Thermax Babcock & Wilcox Ltd. vs. Addl. CIT
A.Y. : 1997-98 Dated : 02.03.2007
Once an assessee is maintaining its accounts as per the
mercantile system, any liability which has accrued in a year, though to be
discharged at a future date, would be a proper deduction while working out the
profits and gains of business.
There exists a stipulation in the contract agreements
entered into by the assessee with its customers for manufacture of boilers
that liquidated damages would be paid by either party for causing delay in
executing or erecting or commissioning the work. For the relevant A.Y., the
assessee made a provision of Rs.40,73,360 for liquidated damages. The
Assessing Officer held it to be a contingent liability and hence not
allowable. The disallowance was also upheld by the CIT(A).
On Second Appeal, the ITAT held that :
1. The condition for payment of liquidated damages for
delay in work is inbuilt in the contract agreement itself. Therefore, there
exists an undertaking given by the parties to execute the work within
specified time, and if any delay is caused in completing the work within the
specified time, the defaulter has agreed to pay damages on account thereof.
This undertaking is not found to be conditional.
2. This certain act or event of not completing the work
within the stipulated time has imported a definite and absolute liability on
the assessee and merely because of the fact that liability would be
discharged at a future date and there is a difficulty in estimating the
correct amount thereof would not convert this definite and absolute
liability into conditional one.
3. There could be a dispute only with regard to the exact
quantification thereof, but that by itself would not convert the definite
liability into a contingent one. Where no dispute has been raised as to the
assessee’s liability to pay liquidated damages for delay in executing the
contract work, the provision for liability may be claimed in the year to
which the transaction relates, provided it can be fairly ascertained or
estimated on agreed and admitted terms of the contract.
4. From the Notification No. S.O. 69(E), dt. 25th Jan.,
1996, issued by the CBDT under S.145(2), it is clear that the Department has
itself accepted the principle that a provision should be made for all known
liabilities and losses even though the amount cannot be determined with
certainty and represents only a best estimate in the light of available
information.
Based on the above observations, the ITAT remanded the
matter back to the Assessing Officer to ascertain and determine the accrued
liability pertaining to the relevant A.Y. in light of the terms and condition
of the agreement and accordingly allow the deduction.
Cases relied upon :
