ORDER
P. Mohanarajan, J.M.
1. By this miscellaneous petition, the assessee seeks rectification of the error in the order of this Tribunal dt. 12th Dec., 2002, read with order dt. 24th Sept., 2003, in the aforesaid appeals.
2. The petition of the assessee is that the above two appeals were disposed of by the common order dt. 12th Dec., 2002, by the Tribunal. The assessee was in appeal against the disallowance of claim for warranty, guarantee and liquidated damages for the asst. yrs. 1997-98 and 1998-99 amounting to Rs. 74,43,308 and Rs. 3,14,77,555, respectively. The Hon’ble Tribunal upheld the order of the authorities below and confirmed the disallowance after giving a finding in paras 11 to 14. In passing the order, the Tribunal had committed a mistake in both facts and law. It was pointed out that the Tribunal had given the findings in para 14 which is extracted hereunder :
“14. In these two cases the assessee-company has claimed for damages as a deduction in computing its income as soon as the delay in the supply is noticed and the case of under-performance remained at the end of the respective previous years with a large contour of provisional liability. The delay has not been discussed and settled between the parties and under-performance has not been evaluated between the parties. Discussions and negotiations have not been completed. The final amount of breach and the final amount of damages have not been ascertained. Before finalising all the above procedures, it is very premature to jump into a conclusion that the assessee-company has incurred a liability for the payment of liquidated damages as exactly provided for in the respective contract agreements.”
After recording the findings, the Tribunal proceeded to disallow the claim of the assessee which resulted in an error, which was apparent on record and miscarriage of justice. Seeking rectification of the mistake, the assessee on 11th June, 2003, filed miscellaneous petition and the same was dismissed by the Tribunal vide order dt. 24th Sept., 2003. In the miscellaneous petition filed it was argued that :
(1) even as per the findings recorded, expenditure claimed was allowable having regard to the law explained and settled by the Supreme Court in Calcutta Co. Ltd v. CIT (1959) 37 ITR 1 (SC) and Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC).
(2) The decision of the Kerala High Court relied on by the Tribunal was no longer a good law in view of the Supreme Court’s decision. While considering this argument, the Tribunal rejected the miscellaneous petition by holding that the petition is for a review. In particular, p. 5 of the order of the miscellaneous petition is extracted hereunder :
“Again if we examine the decisions of the Hon’ble Supreme Court in (1959) 37 ITR 1 (SC) (supra) as well as (2000) 245 ITR 428 (SC) (supra), we find that the ratio of the Supreme Court decisions is that a contractual liability is usually in the nature of a binding liability and liquidated damages need to be deducted in computing an assessee’s income or loss. We have no quarrel with the above decisions pronounced by the Hon’ble apex Court.”
From the above, it is clear that the Tribunal though explained the position of law based on the decisions of the Supreme Court, yet overlooked to follow the decisions which is clearly a mistake of law. Correction of mistake of law does not amount to review as held by the Himachal Pradesh High Court in Himachal Pradesh Financial Corporation v. CIT (1998) 233 ITR 450 (HP) which is extracted herein.
“I… When the Supreme Court has decided a matter on a question of law, it is the law of the land and it has to be followed by all the Tribunals and the Courts in this country vide Article 141 of the Constitution of India. Hence, if the Tribunal had decided a matter overlooking the judgment of the Supreme Court on a question of law, it is certainly a mistake apparent from the record. Such mistake can be rectified under Section 254(2) of the IT Act….”
Further, for the mistakes committed by the Tribunal, there is an inherent jurisdiction to correct the same as held by the Madras High Court in Mrs. K.T.M.S. Umma Salma v. CIT (1983) 144 ITR 890 (Mad). The Tribunal has not dealt with the issue of method of accounting. The Tribunal has erred in not considering the method of accounting regularly followed by the assessee and thereby overlooked the mandatory nature of direction given under Section 145 of the Act. The Tribunal has erred in not considering the impact of accounting standard 7 and accounting standard 9 of the ICAI in deciding the issue. The Tribunal completely overlooked the fact that in the case of under-performance the income itself would not accrue to the assessee on the concept of real income, thereby the Tribunal ignored its own decision rendered in Kaveri Engg. Industries Ltd. v. Dy. CIT (1992) 43 ITD 527 (Mad), 35 ITD 18 (Hyderabad Special Bench [sic–this should be K.G.P. Ltd. v. ITO (1990) 34 ITD 50 (Hyd)(SB)–Ed.] and also in 110 ITR 435 (sic). It has been held by the Supreme Court in CIT v. Indo Nippon Chemicals Co. Ltd. (2003) 261 rrR 275 (SC) that “…..However, if he comes to the conclusion that the method of accounting employed by the assessee makes it impossible to correctly compute the income, then the AO is entitled to adopt any other suitable accounting method. We may add that whatever method the AO adopts, the method has to be consistent with the accepted principles of accountancy”. It may further be noted that the concept of real income as declared by the Hon’ble Supreme Court in United Commercial Bank v. CIT (1999) 240 ITR 355 (SC) has also not been applied in deciding the case of the assessee. There is no discussion at all on these aspects, thereby there is an error of non-consideration of relevant issue. Any decision rendered in ignorance of a Supreme Court decision or by overlooking such a decision is an order which is open for rectification under the law. The assessee’s prayer to apply the decision of the Supreme Court cannot be ignored or it be treated as seeking a review of the earlier order. Refusal to do so by rejecting the miscellaneous petition filed by the assessee results in miscarriage of justice and same requires to be rectified. In view of the foregoing, it is submitted that the order of the Tribunal dt. 12th Dec., 2002, read with order dt. 24th Sept., 2003, be modified to allow the claim of the assessee, or in the alternate, the order be recalled for a fresh hearing in the interest of justice.
