M/S.ffe Minerals India Private Limited v. The Joint Commissioner Of Income-Tax,Special Range Vi, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN M/s.FFE Minerals India Private Limited,27, G.N.Chetty Road,T.Nagar, Chennai-600 017. ..Appellant/Respondent in Tc.501/07 & 502/07 and 1450 and 1451/07 -vs- The Joint Commissioner of Income-tax,Special Range VI, Chennai...Respondent/Appellante in TC.501/07 and 502/07 and 1450 and 145/07 Tax Case (Appeal) filed under Section 260-A of the IncomeTax Act, 1961 against the order of the Income-tax AppellateTribunal,“A”Bench,Chennaidated12.12.2002inI.T.A.No.2022/Mds/2000 for the assessment year 1997-98. https://hcservices.ecourts.gov.in/hcservices/ Tax Case No.1450 of 2007 in 'A' Bench, dated 29th March 2007 inITA.NO.966/mds/2003Assessment year 1999-2000. Tax Case No.1451 of 2007: 'A' Bench dated 29th March 2007 in ITA No.734/Mds/2003Assessment year 2000-2001. For Appellant:Mr.G.Baskar(in all Appeals)For Respondent :Mr.Karthik Ranganathan,(in all Appeals)Standing CounselCOMMON JUDGMENT[Delivered by T.S.Sivagnanam, J.] In these batch of cases, the issue arises out of the commonorder of the Tribunal in the assessee’s own case for theassessment years 1997-98 and 1998-99. 2.After hearing the learned counsels appearing for theparties, we found that T.C.(A) Nos.170 and 171 of 2004 are thesubstantive appeals. This is so because, the assessee has filedthese appeals challenging the common order passed by theTribunal, confirming the order passed by the Commissioner ofIncome Tax (Appeals) on the ground that the liquidated damages,as claimed by the assessee for the impugned two assessment yearsremained only as provisional damages or unliquidated damages onthe close of the respective previous years and therefore, theassessee is not entitled to assert for the deduction of theseamounts as if they are liquidated damages. The other fourappeals arose out of the following situation. 3.The assessee filed miscellaneous petition before theTribunal to revise the order dated 12.12.2002, which is impugnedin T.C.(A) Nos.170 and 171 of 2007. The said petition wasdismissed by order dated 24.09.2003. The assessee filed secondmiscellaneous petition to revise and to sustain their claim fordeduction. This miscellaneous petition was allowed by orderdated 21.07.2004, accepting the claim made by the assessee fordeduction of those amounts as liquidated damages. Therefore,the assessee withdrew T.C.(A) Nos.170 and 171 of 2004. https://hcservices.ecourts.gov.in/hcservices/ 4.The Revenue challenged the common order passed by theTribunal on the second miscellaneous petition vide order dated21.07.2004 in T.C.(A) Nos.501 and 502 of 2007. For theassessment years 1999-2000 and 2000-01, the Tribunal followedthe order in the second miscellaneous petition dated 21.07.2004.Therefore, the Revenue has filed T.C.(A) Nos.1450 and 1451 of2007. By our order dated 25.07.2018, we have restored T.C.(A)Nos.170 and 171 of 2004. Those appeals were dismissed asinfructuous in the light of the order passed by the Tribunaldated 21.07.2004. 5.We opined that since the said order dated 21.07.2004 wasput to challenge by the Revenue in T.C.(A) Nos.501 and 502 of2007, the appeals have not become infructuous and therefore, therestoration petitions have been allowed and that being thesubstantive appeals, we have heard the arguments of the learnedcounsels for the parties. 6.The above referred appeals had been admitted on thefollowing substantial questions of law:-“T.C(A) Nos.170 and 171 of 2004 : Whether on the facts and circumstance of thecase and in view of the admitted delay inexecution the Tribunal was right in coming to theconclusion that the claim of Liquidated damages inrespect of delay in delivery has not arisen duringthe current year under appeal?”T.C.(A) Nos.501 and 502 of 2007 : 5.We opined that since the said order dated 21.07.2004 wasput to challenge by the Revenue in T.C.(A) Nos.501 and 502 of2007, the appeals have not become infructuous and therefore, therestoration petitions have been allowed and that being thesubstantive appeals, we have heard the arguments of the learnedcounsels for the parties. 6.The above referred appeals had been admitted on thefollowing substantial questions of law:-“T.C(A) Nos.170 and 171 of 2004 : Whether on the facts and circumstance of thecase and in view of the admitted delay inexecution the Tribunal was right in coming to theconclusion that the claim of Liquidated damages inrespect of delay in delivery has not arisen duringthe current year under appeal?”T.C.(A) Nos.501 and 502 of 2007 : (a) Whether on the facts and in thecircumstances of the case, the Tribunal isempowered to entertain a second application forrectification of its order having rejected anidentical application earlier? (b) Whether the facts and circumstances ofthe case warranted a rectification of its earlierorder by the Tribunal?