ASUMA CASHEW COMPANY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) 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 under Section 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 under Section 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.

(2.) 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 under Section 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 under Section 256(1) of the Income-tax Act regarding the allowability of weighted deduction under Section 35B of the Act. THE assessee filed an application under Section 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 :

(3.) 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.