NATIONAL AGRICULTURAL CO-OPERATIVE MARKETING FEDERATION OF INDIA LTD. vs. COMMISSIONER OF INCOME TAX DELHI & ANR.


- \* IN THE HIGH COURT OF DELHI AT NEW DELHI - + <u>ITAs No.1096/2008, 1138/2008, & 1146/2008</u>

% Judgment reserved on: 3^rd MAY, 2011

Judgment delivered on: 3 JUNE, 2011

NATIONAL AGRICULTURAL CO-OPERTAIVE ... APPELLANT MARKETING FEDERATION OF INDIA LTD.

Through: Mr.S.Ganesh, Sr. Advocate with

Mr.Satyen Sethi, Advocate

Versus

COMMISSIONER OF INCOME TAX ... RESPONDENT

Through: Ms.Prem Lata Bansal, Sr. Advocate

with Mr.Deepak Anand.

CORAM:

HON'BLE MR. JUSTICE A.K.SIKR! HON'BLE MR. JUSTICE M.L.MEHTA

hether the judgment should be

M.L. MEHTA, J.


- (i) Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that liability to pay interest on damages awarded for breach of agreement dated 12.01.1980 to supply 50,000 metric tonnes HPS Groundnut to M/s Alimenta SA Switzerland, was not allowable deduction? - The appellant is a registered society primarily formed with the 2. object to market agriculture produce for the benefit of producers/farmers. It was also entitled to independently carry on its commercial activities. The appellant/assessee entered into contract with M/s Alimenta SA Switzerland (for short 'Alimenta') for export of 5,000 MT HPS groundnut during the period February to April, 1980 subject to certain terms and conditions. On account of ban imposed by Government of India, the assessee was prohibited from exporting balance quantity of HPS groundnuts. Alimenta initiated arbitration proceedings, wherein the assessee was directed to make payment of US\$ 4681000 as damages with interest @ 10.5% from 13th February, 1981 to the date of the award i.e., 15th November, 1989. The assessee preferred appeal before the Board of Appeal which confirmed the award with some modification, i.e., the assessee was directed to pay US\$ 4526000 as damages with interest @ 11.25% from 13th February, 1981 to the date of award i.e. 14th September, 1990.



February, 1981 to 15^th November, 1989. It was observed that there was no specific order to allow interest beyond 15th November, 1989 and since rate of interest for the subsequent period was also not fixed, the liability remains uncertain and it cannot be said to have crystallized during the year. The assessee carried out an appeal before the Tribunal who vide its impugned order dated 25th January, 2008 held that as per the appellate award dated 14th September, 1990, interest on damages awarded was payable only upto the date of award i.e., 14th September, 1990. Alimenta, in suit before the Delhi High Court had claimed interest from the date of award till the date of payment by the appellant. However, the liability was disputed by the appellant who had challenged the said order of the High Court. Therefore, the Tribunal held that on the last date of the previous year for the assessment year under consideration, there was no legal liability on the part of the appellant to pay interest and that liability was crystallized only on 28th January, 2000 (i.e., assessment year 2000-01) when decree was passed by the Delhi High Court. It is against this order that the assessee is in appeal before us.




315 ITR 190 and J.K. Industries Ltd. v. UOI 297 ITR 176.

Faslika Electric Supply Co. v. CIT 143 ITR 551 (Delhi)

- 5. On the other hand, learned counsel for the Revenue submitted that it was only with the passing of award by the appellate authority on 14th September, 1990 that the interest was confirmed. She submitted that even the interest @ 18% from the date of award till the date of realisation accrued only on 28th January, 2000, when the High Court passed the order making the award rule of the court. Learned counsel placed reliance on Central India Electric Supply Co. v. CIT, 247 ITR 54 (SC); P. Mariyappa Gonder v. CIT, 232 ITR 2 (SC); CIT V. Hindustan Housing and Land Development Trust Limited, (1986) 161 ITR 524; Paragon Constructions (I) (P) Ltd. v. Commissioner of Income Tax and Anr., 274 ITR 413 (Delhi) and N. Sundareswaran v. Commissioner of Income-tax, 226 ITR 142 (Kerala). - 6. The case of Rama Bai (supra) related to interest on enhanced compensation payable under the Land Acquisition Act on account of the property of the assessee acquired by the Government. Since the property was held transferred to the Government, compensation and solatium allotted to the



year basis, and cannot be taxed in one lump sum. It is noted that in this case it was laid down that an award of an arbitrator, which was not filed in the court and made rule of the court, has no force or validity.

