Ita/108/2001 Of Commissioner Of Income Tax v. M/S.united Catalysts India Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.M.JOSEPH MONDAY, THE 25TH SEPTEMBER 2006 / 3RD ASWINA 1928 ITA.No. 108 of 2001() --------------------- ITA.508COCH/1993 of I.T.A.TRIBUNAL,COCHIN BENCH DT.31.1.2001. .................... APPELLANT: ----------------- THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADV. SRI.P.K.R.MENON(SR.),SC FOR IT SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT: ------------------- M.S.UNITED CATALYSTS (INDIA) LTD.,BINANIPURAM BY ADV. SRI.P.BALACHANDRAN SMT.PREETHA S.NAIR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 25/09/2006, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & K.M.JOSEPH, JJ. ..................................................................... ..................................................................... Dated this the 25th day of September, 2006. Ramachandran Nair, J. JUDGMENT The question raised is whether the Tribunal is justified in confirming firstappellate order allowing the provision for liquidated damages claimed by therespondent-assessee. The respondent-assessee is engaged in manufacture andmarketing of catalysts. The case of the assessee is that in many cases supplies arebeyond the time agreed upon and therefore, buyers are entitled to claim liquidateddamages in terms of purchase order. Even though the Assessing Officer does notdiscuss the reason for part disallowance or the basis on which balance claim isallowed by him, the assessee furnished details before the Commissioner of IncomeTax (Appeals) as well as before the Tribunal and both the authorities allowed theclaim in full. During the assessment year 1990-91 the assessee made a provisiontowards liquidated damages for Rs.16,23,672/-. However, the Assessing Officerout of the said amount disallowed an estimated amount of kRs.4 lakhs on theground that evidence was not available to allow the full claim. 2. On going through the Tribunal's order we find that they have referred toatleast one contract and found that liquidated damages payable by the assessee wasat the rate of half percent per week subject to a maximum of 5% in the case offailure on the part of the assessee to deliver the material in time. The Tribunal further found that during the accounting year relevant for this year the petitionerreceived Rs.2,02,444/- from out of provision made for earlier years and the samewas adjusted against provision under Section 41(1) of the Income Tax Act andonly the balance is claimed in this year. Therefore, obviously the assessee isfollowing a trade practice of making a provision for the accounting year aftersetting off the actuals received from out of earlier year's provisions in this year.Strangely, the assesee has not furnished the details before the Assessing Officer atthe time of assessment and the Assessing Officer also did not bother to call for thepurchase orders to find out whether there is a rational basis for making theprovision. Liquidated damages are always precisely computable as rates ofpenalty will be covered by contracts or purchase orders. If the assessee is sureabout the entitlement of the claim of the purchaser, then we see no reason why theamount should not have been shown in the bill or as a credit note so that only netamount gets credited in the accounts. On the other hand, if assessee is waiting forthe buyer's claim and if there is any scope for negotiation or bargaining, then theassessee will be justified in making a provision which also should be based on theterms of the purchase order or contract. In other words, if the liquidated damagesare provided in the contract or purchase order, then the assessee is entitled to makethe claim in terms of the same. The assessee should have produced the detailsbefore the officer and it was open to the officer to examine whether provision ismade based on the contract and if so, to allow the same. In other words, there is no scope for estimated disallowance from provisions made to provide for liabilityin terms of the contract. From the order of the Tribunal it is clear that assesseehas a clear basis for creating the provision and is following a system of accountingby adjusting subsequent receipts against provisions. If this is a regular practice ofthe assessee, we see no reason for disallowance of any estimated amount by theofficer. In view of the specific finding by the Tribunal as above, we find noground to interfere with the Tribunal's order. The Income Tax Appeal is thereforedismissed. However, it would be open to the officer to examine the rationality ofthe claim based on contracts as stated above for later years. C.N.RAMACHANDRAN NAIRJudge pms K.M.JOSEPHJudge C.N.RAMACHANDRAN NAIR &K.M.JOSEH, JJ.----------------------------------------- T.R.C. No. of 200-------------------------------JUDGMENT Dated