction, being the liability for damages incurred by the assessee towards its stockists. 4. So far as ground No. 2 is concerned, the case of the assessee is that out of Rs. 4 crores alongwith interest awarded by the Hon'ble Supreme Court, vide its judgment dated 18-9-1997, the assessee had returned an amount of Rs. 1,15,27,120 in the assessment year 1996-97, and the same was also brought to tax in that year. 5. Written submissions of the assessee on Ground No.2 read as under:-- "As per Supreme Court order (Item No. 14 on pages 217-226 of Paper Book No. 1), Assessee received Rs. 4 crores as full and final settlement of the claim under arbitration for the dispute between assessee and Mysore Lamp Works Ltd. As stated in the Supreme Court order at page No.2 page No. 218 of the Paper-book No. 1, last Para 'This court on 11 th July, 1995, after Noticing the fact that the appellant deposited a sum of Rs. 1,15,00,000 in the executing court and the amount has since been withdrawn by the ....
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....ing of a formal agreement with MCW. (ii) These letters have unilaterally fixed targets to be achieved by the stockists and dealers by the assessee himself. (iii) There is no formal contractual agreement on the part of any of the dealers. (iv) As the term goes 'Dealers and Stockists', as is the practice do not deal with any specific product of an exclusive company but would deal with products of various companies in the same line. (v) The letters ostensible written by the dealers intimating losses are general and Vague. They do not relate to specification of business nor quantify the financial losses which the assessee seeks to claim now. (vi) The letters in short are self-serving." He relied mainly upon the decision of the Apex Court in the case of Bharat Earth Movers Ltd. v. CIT [2000] 245 ITR 428, which lays down the characteristics of accrued liability eligible for deduction as business expenditure, and disallowed the claim for deduction of Rs. 3,11,18,213. 8. On appeal, the CIT(A) agreed with the findings of the Assessing Officer. He also observed that the circular letters of the assessee dated 25-3-1987 are all stereo-typed, and the so-called targets are unilaterally fi....
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....ble to understand the reason for this. Due to lack of stocks, we are not in a position to move in the market. To ensure sales as per the target fixed by you in sales of Bulbs, we have in reduced schemes in the local market with lot of expenditure. Instead of sending us the Bulbs as per the Target fixed by you, you have not at all sent any Bulbs to us so far. As the time is over, the shopkeepers are demanding for Scheme. Hence, we are put to loss due to this scheme. You will have to shoulder responsibility for such loss. As you are not sending the Bulbs in time, it is showing adverse impact on our other businesses. So, we request you to respond in time and extend your cooperation is spreading the business. for Vijay Agencies, Sd/-" There is a further follow-up letter from this very concern. The said letter dated 15-9-1988, filed at page-75/11 of the paper-book, reads as under-- Vijay Agencies 1/128, Main Bazar, Nandyal- 518 501 Date: 15-9-1988 Coromandel Marketing India Pvt. Ltd., Hyderabad. Respected Sir, We have written two letters dated 2-1-1988 and 10-7-1988. But you are not supplied any stocks. We are felting sorry you have not sending our regular stocks all ....
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....ing you Sir, Yours faithfully, for Sri Vijaya Agencies Sd/- Manager..." 11. There are also letters from M/s. Krupa Agencies, Chagalamarri (Kurnool Distt.) filed in the paper-book. Letter dated 6-7-1988 from the said concern, filed at page 75/2 of the paper-book reads as under-- "Krupa Agencies Prop: M. Prabhakar Main Bazaar, Chagalamarri (Kurnool Distt.) A.P. Date: 6-7-1988 To Coromandel Marketing (India) Pvt. Ltd., Liberty Road, Himayath Nagar, Hyderabad. Greetings to the above addressee. You have put up a monthly target to us, for which we are very happy. But you are not sending the Stocks accordingly. Here, we too have introduced special Scheme for sales of the stocks. Hence, we will be put to great loss if you do not supply the stocks. Hence, we request you to supply the stocks to ensure no loss to us. In the past you have made good supplies in SSSI & II. And now, if you do not make the supplies, we will loose reputation in the market. Till now, we have made supplies within the time stipulated by us. But now due to the irregular supplies we are loosing our reputation and it is unfortunate that we are sustaining losses. Therefore, we request you to mak....
