TaxTMI 
TaxTMI 
1957 (2) TMI 62
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....t to the said countries. The price of coffee fixed by the India Coffee Board on the export quota was far below the local price. In case of failure to export the coffee so purchased, clause 8 of the contract provided: " If the buyer fails to ship the coffee purchased for export to a destination outside India, the Board reserves to itself the right to levy liquidated damages or to restore the status quo in any one of the following ways, at the absolute discretion of the Controller of Coffee : (a) To recover a fixed measure of damages at Rs. 20 per cwt. to be paid to the surplus pool ; (b) to export an equivalent quantity by weight of coffee purchasing the same from pool and to recover the loss incurred in the transactions from the buyer. The decision of the Controller in the matter of price at which such coffee is purchased and sold and in the matter of fixing the loss shall be final; and (c) to call upon the buyer to restore the stock delivered to him at a price less than the purchase price by 2 ½ per cent. of the price for every month after the expiry of the period for export fixed above and the date when the buyer is called upon to restore the stock provided tha....
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....y for the expenditure was known or incurred. In fact, if the assessment for 1944-45 had been promptly completed, there could have been no claim by the assessee in that year. The assessee never informed the authorities either before 16th August, 1943, or soon after that it had infringed the law and incurred liability by way of damages which had to be paid to the Coffee Controller. Thus, there was no liability incurred at all during the period for which the claim was made. Secondly, it was found that the impugned sum was described as liquidated damages and as such it did not form an addition to the cost of commodity purchased by the assessee. On these two grounds, the Tribunal negatived the assessee's claim and dismissed the appeal. 5. The question of law on which the Tribunal had been directed to state is as follows : "Whether on the facts and in the circumstances of the case, the sum of Rs. 1,19,177 paid by the assessee as damages to the Indian Coffee Board for not exporting the coffee seeds outside India under the terms of agreement is allowable as an expenditure under section 10(2)(xv) of the Act in the assessment year 1944-45?" S. Swaminathan, for the assessee C.....
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....al. (c) To call upon the buyer to restore the stock delivered to him at a price less than the purchase by 2+ per cent. of the price for every month after the expiry of the period for export fixed above and the date when the buyer is called upon to restore the stock provided that a period of fifteen days and over shall be treated as a month and a period less neglected." "The fixed damages referred to above shall be deemed as liquidated damages and the buyer shall not be entitled to any reduction thereof in any circumstances." It was apparently the first of these alternatives that it was availed of by the Controller of Coffee, and the damages the assessee was liable to pay for its admitted breach of the contractual obligation was assessed at Rs. 1,19,177 on 1st June, 1946. The assessee paid this amount in instalments in the latter part of its year of account 1945-46. The assessment proceedings for 1944-45 were completed by the Income-tax Officer only on 5th August, 1947. The assessee firm claimed that the sum of Rs. 1,19,177 it had paid as liquidated damages should be deducted to arrive at its assessable prof....
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....ainst the enforcement in future of what was still a contingent liability in 1942-43. However prudent such a provision might have been from the point of view of accountancy, that would not have sustained a claim for deduction under section 10(2)(xv) of the Act with reference to the account year 1942-43. It would still have been an unascertained claim for damages for breach of contract. The claim itself was not made in the year of account. That there could be no defence to the claim when it was made did not alter the fact that the claim had yet to be made and the damages yet to be ascertained. It could not be predicated in 1942-43 what would be the claim of the India Coffee Board, the other contracting party entitled to damages under the contract. We have already set out the terms of clause 9 of the contract. It provided for three alternatives, any one of which the India Coffee Board could claim at the discretion of the Controller of Coffee. The quantum of damages could not possibly have been identical under each of these three alternatives open to the India Coffee Board. Which of these three alternatives gave the greatest monetary advantage to the India Coffee Board at any given ....
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....n as the required equipment became available. The company claimed the latter set of amounts as admissible deductions in computing its assessable profits. That claim was disallowed. In the assessment proceedings an accountant called in as an expert gave evidence. He stated that the accounts had been prepared in accordance with the principles of sound commercial accounting. He added that, if he had been the auditor of the assessee company, he would not have been prepared to certify the accounts as correct, if the provisions to meet the company's liabilities in respect of equipment shortages had not been made year by year in the manner in which the accounts showed them to have been made. In dealing with the evidence of the accountant, Tucker, L.J., observed: ".....they (accounts) might well have been prepared in accordance with the principles of sound commercial accounting without being permissible deductions before arriving at the profits in a particular year." After analysing the terms of the contract in that case Tucker, L.J., observed: "The real liability under the contract, so far as the repl....
