Asuma Cashew Company vs Commissioner of Income Tax Commissioner of Income Tax Vs Asuma Cashew Company

K.S. Paripoornan, J.—The assessee as well as the Revenue filed reference applications to refer certain questions of law for the decision of this court, which, according to them, arose out of the appellate order passed by the Income Tax Appellate Tribunal ("the Tribunal") in I. T. A. No. 249/(Coch) of 1982 dated December 16, 1983. The Tribunal has referred one question in R. A. No. 45/(Coch) of 1984, filed by the assessee and one question in R. A. No. 128/(Coch) of 1984, filed by the Revenue. We are concerned with the assessment year 1978-79. The accounting period ended on June 6, 1977. The assessee herein was engaged in the business of exporting cashew kernels. It had entered into a contract with a foreign party known as "Hollander Trading Corporation" for supply of cashew kernels. As per the terms of the contract, the assessee did not export the nuts. It committed breach of the contract. The matter was referred to the arbitration of the Association of Food Distributors, New York, as per the terms of the contract. An award was passed on August 9, 1979. The assessee was required to pay the foreign company a sum of Rs. 6,20,848 by way of damages. The assessee''s claim for deduction of the amount was disallowed by the Income Tax Officer for the year 1978-79 on the ground that the liability arose only on the passing of the award which was subsequent to the close of the accounting period. In appeal, the Commissioner of Income Tax (Appeals) accepted the plea of the assessee. The Commissioner of Income Tax held that the liability arose during the relevant accounting period since the breach of the contract occurred during that period and the arbitration was only for the purpose of fixing the quantum of damages. In other words, the accrual of liability was not dependent on the passing of the award. The Revenue filed an appeal before the Appellate Tribunal as Income Tax Appeal No. 249 (Coch) of 1982. In the first appeal, the Commissioner of Income Tax (Appeals) had also allowed the claim of the assessee for weighted deduction u/s 35B in respect of the commission paid to various persons. The claim was disallowed by the Income Tax Officer stating that the payment was made in India and that the claim will not fall u/s 35B(1)(b). However, the claim was allowed by the Commissioner of Income Tax (Appeals) stating that the commission was paid for obtaining information regarding markets outside India for the assessee''s products.

The Tribunal considered the above two aspects in detail. On the first aspect, it held that in this case, the claim by the foreign company was for unliquidated damages and the liability can be said to be crystallised only when the damages is determined and accepted either by private negotiation or determined by an arbitrator or court. In this view of the matter, it was held that an enforceable liability can be deemed to come into existence only when it was determined and fixed by the arbitrators and not when the breach occurred. So, the plea of the assessee for deduction of the amount paid to the foreign company in the sum of Rs. 6,20,848 was negatived. On the second aspect regarding the claim of the assessee for weighted deduction u/s 35B of the Act, the Tribunal held that the allowance made by the Commissioner of Income Tax (Appeals) is justified and is in accord with the decision of the Special Bench decision in J. Hemchand and Co.''s case. The decision of the Commissioner of Income Tax (Appeals) on this aspect was affirmed. The decision of the Commissioner of Income Tax on the first aspect regarding the deducibility of the sum of Rs. 6,20,848 required to be paid as damages to the foreign company, upheld by the Commissioner of Income Tax, was reversed. The Revenue filed an application u/s 256(1) of the Income Tax Act regarding the allowability of weighted deduction u/s 35B of the Act. The assessee filed an application u/s 256(1) of the Act regarding the deducibility of the damages awarded by the arbitrators to the foreign parties as per the award. It is on these two applications, one filed by the assessee and the other filed by the Revenue, that the Tribunal has referred the two questions of law for the decision of this court. The questions are the following :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability of the assessee to pay compensation/damages to the foreign party accrued only on the passing of the award by the arbitrator and not on the date of the breach of the contract ? and

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the commission paid by the assessee in India was for obtaining information regarding markets outside India for the products of the assessee and that weighted deduction u/s 35B is allowable on the same ?"