(c) Whether the Tribunal as in the guise ofrectifying its order dated 12.12.2002 has ineffect reviewed the said order which it is notempowered to do?T.C.(A) Nos.1450 and 1451 of 2007 : (a) Whether on the facts and in thecircumstances of the case, the Tribunal was rightin dismissing the Revenue's appeal against theorder of the CIT(A) granting relief in amiscellaneous application when the issue was stilldebatable? (b) Whether on the facts and in thecircumstances of the case the Tribunal was rightin holding that the assessee is entitled todeduction of the provisions made for damages fordelayed supply, even prior to finalizing thesame?” 7.Mr.G.Baskar and Mr.M.P.Senthil Kumar, learned counsels forthe assessee submitted that the Tribunal was well justified inpassing the order dated 21.07.2004 thereby substitutingparagraph 11 of its earlier order dated 12.12.2002. 8.By referring to the terms and conditions of the agreement,it is submitted that the liability is an ascertained liability,as the conditions clearly stipulate the percentage of liquidateddamages which the assessee has to incur in case of breach of thecovenants of the contract. It is submitted that the assessee isengaged in the business of turnker projects, in which, time isthe essence of contract, and one of the conditions enumerated inthe contract was delivery of equipment in time, which if notdone within the stipulated time, leads to liquidated damages.It is further submitted that the said provision is anascertained liability and not contingent liability. 9.It is further submitted that as when there is a delay indelivery of the machinery, liability to pay damages accrues andit is an ascertained liability and in case of purchase, wherethere has been delay in delivery, the purchasers have withheldthe amount of liquidated damages and the assessee has also notdenied the liability. 10.The learned counsels have drawn the attention of thisCourt to the order passed by the CIT(A) dated 09.10.2000, inwhich the quantum of liquidated damages payable on account offailure to meet the performance of guarantees have beenstipulated. It is submitted that individual liquidated damageson account of failure to meet the performance guarantees shallbe maximum of 2.5% of the contract value and shall be applicablefor dewatering capacity of the Lime Sludge Filter, productioncapacity of the Kiln, quality of Burnt Lime, LSHS OilConsumption per tonne of lime etc. 10.The learned counsels have drawn the attention of thisCourt to the order passed by the CIT(A) dated 09.10.2000, inwhich the quantum of liquidated damages payable on account offailure to meet the performance of guarantees have beenstipulated. It is submitted that individual liquidated damageson account of failure to meet the performance guarantees shallbe maximum of 2.5% of the contract value and shall be applicablefor dewatering capacity of the Lime Sludge Filter, productioncapacity of the Kiln, quality of Burnt Lime, LSHS OilConsumption per tonne of lime etc. 11.Further it is submitted that the total of the aboveliquidated damages on account of failure to meet suchperformance guarantees shall be limited to a maximum of 7.5% ofthe total contract price and the liquidated damages for delay indelivery of equipment and spares is 0.5% per week subject to themaximum of 5% on contract price. Further, the total liquidateddamages on account of failure to meet performance guarantees and https://hcservices.ecourts.gov.in/hcservices/ late delivery shall be limited to 10% of total contract price.Thus, it is submitted that the liability to pay liquidateddamages arises immediately on occurrence of the delay. Hence,the liability accrued is an accrued liability and the assesseehas accepted the delay in each of the contract as on 31.03.1997and 31.07.1998 and have computed liquidated damages as per therespective contracts. The above contention though not initiallyaccepted by the Tribunal, on the second miscellaneous petitionhaving been filed, the Tribunal accepted the case of theassessee and held as follows:- “.............The claims in the books are basedon the terms of the contract between the parties.Since the liability has arisen and is crystallizedas a result of binding contract between the partiesthe same is allowable as held by the Hon'ble SupremeCourt reported in 37 ITR 1 and 245 ITR 248 as wellas the decision of the Special Bench reported in 35ITD 18 and 43 ITD 527 and as conceded by thedepartment before the jurisdictional High Court in130 Taxman 400 (supra). We further hold thatallowability of the claim need not be postponed tillthe plea for waiver is considered or rejected by thecustomer. We also hold that in view of thedecisions of the Hon'ble Supreme Court reported in37 ITR 1, 245 ITR 24, 261 ITR 275 and 240 ITR 355extracted above, the decisions of the Kerala HighCourt reported in 226 ITR 142 and 182 ITR 175 arenot relevant in deciding the issue......” 