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....bsp; "........this only serves to make it plain that what they are seeking to do is to put against the actual ascertained receipts from their business in one period a loss which is neither suffered nor incurred in that period. I know of no justification for this, either under the rules or principles of the Income Tax Acts, or in ordinary commercial accounting." In Naval Colliery Co. Ltd. v. Commissioners of Inland Revenue [1928] 12 Tax Cas. 1017 the assessee company, which carried on business in mining, held their mines on leases which contained the usual covenants for the repair and maintenance of the mines, pits, roads etc. Owing to national stoppage in the coal mining industry, the company was forced to close down their mines from 1st April, 1921, to 2nd July, 1921. The stoppage of work resulted in severe damage to the mines involving considerable amount of expenditure to recondition the mines. The reconditioning work was commenced after 2nd July, 1921. For the period of account from 1st April, 1921, to 30th June, 1921, the assessee debited itself in its accounts with the cost of reconditioning the mines, though no expenditure was made until after the end of the accounting pe....
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....iability by admission or decision that it can properly be brought into computation........" The position is thus summed up in Simon's Income Tax, second edition, Vol. II, paragraph 230, at page 203: "In computing the profits of a trade it is the normal accountancy practice to allow as an expense any sum in respect of liabilities which have accrued over the accounting period, and to make a deduction of such sums from the profits. Following the decision in Peter Merchant Ltd. v. Stedeford (Inspector of Taxes) [1948] 30 Tax Cas. 496 however, it appears that the nature of liabilities which may be deducted on business and accountancy principles does not accord with the nature of liabilities deductible for income-tax purposes. For income-tax purposes it was held that a distinction must be drawn between an actual, i.e., legal liability, which is deductible, and a liability which is future or contingent and for which no deduction can be made." The position under section 10(2)(xv) of the Indian Income-tax Act is the same, as the learned authors pointed out in Kanga and Palkiwala's Income....
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....een finally settled, the accounts could be reopened so as to bring in a payment for such work, even though it is gratuitous, which is made thereafter. That related to a receipt after the period of account. In view of the true principles applicable to relating back of expenses, we see no scope for extending the principle laid down in Dadswell's case* to the claim of the assessee. Our conclusion on this part of the case is that, even if the sum the assessee had eventually to pay in 1945-46 as liquidated damages for breach of its contractual obligation had constituted a permissible deduction under section 10(2)(xv) of the Act, such a claim could not have been allowed in the assessment year 1944-45 in computing the assessable profits for the accounting year 1942-43. We shall next deal with the question whether the requirements of section 10(2)(xv) could be satisfied, i.e., whether this expenditure had been laid out or expended wholly and exclusively for the assessee's business. What the Income Tax Act in England does not permit among other things is (1) any disbursements or expenses not being money wholly and exclusively laid out or expended for the purpose of trade (r....
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....ther vocation, or fall on the trader in some character other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accident in travelling might be deducted. On the other hand if a man kept a grocer's shop, for keeping which a house is necessary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising thereby to the grocer ought not to be deducted. Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise." What Lord Davey observed in the same case has been applied as consistently by Courts in India as in England. Lord Davey said: ".....'for the purposes of the trade.' These words are used in other rules and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, etc. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made ....
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....Attorney-General has elected to take treble the value of the goods, nor does it matter that it may be called in the information a forfeiture. It is in fact, under the section, a penalty." At page 237 the learned Master of the Rolls pointed out that no moral obliquity attached itself to the conduct of the assessee who had to pay a penalty, but he observed that that made no difference. At page 238 the learned Master of the Rolls observed: "Now what is the position here? This business could perfectly well be carried on without any infraction of the law at all. This penalty was imposed because of an infraction of the law and that does not seem to me to be, any more than the expense which had to be paid in the case of Strong v. Woodifield appeared to Lord Davey to be, a disbursement or expense which was laid out or expended for the purpose of such trade,.........nor does it seem to me, though this is rather more questionable, to be a sum paid on account of a loss connected with or arising out of such trade,............." Warrington, L.J., observed at page 24: &n....