We heard counsel for the assessee, Mr. E.R. Venkiteswaran, and counsel for the Revenue, Mr. P.K.R. Menon. The Tribunal has held that the contract entered into by the assessee with the foreign firm "Hollander Trading Corporation", which provided for the supply of cashew kernels, was not produced before the authorities. However, the Tribunal, on the basis of available materials, held that the contract did not provide for payment of any particular amount as damages in case of breach of the contract and the claim by the foreign company was for unliquidated damages. Proceeding further, the Tribunal took the view that it was not a case where the quantum of damages alone was referred to the arbitrator, but it was a case where the very question as to whether the assessee is liable to pay damages was referred to arbitration. On these facts, the Tribunal held that the liability of the assessee to pay compensation will arise or be crystallised only when the liability to pay damages is adjudicated and the liability itself is determined and accepted by private negotiation or is determined by an arbitrator or by a court. In other words, it was held that an enforceable liability will spring into existence only when it was determined and fixed by the arbitrators and not when the breach occurred as contended by the assessee. We see no error in the said reasoning and conclusion of the Tribunal. One should further state that the very question as to whether any liability was incurred by the assessee during the accounting period ending on June 30, 1977, will depend upon the nature of the contract entered into by the assessee with the Hollander Trading Corporation. The exact terms of the contract are not before us. The document is not included in the paper book. So, we have to proceed on the basis that the claim for damages by the foreign company was for unliquidated damages and the very question as to whether the assessee was liable to pay the damages itself was for the first time determined only by the arbitrator. In this view of the matter, our answer to the question referred by the Tribunal, at the instance of the assessee, is in the affirmative, against the assessee and in favour of the Revenue.

Regarding the weighted deduction allowed by the Tribunal u/s 35B of the Act, counsel for the Revenue contended that the decision in J. Hemchand and Co.''s case has not been accepted by the Revenue. However, it was brought to our notice that a Bench of this court in Commissioner of Income Tax Vs. C. Tharian and Sons, has taken the view that the payment made in India is not an allowable deduction. We need not consider this matter in detail since it was brought to our notice that there are circulars issued by the Central Board of Direct Taxes giving administrative relief to assessees, substantially or in part, adopting J. Hemchand and Co.''s case. These circular issued by the Central Board of Direct Taxes are not before us. All that was stated at the Bar was that the circular issued by the Board in this behalf is dated December 28, 1981. It is further stated that mention is made about the said circular issued by the Central Board of Direct Taxes in the decision of the Allahabad High Court in Commissioner of Income Tax Vs. Novelty Trading Corporation and Others, and Commissioner of Income Tax, Delhi-I Vs. Jay Engineering Works, . We had occasion to pronounce in the matter in Income Tax Reference No. 239 of 1982 Commissioner of Income Tax Vs. Aluminium Industries Ltd., ]. In the light of our earlier decision in Income Tax Reference No. 239 of 1982, dated January 18, 1989 [ Commissioner of Income Tax Vs. Aluminium Industries Ltd., .], we are of the view that this is a matter which requires further appraisal and adjudication by the Tribunal in the light of the circular issued by the Central Board of Direct Taxes dated December 28, 1981. The assessee is entitled to the benefit of the said circular to the extent the said circular has given effect to the decision of the Special Bench of the Tribunal in J. Hemchand and Co.''s case. So we decline to answer the question referred by the Tribunal at the instance of the Revenue, but at the same time, direct the Tribunal to restore the appeal to its file to the above limited extent and adjudicate on the question regarding the entitlement to the weighted deduction u/s 35B of the Act, in the light of the circular issued by the Central Board of Direct Taxes dated December 28, 1981, to the extent the said circular had given effect to J. Hemchand and Co.''s case.

The income tax references are disposed of as above. A copy of this judgment under the seal of this court and the signature of the Registrar will be sent to the Income Tax Appellate Tribunal, Cochin Bench.