Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability of the assessee in respect of the damages payable for committing breach of the contracts accrued on the passing of the award in arbitration proceedings ?

K. S. PARIPOORNAN, J.:

At the instance of the Revenue, the Income tax Tribunal (Cochin Bench) had referred the following four questions of law for the decision of this Court :

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability of the assessee in respect of the damages payable for committing breach of the contracts accrued on the passing of the award in arbitration proceedings ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability under the award passed in arbitration had accrued in spite of the fact that no decree had yet been passed by the Court in which the awards were filed?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability crystallised on the passing of the award, in spite of the fact that the assessee had written to one of the parties pleading for reduction of the amount payable ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the commission paid by the assessee was expenditure incurred for obtaining information regarding markets outside India for the products of the assessee and that, consequently, the assessee is entitled to weighted deduction on the amount under s. 35B of the IT Act, 1961 ?”

The respondent-firm is an assessee to income-tax. The matter arises in connection with the asst. yr. 1978-79, accounting period ending 31st Dec., 1977. The respondent maintains its accounts on mercantile basis. The firm is a cashew exporter. It entered into contracts with Hollander Trading Corporation, New York, and Gibbs Nathaniel (Canada) Ltd., Canada, for supply of cashew nuts. Two of the contracts were entered into during the relevant accounting period. The firm did not export the cashew as per the contracts. There was a breach of the contracts and obligations. The matter was referred to arbitration. In the case of the contract with Hollander Trading Corporation, the award was passed on 9th Aug., 1977, In the case of Gibbs Nathaniel (Canada) Ltd., the award was passed on 21st Nov., 1977. The total amount of the awards came to Rs. 42,47,875. The assessee had to pay the said amounts. The assessee-firm claimed deduction of the said amounts during the relevant assessment year. The assessing authority rejected the claim. For the same year, the assessee had also claimed weighted deduction, under s. 35B of the IT Act, of a sum of Rs. 1,25,762 paid as commission to K. N. Pai, Bombay, and Eastern Export Trading Co., Bombay. The ITO disallowed the claim on the ground that the payments were made in India and not outside India. In appeal, the CIT (A) allowed the claim of the assessee regarding the damages held payable by the assessee as per the awards. The weighted deduction claimed was also allowed. The Revenue appealed to the Tribunal. The Tribunal held that the nature of the liability under the arbitration award in the instant case is one for unliquidt. damages as in Asuma Cashew’s case [I. T. A. No. 249 (Coch) of 1982] and that the liability to pay the damages became crystallised when the amount of damages is accepted either by negotiation or is determined by an arbitrator or by a Court. It was found that the awards were passed during the relevant accounting period and the assessee had accepted the awards. The Tribunal adverted to the plea of the Revenue that the award is to be filed in Court and that the assessee had written to one of the parties pleading for reduction of the amount and held that in cases where the award was accepted by the assessee, the liability has accrued and has become certain and so the formality of filing of the award in Court and passing of a decree, is not relevant. Similarly, the fact that in one case the assessee wrote to one of the parties pleading for reduction of the amount will not be a case for contesting the claim. The order passed by the CIT (A) holding that the liability to pay damages accrued during this year as per the awards and so it is a permissible deduction was upheld. Similarly, the order passed by the CIT (A), allowing weighted deduction under s. 35B of the Act was affirmed, based on its earlier decision in Kerala Nut Food Trading Co.’s case (I. T. As. Nos. 333 to 336 (Coch) of 1981. After the said appellate decision of the Tribunal dt. 22nd Feb., 1984, at the instance of the Revenue, the four questions of law, formulated hereinabove, have been referred for the decision of this Court.

We heard counsel for the Revenue, Mr. P. K. R. Menon and counsel for the respondent-assessee, Mr. Balachandran. Broadly, two questions arise for consideration : “(i) Whether the assessee is entitled to deduction of the amounts covered by the award ? and (ii) Whether the assessee is entitled to weighted deduction under s. 35B of the Act ?”