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.... Co., Ltd. v. Commissioner of Income-tax, it was on the application of the principle laid down by Lord Loreburn, L.C., in Strong v. Woodifield. At page 563 Chagla, C.J., observed: "Now, applying these two tests to the facts of the case, in my opinion, both the tests are satisfied because the loss is incidental to the trade because it was in the course of its business of selling stationery that the directors were charged with having contravened the law and it is also in its capacity as a trader that the company was called upon to defend its directors and the salesman." Earlier the learned Chief Justice pointed out that the expenses for the litigation were not incurred by the persons charged with the offences themselves, but they were incurred by the company in order to save those persons from the consequences of the prosecution. We have referred to this case only to show that the principles laid down in Strong v. Woodifield(1) were not departed from in deciding whether the deduction claimed by the assessee, Advani & Co., under section 10(2)(xv) was permissible. The learned couns....
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....e we have to consider in this case, helps the assessee. In Scammell and Nephew Ltd. v. Rowels the company paid GBP 7,500 in settlement of a claim for damages for defamation. That payment was under a compromise entered into between the assessee company and Mr. Toms. The claim of the assessee company, that the payment constituted a permissible deduction, was upheld by the Court of Appeal. Affirming the decision of Lawrence, J., at page 53, Greene, M.R., pointed out: "...........there is no evidence upon which the Commissioners could find that the object of the appellant company in entering into the compromise was anything except to obtain payment of as much of the balance of the accounts as they could persuade Mr. Toms to agree to, and that account being, as I have said, a trading account, it seems to me that the compromise was a compromise effected for the purpose of the company's trade and for the purpose of enabling them to recover the payment of a trading debt owing to them from a customer, which would come into computation in their trading account. On that basis, payments made as a con....
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.... other object in view than the sale of the newspaper. The liability, to damages was incurred or the claim was encountered because of the very act of publishing the newspaper. The thing which produced the assessable income was the thing which exposed the taxpayer to the liability or claim discharged by the expenditure." Rich, J., put it thus: "As publication is the common source of income and liability, the necessary connection between the carrying on of the business of newspaper and the liability which causes the expenditure is complete." The claim of the assessee before us is on a totally different footing, as we shall presently show. Equally strong reliance was placed by the learned counsel for the respondent on Mask and Co. v. Commissioner of Income-tax, Madras[1943] 11 I.T.R. 454. In that case the assessee firm, which was carrying on business in crackers, entered into a contract with other proprietors in the same line of business, under which the assessee's goods were to be sold at certain specified rates. But in breach of this contract the assessee sold cracke....
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.... by the company was for fraud and deceit on its part or was akin to such damages, observed at page 93: "If it is fraudulent and deceitful then the penalty it pays by way of damages cannot be deducted as a trading expense any more than could the penalty in Commissioners of Inland Revenue v. Alexander Von Glehn & Co. Ltd." Possibly it was only the argument that was set out, because the learned Judge observed next: "For the respondent company it was argued that even were the GBP 25,000 damages, or akin to damages, for fraud and deceit it would still be entitled to deduct that sum in computing its taxable profits, but as this question in my view does not arise I say nothing about it." The last of the cases we have to refer to on the question of damages is Fairrie v. Hall*. In that case the assessee Fairrie had to pay GBP 3,575, damages and costs, in an action for malicious libel. After referring to the principles laid down in Strong v. Woodifield** Macnaghten, J., observed at page 20....
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....ffee, whether for ultimate export out of India or for sales within India, had a statutory basis. It is true the Act itself did not in express terms prohibit sale within India of coffee sold by the Board for export. That what was broken by the assessee was a term of the contract and not an express provision of law does not, in the circumstances of this case, make any real difference to the principle to be applied. It was in exercise of the statutory duties imposed on the Board to regulate and control sales of coffee produced in India, in the interests of the national economy of the country, that the Board, through the instrumentality of a contract, virtually laid an embargo on sale within India of coffee that had been sold at a concessional rate for the specified purpose of export. It was that that the assessee transgressed when it deliberately and without any apparent excuse sold the coffee within India. What it had to pay was no doubt called liquidated damages. But the payment was really akin to a penalty for committing an act opposed to public policy, a policy that underlay the Act, which the Act left to the India Coffee Board to enforce. The assessee could and should have carrie....