12.Thus, it is submitted that the Tribunal was welljustified in passing the order dated 21.07.2004, in the secondmiscellaneous petition, which lies upon the correct legalposition and hence, the order dated 12.12.2002 impugned in TCANos.170 and 171 of 2004 calls for interference. 13.The learned counsels for the assessee referred to thedecision of the Hon’ble Supreme Court in Calcutta Co. Limitedvs. CIT reported in (1959) 37 ITR 1. By referring to the saiddecision, it is submitted that liability already accrued on thedate when the contract was entered into and though thatliability was to be discharged on a future date, it is anaccrued liability and the estimated expenditure, which would beincurred in discharging the same could very well be deductedfrom the profits and gains of the business. 14.Reliance was placed on the decision of the Hon’bleSupreme Court Rotork Controls India (P) Ltd. vs. Commissioner ofIncome Tax reported in (2009) 314 ITR 0062 wherein the provisionfor warranty claims on the basis of past experience was held tobe an allowable as deduction under Section 37 of the Income TaxAct, 1961 (hereinafter referred to as “the Act”). https://hcservices.ecourts.gov.in/hcservices/ 14.Reliance was placed on the decision of the Hon’bleSupreme Court Rotork Controls India (P) Ltd. vs. Commissioner ofIncome Tax reported in (2009) 314 ITR 0062 wherein the provisionfor warranty claims on the basis of past experience was held tobe an allowable as deduction under Section 37 of the Income TaxAct, 1961 (hereinafter referred to as “the Act”). https://hcservices.ecourts.gov.in/hcservices/ 15.Reliance was also placed on the decision of the Hon’bleSupreme Court in the case of Bharat Earth Movers vs.Commissioner of Income Tax reported in (2000) 245 ITR 0428. Byreferring to the said decision, it is submitted that theprovision for meeting the liability for encashment of earnedleave by the employees was held to be admissible deduction. 16.T(A) as well as the Tribunal in its order dated12.12.2002 negatived the case of the assessee by placingreliance on the decision of the High Court of Kerala inN.Sundareswaran vs. CIT reported in (1997) 226 ITR142. 17.The learned Standing Counsel distinguishing the saiddecision submitted that in the said case, the assessee had madeprovision on the ground that the foreign buyer had initiatedarbitration proceedings and immediately without awaiting for theoutcome of the arbitration proceedings, a provision in theaccounts was made for the claim of damages. Therefore, it issubmitted that in the said case, the Court held that the amountwas unascertained and contingent. It is submitted that the saiddecision can have no application to the facts of the presentcase, as the liability has been fixed under the agreement andthe assessee has accepted the delay and the payments have beeneffected to the assessee after deducting the amount towardsdamages as fixed under the contract. With the abovesubmissions, the learned counsels prayed for allowing TC(A)Nos.170 and 170 of 2004 filed by the assessee and dismissing TC(A) Nos.501 and 502 and 1450 and 1451 of 2007 filed by theRevenue. 18.Mr.Karthik Ranganathan, learned Standing Counselappearing for the Revenue sought to sustain the order passed bythe Tribunal by contending that to be entitled for deduction onthe provision made, the assessee has to satisfy the three testslaid down by the Hon'ble Supreme Court in Rotork Controls India(P) Ltd. vs. Commissioner of Income Tax reported in (2009) 314ITR 0062. 19.By referring to the decision in the case ofCommissioner of Income-tax vs. Forbes Campbell Finance Ltd.reported in (2013) 352 ITR 602, it is submitted that the Hon'bleCourt has held that unless the three conditions recognising theliability are satisfied, the claim could not be automaticallyallowed as a provision made on a historical trend. 20.Reliance was also placed on the decision of the Hon'bleDivision Bench of this Court in the case of Renowned AutoProjects Mfrs. Ltd. vs. Income-tax Officer [(2013) 40taxmann.com 13 (Madras)], wherein the Court took intoconsideration the decisions in Rotork Controls India (P) Ltd. https://hcservices.ecourts.gov.in/hcservices/ (supra) as well as in the case of Forbes Campbell Finance Ltd.(supra) and held that the assessee, having not proved theprovision of warranty expenditure based on any scientificmethod, cannot place reliance on the decision of the Hon'bleSupreme Court in Rotork Controls India (P) Ltd. (supra). 21.The learned counsel also referred to the decision ofthe High Court of Calcutta in Commissioner of Income-tax vs.Burlop Commercial (P.) Ltd. [(1993) 200 ITR 605]. https://hcservices.ecourts.gov.in/hcservices/ (supra) as well as in the case of Forbes Campbell Finance Ltd.