- 7. In the case of R.C. Gupta (supra), assessee had effected certain purchases from Hindustan Steel Limited (HSL) in respect of which sum of Rs.5,06,761/- was payable. HSL filed a suit for recovery as assessee was disputing the liability. Notwithstanding the dispute, the assessee claimed deduction of the amount. This court referred to the principle as laid down in Bharat Earth Movers v. CIT (supra) wherein it was held that the liability was capable on being estimated with reasonable certainty when a recovery suit was filed by HSL against the assessee. Merely because the liability was not a statutory one, it cannot be said that the liability was not certain, but was merely a contingent one. - 8. In the case of Navjivan Roller Flour and Pulse Mills Ltd.(supra) also relied upon by the assessee, it was held that the liability to pay the damages was incurred by the assessee when the trade association passed an award for damages for breach of contract. Merely because the award was challenged in the appeal could not be a ground for holding that the assessee did not incur the liability. The mere fact that the


- assessee disputes a liability, is no ground for denying the claim for deduction in respect of such liability. - 9. Learned counsel for the assessee also placed reliance on matching principle stating it to be basic and settled principle of accounting and/or of the Income Tax laws. In this regard, reliance was placed on the case of J.K. Industries Ltd. v. UOI, 297 ITR 176 and it was submitted that as per this judgment the expenditure incurred in relation to a particular item of revenue must be matched with the revenue of that period, because it is only then that the real income of the assessee for that period can be determined. - 10. Invoking the ratio of the aforesaid decisions, the learned counsel submitted that the interest liability on the outstanding amount of damages accrued, inasmuch as the award against the assessee had already been made and the interest was capable of estimation with reasonable certainty. Now we may like to mention about the judgments which were cited by the learned counsel for the revenue. In the case of Central India Electric Supply Co. (supra), the Supreme Court rejected the plea of the assessee that the liability had become due on its quantification after passing of the award by the Umpire. The Apex Court observed that the arbitrator was appointed through the intervention of the court and, therefore, award



There was no absolute right to see the amount on stage and therefore the enhanced compensation did not become income arising or accruing to the assessee. Likewise, in the case of Paragon Constructions (I) (P) Ltd. v. Commissioner of Income Tax and Anr. (supra), this Court held that income accrued to the assessee only on the date on which decision was rendered by the Court. To the same effect was the decision of the Kerala high Court in N. Sundareswaran (supra) that in the absence of any material evidencing the finalization of proceedings and quantification of damages payable by the assessee, the claim for deduction of damages payable cannot be allowed.


case of Central India Electric Supply Co.(supra), the Supreme Court has held as under:

"The fact that the judgment and the decree of the Civil Court passed on the award was pending consideration in appeal before the High Court was also not a good ground to contend that the price was not due till the litigation with regard to the award was not over. In law the money payable under a decree becomes due for payment on the date of passing of the decree and nonetheless it is so even if the decree is appealed against and there is likelihood of the decree being set aside, modified or confirmed in appeal."


of realization. In fact, it is from this order of the court that the liability of the assessee to pay the interest at the rate of 18% till the date of payment accrued. Prior to this, all that existed was liability of damages and the liability to pay the quantified interest accrued to the assessee only with the award becoming rule of the court on 28th January, 2000. The liability on account of interest prior to 28th January, 2000 was uncertain inasmuch as it was not certain that court would award interest and if so, at what rate. The court might or might not have awarded interest at all or may not have even made the award as rule of the court. All this was uncertain prior to this order of the court and that being so, on the last date of all the three assessment years in question, there was no accrual of liability and, therefore, the assessee could not claim deduction of the same for the assessment years 1996-97. 1997-98 and 1998-99.

2011:DHC:14464-DB


this court passed decree on 28^th January, 2000 and, therefore, the assessee could not claim deduction for the same in the assessment years 1996-97, 1997-98 and 1998-99. We thus, answer question in affirmative in favour of the Revenue and against the assessee and consequently dismissed the appeal.

M.L.MEHTA (JUDGE)

A.K.SIKRI (JUDGE)

JUNE 3, 2011 AK/Dev