4. It is common ground that the awards were passed on 9th Aug., 1977, and 21st Nov., 1977, against the assessee for payment of two sums aggregating to Rs. 42,47,875, which was during the relevant accounting period. The claim, which finally resulted in the award, is one for unliquidt. damages. In Asuma Cashew’s case [ITA No. 249 (Coch) of 1982], the Tribunal held that, in cases where the claim is for unliquidt. damages, the liability can be said to be crystallised only when the amount of damages is accepted either by private negotiation, or is determined by an arbitrator or by a Court. The above view of the Tribunal was upheld by this Court in I.T.R. Nos. 224 and 225 of 1984, by judgment dt. 3rd Feb., 1989 [Asuma Cashew Co. vs. CIT (1990) 84 CTR (Ker) 198 : (1990) 182 ITR 175]. We held that an enforceable liability in such cases will spring into existence only when it is determined. It can be determined either by private negotiation, or it can also be determined or fixed by the arbitrators. In the light of our earlier Bench decision in 1. T. R. Nos. 224 and 225 of 1984, dt. 3rd Feb., 1989 [Asuma Cashew Co. vs. CIT (supra)], the view of the Tribunal that the assessee is entitled to deduction of the amount, determined by the award as payable, is right. But counsel for the Revenue submitted that one of the awards was filed in Court and a decree had yet to be passed. It was further submitted that the assessee had written to one of the parties pleading for reduction of the amount. It was argued that the award is not effective until it is made a decree of a Court and no liability accrued or arose by a mere passing of the award. Our attention was invited to the decisions in Wali Mohammad vs. Mt. Pano, AIR 1960 Pat 128, O. Mohamed Yusuf Levai Saheb vs. S. Hajee Mohammed Hussain Rowther, AIR 1964 Mad 1 (FB) and CIT vs. Hindustan Housing and Land Development Trust Ltd. (1986) 58 CTR (SC) 179 : (1986) 161 ITR 524 (SC). We are of the view that the above plea is without force. As stated, the claim is for unliquidt. damages. The moment the amount is adjudicated or admitted, it becomes a debt. Here, the claim for unliquidt. damages was adjudicated by the passing of an award by the arbitrator. The assessee maintains accounts on the Mercantile basis. In such circumstances, the claim made against the assessee in respect of unliquidt. damages was ascertained and determined when the award was made. The liability was incurred or had accrued on that day. The award is a final adjudication of a Tribunal at the parties’ choice. Till it is set aside in appropriate proceedings by a competent Court, it is conclusive and valid. There can be no doubt that a right is created in favour of the party to whom amounts have been awarded and the liability has been incurred by the party against whom the amount is decreed as payable. The award, even if it is not made a decree of the Court, has its existence in law. The award does create rights. It may be that those rights cannot be enforced until the award is made a decree of a Court. The fact that the assessee wrote to one of the parties, pleading for reduction of the amount, will not be a case of contesting the claim. We are fortified in the above view by the decisions in CIT vs. Ganesh Stores (1986) 56 CTR (MP) 8 : (1986) 162 ITR 493 (MP) and Satish Kumar vs. Surinder Kumar, AIR 1970 SC 833. In this connection, we should state that the decision of the Supreme Court in CIT vs. Hindustan Housing and Land Development Trust Ltd. (supra), is distinguishable. The award passed by the Land Acquisition Authority under the Land Acquisition Act is only an offer. The legal incidence of an award under the Land Acquisition Act is different and is not relevant in considering as to whether an award, passed by an arbitrator chosen by the parties, is legal and valid, and creates rights or fastens liability, even though not made decree of a Court. In this view of the matter, we are of the view that the decision of the CIT (A) holding that since the liability of the assessee was quantified by the award, the liability arose during the accounting period and so the assessee- firm is entitled to deduction and the endorsement of the said view by the Tribunal is valid and justified in law. Our answer to question No. (1) is in the affirmative. Our answer to question No. (2) is also in the affirmative. Our answer to question No. (3) is also in the affirmative. All the three questions are answered against the Revenue and in favour of the assessee.

5. The only other question is regarding the entitlement to weighted deduction under s. 35B of the IT Act. The ITO held that the assessee paid the amounts of Rs. 1,25,762 and Rs. 14,708 in India and since the payments were not made outside India, the assessee is not eligible for deduction under s. 35B of the Act. In appeal, the CIT (A) noticed the contention and directed the ITO to allow the relief. He did not expressly adjudicate as to whether, as a fact, the assessee had paid the commission as stated, and if so, whether the assessee is entitled to deduction in law. The Tribunal proceeded on the basis that the CIT (A) had adjudicated the claim and held that the assessee is entitled to the deduction. This was a misapprehension. The question as to whether the assessee had paid the commission for obtaining information regarding markets outside India for its products should be adjudicated. The further question is even if the payment is true, whether the assessee is entitled to deduction under s. 35B of the IT Act should be adjudicated. On a perusal of the order of the CIT (A) dt. 4th March, 1982, and that of the Tribunal dt. 22nd Feb., 1984, we are not in a position to say that the matter has been adjudicated upon properly and in accordance with law. Therefore, we decline to answer question No. (4) referred to us by the Tribunal. At the same time, we direct the Tribunal to restore I. T. A. No. 395 (Coch) of 1982 to its file for the limited purpose of adjudicating whether the respondent-assessee (firm) is entitled to the deduction under s. 35B of the IT Act. In deciding the question, the Tribunal shall also bear in mind the directions issued by us in similar cases in ITR No.

239 of 1982 [CIT vs. Aluminium Industries Ltd.(1990) 182 ITR 172] and ITR Nos. 224 and 225 of 1984 Asuma Cashew Co. vs. CIT (supra). We decline to answer question No. (4). The income-tax referred case is disposed of as above.

A copy of this judgment under the seal of this Court and the signature of the Registrar will be forwarded to the Tribunal, Cochin Bench.

[Citation :182 ITR 216]