(supra) and held that the assessee, having not proved theprovision of warranty expenditure based on any scientificmethod, cannot place reliance on the decision of the Hon'bleSupreme Court in Rotork Controls India (P) Ltd. (supra). 21.The learned counsel also referred to the decision ofthe High Court of Calcutta in Commissioner of Income-tax vs.Burlop Commercial (P.) Ltd. [(1993) 200 ITR 605]. 22.After we have elaborately heard the learned counselsfor the parties, we are required to consider the aspect as towhether the assessee is entitled for deduction under Section 37(1) of the Act in respect of provision made towards damages thatthe assessee is liable to pay to the organisation for whom theyhave already done turnkey projects, which has been provided bythem in their books of accounts. We may note that Section 37 ofthe Act uses the word “any expenditure”. Therefore, anexpenditure, which is referred to therein, viz., Section 37(1),would be entitled for being claimed as a deduction. Thus, thetest to be satisfied by the assessee to claim a provision to bean expenditure in terms of Section 37(1) of the Act, the onus isheavily on the assessee and the assessee has to necessarilydischarge the obligations, which have been laid down by theHon'ble Supreme Court in Rotork Controls India (P) Ltd.(supra), which has been popularly known as “triple test”. TheHon'ble Supreme Court in the said decision, explained as to whatis a provision? in the following terms:- “10. What is a provision? This is thequestion which needs to be answered. A provision isa liability which can be measured only by using asubstantial degree of estimation. A provision isrecognized when: (a) an enterprise has a presentobligation as a result of a past event; (b) it isprobable that an outflow of resources will berequired to settle the obligation; and (c) areliable estimate can be made of the amount of theobligation. If these conditions are not met, noprovision can be recognized. 12. A past event that leads to a presentobligation is called as an obligating event. Theobligating event is an event that creates anobligation which results in an outflow ofresources. It is only those obligations arisingfrom past events existing independently of thefuture conduct of the business of the enterprisethat is recognized as provision. For a liability toqualify for recognition there must be not onlypresent obligation but also the probability of anoutflow of resources to settle that obligation.” 23.Thus, the three tests being that (a) an enterprise hasan obligation as a result of a past event; (b) it is probablethat an outflow of resources will be required to settle theobligation; and (c) a reliable estimate can be made of theamount of the obligation. The Revenue cannot dispute the factthat the assessee in the instant case satisfied test Nos.(a) and(c). 24.To be entitled to a deduction as claimed by theassessee, the assessee has to cumulatively satisfy all the threetests. Therefore, it has to be seen as to whether it isprobable that an outflow of resources will be required to settlethe obligation. 25.Mr.G.Baskar, learned counsel for the assessee submittedthat in the instant case, it is not a probability at all butdefinite mathematical position, as the contract itselfstipulates the percentage of liquidated damages, which ispayable based on the length of delay. In this regard, documentswere referred to, to show that there is an admitted delay on thepart of the assessee and therefore, the third party for whom,turn key projects have been implemented, are bound to deduct thesame and therefore, there is a certainty in the outflow. Inthis regard, various contracts entered into with the contractingparties were referred to. 25.Mr.G.Baskar, learned counsel for the assessee submittedthat in the instant case, it is not a probability at all butdefinite mathematical position, as the contract itselfstipulates the percentage of liquidated damages, which ispayable based on the length of delay. In this regard, documentswere referred to, to show that there is an admitted delay on thepart of the assessee and therefore, the third party for whom,turn key projects have been implemented, are bound to deduct thesame and therefore, there is a certainty in the outflow. Inthis regard, various contracts entered into with the contractingparties were referred to. 26.The Hon'ble Supreme Court while laying down the threetests, has used the expression “probable” in the second test.The 'Black's Law Dictionary' defines “probable consequences” tomean an effect or result that is more likely to follow itssupposed cause than not to follow it. “Possibility” has beendefined as an event that may or may not happen. Thus, degree ofproof required to show that there is a probability of outflow ofresource is higher, as the effect is which is more likely tohappen than not to happen as to where possibility is an event,which may or may not happen. Therefore, the assessee has todefinitely show that there is every probability that an outflowof resources will be required to settle. 