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....f such internal memo, filed at page 75/16 of the paperbook, reads as under-- "Respected Sir, I have visited the following towns on my market work that the situation is very embrasing both with the dealers and the authorised agents. Please find the town-wise, particularly major towns which I visited in the fortnight. 1. Srikakulam--Here our Agent complainted about quality of Lepakshi bulbs, which are getting maximum replacement, as manufacturing defects are there. And the dealers are complaining the quality of the product, which it was very bad. The reputation is going with the consumers. 2. Bobbili--The Agent complained the quality and replacements accumulated a lot and the outstanding (direct) which he is refused to pay. 3. Vizianagaram--Agent has regretted for the non-supply of stock, and the stocks which he got previously getting replacements and consumer complaints about fusing very soon and when testing. 4. Visakhapatnam--The agent has deplored about irregularity supply and replacement are accruing more and more on previous supply as quality (fusing immediately particularly 60W, 40W and 100W bulbs) And the outstanding due is high the Agent has not paid and the more over....
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....ers received from M/s, Krupa Agencies, which we have extracted hereinabove. The learned counsel for the assessee also invited our attention to certain remarks of the Arbitrator figuring at pages 386 and 387 of the Award, which read as under- ".....The cessation of supplies by MLW directly resulted in heavy financial loss over the period of subject-agreement. While CMI could not curtail its expenditure as the subject-agreement subsisted, losses due to non-supply by MLW began to mount up over the period of subject agreement. Keeping in view of the agreement with MLW various schemes were initiated by CMI to sell Lepakshi and Coromandel Brand and agreements were in turn entered into with the Stockists, Agents and Dealers to supply these lamps and tubes. As against the huge Purchase Orders, MLW supplied goods worth only Rs. 10.55 lakhs. As MLW failed to supply CMI the goods, CMI could not honour its own commitment to third parties and the good reputation built up in the market over the years was damaged (vide Exs. C-670 to 687). The credibility of CMI slowly but steadily got eroded. Stockists claimed damages consequent upon CMI's failure to supply the goods. The direct effect of it was....
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....he other hand pleaded that liability for damages arises from a contract, as rights and liabilities of the contracting parties are spelt out in the contract, and damages for breach of contract have also to be spelt out or at least the contract should provide for ascertainment of the damages through arbitration of dispute. It is pleaded that the agreement entered into by the assessee with M/s. Mysore Lamp Works dated 1-4-1987 is a formal contract, and is total different from the alleged contracts, contained in the circular letters issued by the assessee, fixing the targets to its stockists/dealers. The rights and liabilities of the parties are spelt out in the assessee's contract with M/s. Mysore Lamp Works, whereas the so-called contracts contained in the circular letters spelt out nothing of that sort. The circular letters only contained the targets unilaterally fixed by the assessee, for being achieved by the stockists/dealers, though they are agreed to by the stockists. The assessee cannot claim any damages if the corresponding stockists failed in reaching the targets, and vice versa the stockists cannot claim any damages if the supplies are not made by the assessee-company. The ....
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....resentative, the so-called agreement contained in the circular letter of the assessee to its stockists, cannot be regarded as an agreement between the assessee and the stockists, saddling the assessee with any liability in case of failure to make the supplies as per the targets fixed. The circular letter does not spell out any such liability on the part of the assessee. It does not even provide for arbitration, nor has arbitration been undertaken to settle the dispute between the assessee and the stockists. The letters received from the stockists, which we have reproduced hereinabove, do not quantify the losses, and they do not even hold the assessee liable to meet those losses. At any rate, the letters do not contain the figures of losses incurred by the concerned parties. No legal proceedings have been undertaken by these parties against the assessee, and so, there is no ascertained liability on the part of the assessee towards its stockists. With regard to the credit notes allegedly sent by the assessee, we have specifically enquired of the learned counsel for the assessee whether the postal acknowledgements in support of the action of sending the credit notes are available. He....
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.... the view that the decisions cited by the learned Departmental Representative support his stand. In the case of Bharat Earth Movers Ltd., the Apex Court observed as under-- "If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." We are of the view that in the present case, the liability has not definitely arisen in the accounting year relevant to the assessment year 1998-99. It is not a case where merely the quantification has been postponed. There are no parameters obtaining in the accounting year relevant for assessment year 1998-99, for effecting quantification of the claims of the stockists. The claims m....