IN RE: MAHANAGAR TELEPHONE NIGAM LTD. Vs. STATE

JUDGEMENT

(1.) IN this case an application under section 245Q(1) of the Income -tax Act, 1961 (for short 'the Act') in Form No. 34E (meant for notified residents) has been filed in this office on 18 -11 -2004 by the applicant - Mahanagar Telephone Nigam Ltd. (for short 'MTNL') which is a Public Sector Company as defined in section 2(36A) of 'the Act'. Originally the application was filed on 20 -11 -2002 but the same was rejected on the ground that clearance from the Committee on Disputes (COD) had not been obtained by the applicant and it was left open to the applicant to make a fresh application after obtaining the necessary approval. The necessary permission has now been granted by the COD as per minutes (of the High Power Committee on Disputes) dated 25 -10 -2005 and the present application has been admitted vide Order dated 14 -11 -2005. Indian Telephone Industry Ltd. (for short 'ITI') is also a Public Sector Company and is one of the suppliers of plant and machinery to MTNL. The terms of the purchase order/agreement provide that if ITI Ltd. fails to deliver equipments within the stipulated time, MTNL would be entitled to liquidate damages (for short 'LD') . Accordingly, for the period 1987 -88 to 1995 -96, MTNL recovered from the bills of ITI Ltd. liquidated damages amounting to Rs. 2,14,129,382. The amount recovered was adjusted against the cost of assets in some years and shown as income of MTNL in other years and tax was paid on such income in the respective years. Subsequently representations were received by MTNL for waiver of LD, as according to ITI, they were not liable to pay such LD, as supplies could not be made within stipulated time due to various reasons beyond their control. However, in this regard MTNL received a direction from the Telecom Commission vide letter dated 17 -3 -1997 and 18 -11 -1997 for waiver of these liquidated damages already recovered by MTNL. Accordingly, the Board of Directors of MTNL following directions of the Telecom Commission and on account of business exigencies and expediency decided that it would be appropriate to waive the liquidated damages in respect of the aforesaid delayed supply of equipments. Therefore, against the deductions made on account of such liquidated damages from bills, certain amounts were refunded to ITI Ltd. by MTNL during the financial year 2001 -02 (assessment year 2002 -03) and the same were claimed as deduction from its income of that year. However, the Assessing Officer added back to the total income of the assessee an amount of Rs. 12.32 crores on account of disallowance of refund of Liquidated Damages to ITI Ltd. MTNL filed appeal against the order of Assessing Officer. Commissioner of Income -tax (Appeals) has ordered the Assessing Officer to rectify the assessment on receipt of order of Authority For Advance Rulings. As the amount deducted/appropriated towards liquidated damages by MTNL in the earlier years had been shown as income, and tax paid thereon, the amount now refunded to ITI Ltd., deserves to be allowed as deduction from its business in the assessment year 2002 -03. On the facts stated above, the applicant has sought advance ruling of the Authority on the question set forth as follows :

(2.) IN the 'Notes to Accounts' of Tax Audit Report for the financial years 1992 -93 and 1993 -94, the auditors had given following remarks : 'Claim for liquidated damages from contractors for delayed execution of work is accounted for when the amount is finally determined and agreed upon. The same is adjusted to capital for revenue account, as the case may be but it is not clear what treatment was given to the "LD" charges i.e. capital or revenue.

(3.) SCHEDULE O (Other Income) of the P&L Account for the years 1994 -95 and 1995 -96 reveals that the assessee has accounted for LD charges received during the year under a separate sub - head 'Liquidated Damages' and not grouped under the sub -head 'Others'.