27.The documents placed before the Court will clearly showthat there has been negotiations, discussions before theliquidated damages was arrived at, which was much after thesubject assessment years. These documents are in factstrengthening the case of the Revenue and the findings renderedby the CIT(A) as well as the Tribunal, which had held that thereis no ascertained liability. 28.As pointed out by the Hon'ble Supreme Court, a pastevent that leads to a present obligation is called an obligatingevent and the obligating event is an event that creates an https://hcservices.ecourts.gov.in/hcservices/ obligation, which results in an outflow of resources. Thus,only those obligations arisen for past event existingindependently on the future contract of the enterprise isrecognised provision. Admittedly, in the instant case, no suchpast events have been placed before the Assessing Officer toshow that there is every probability that the expenditure willbe incurred. At best, the assessee can pitch their case as acase of possibility but, not a case of probability. Thus, theassessee having failed to fulfil the triple test prescribed inRotork Controls India (P) Ltd. (supra), is not entitled to thededuction as claimed by them. 29.The learned counsel for the assessee submitted that theassessee should be entitled to claim the same in the year whenthe damages had been recovered. Needless to state that it isfor the assessee to disclose the same in the return of income tothe relevant year, which will obviously be considered by theAssessing Officer in accordance with law. Accordingly, thesecond substantial question of law framed in these appeals isanswered in favour of the Revenue and against the assessee. 30.In the light of the decisions referred above, we havetaken the second question of law and decided the case in favourof the Revenue and against the assessee. 31.The first substantial question of law, which has beenframed for consideration as to whether on the facts and in thecircumstances of the case, the Tribunal was right in dismissingthe Revenue's appeal against the order of the CIT(A) grantingrelief in a miscellaneous application when the issue was stilldebatable, has become academic. Therefore, we leave open thatquestion for consideration. 30.In the light of the decisions referred above, we havetaken the second question of law and decided the case in favourof the Revenue and against the assessee. 31.The first substantial question of law, which has beenframed for consideration as to whether on the facts and in thecircumstances of the case, the Tribunal was right in dismissingthe Revenue's appeal against the order of the CIT(A) grantingrelief in a miscellaneous application when the issue was stilldebatable, has become academic. Therefore, we leave open thatquestion for consideration. 32.Mr.D.Prabhu Mukunth Arunkumar, learned Standing Counselsubmitted that the Hon'ble Full Bench of the High Court of Delhiin Lachman Dass Bhatia vs. Assistant Commissioner of Income-tax[ITA No.724/2010 dated 06.08.2010] held that an order passedunder Section 254(2) of the Act recalling an order in entiretywould not be amenable to appeal under Section 260A of the Act.Further, it has been held that an order rejecting theapplication under Section 254(2) is not appealable and if anorder is passed under Section 254(2) amending the order passedin appeal, the same can be assailed in further appeal onsubstantial question of law. 33.The learned counsel for the assessee submitted thatthere are decisions of this Court, where writ petitions werefiled challenging such orders and were converted into tax casesand have been decided. 34.In our considered view, as observed earlier, the firstsubstantial question of law, which has been framed forconsideration, has become academic in the instant case andtherefore, we refrain from expressing any opinion on the saidquestion and leave it open. 35.Accordingly, the appeals filed by the Revenue areallowed and the appeals filed by the assessee are dismissed onquestion no.2. No costs. Sd/- Assistant Registrar(CS-V) //True Copy// Sub Assistant RegistrarabrTo1.The Joint Commissioner of Income-tax, Special Range VI, Chennai.2.The Income-tax Appellate Tribunal, “A” Bench, Chennai.+ 1 cc to Mr. Karthik Rnganathan, Advocate Sr.56026+ 2 ccs to M/s. N. Muthukumar, Advocate SR.55839+ 2 ccs to M/s. N. Muthukumar, Advocate Sr.53838+ 2 ccs to M/s. N. Muthukumar, Advocate Sr.55837Tax Case (Appeal) Nos.170 & 171 of 2004and 501 & 502 and 1450 & 1451 of 2007 PP(CO)EU(20/09/2018) https://hcservices.ecourts.gov.in/hcservices/