3. At the time of hearing, Shri K.P. Pradeep, FCA, learned counsel for the assessee, argued that the facts as found in (1992) 43 YTD 527 (Mad) (supra) and 35 ITD 18 [sic–(1990) 34 ITD 50 (Hyd)(SB) (supra)] is similar to the case on hand as could be found in para 46 of the decision in (1992) 43 ITD 527 (Mad) (supra) that :
(a) the assessee, in some instances, did delay the delivery of the goods which it had contracted to supply. The assessee did not deny the said factum of delay.
(b) As a direct consequence of its failure to stick to the stipulated delivery schedule, the assessee rendered itself liable to penal pecuniary consequences stipulated in the delayed delivery clauses. The assessee did not dispute this factum also:
(c) It should, therefore, follow that as regards the liquidated damages stipulated in the delayed delivery clauses, the assessee incurred a liability in praesenti with the customers simultaneously getting a right to receive the stipulated amount.
(d) The fact that the assessee approached its customers with a plea of waiver does not alter the aforesaid position. This is because the acceptance of the assessee’s plea was contingent upon the customers’ good sense, their pleasure. In other words, the mere fact that the assessee had made a plea for waiver or given the further fact that in some instances the customers had accepted the plea, wholly or in part, does not have the effect of postponing the accrual of the liability of the assessee to pay liquidated damages to the point of time when its plea was accepted, wholly or in part by its customers.
The finding given in para (d) of the aforesaid decision fully applied to the issue on hand. In the present case the Tribunal having noticed these findings ought to have relied on these decisions and should have consequently held the issue in favour of the assessee. The distinction drawn by the Tribunal that present issue is not covered by the aforesaid decision is apparently wrong and is a mistake to be rectified.
4. He further submitted that the Tribunal erred in not rectifying its decision to bring it in conformity with the decisions of the Supreme Court in (1959) 37 ITR 1 (SC) (supra) and (2000) 248 ITR 428 (SC) (supra), and accordingly the decision of the Tribunal is clearly an error which should be rectified. It is the expectation of the assessee that the Tribunal will decide the appeal in conformity with the decisions of the Hon’ble apex Court and in this (case) on applying the decision of the apex Court, the issue in this case has to be held in favour of the assessee.
5. It was argued that in the present case the assessee had provided and claimed the liability arising on account of delay in execution of the contract as well as under-performance of the contract, quantified on the basis of the preexisting contract with the parties. There was no dispute in the quantum of damages payable by the assessee to its customers. These facts having been correctly recorded by the Tribunal, the Tribunal ought to have allowed the liability as a deduction in line with the decision of the Hon’ble Supreme Court reported in (1959) 37 ITR 1 (SC) (supra) which is extracted hereunder :
“Approaching the question before us in the light of the observations made above we have got to determine what was the nature of the liability which was undertaken by the appellant in regard to the development of the lands in question, whether it was an accrued liability or was one which was contingent on the happening of a certain event in the future.
There is no doubt that the undertaking to carry out the developments within six months from the dates of the deeds of sale was incorporated therein and that undertaking was unconditional, the appellant binding itself absolutely to carry out the same. It was not dependent on any condition being fulfilled or the happening of any event, the only condition being that it was to be carried out within six months which in view of the fact that the time was not of the essence of the contract meant a reasonable time. Whatever may be considered a reasonable time under the circumstances of the case, the setting up of that time-limit did not prescribe any condition for the carrying out of that undertaking and the undertaking was absolute in terms. If that undertaking imported any liability on the appellant the liability had already accrued on the dates of the deeds of sale, though that liability was to discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could very well be deducted from the profits and gains of the business.
Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed.
The difficulty in the estimation thereof again would not convert the accrued liability into a conditional one, because it is always open to IT authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case.”
6. Further, in the case of Bharat Earth Movers Ltd. v. CIT (supra), the Hon’ble Court has held that :
“The law is settled : if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.–Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC) and Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC) : TC 16R. 197 applied”
Also support the case.
7. It was also pointed out that a similar issue was decided by the Hon’ble jurisdictional High Court in favour of the assessee in the case of CIT v. Beema Mfrs. (P) Ltd. (2003) 130 Taxman 400 (Mad) which is extracted below :
“1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provision for warranty made by the assessee is an allowable deduction for the asst. yrs. 1986-87 and 1987-88?
2. Having observed that the amount provided towards warranty is contingent upon being quantified in the subsequent years whether the Tribunal was right in law in allowing the provisions made by the assessee as an admissible deduction?
3. Having regard to the fact that the provision made by the assessee towards the warranty is a liability on the contingency of the goods becoming defective within the terms of warranty clause, whether the Tribunal was right in law in holding that the provisions made by the assessee thereon is an allowable business expenditure?
2. It is fairly stated by Mrs. Pushya Sithraman, learned senior standing counsel appearing for the Revenue, that this issue raised in this case is covered against the Revenue by the judgment of this Court in TC No. 85 of 1997 dt. 9th Sept., 2002.
3. Following the said judgment and for the reasons stated therein we answer the questions of law referred to us in favour of the assessee and against the Revenue.”
8. The above decision fully covers the issue on hand and the decision binds the Tribunal to hold the issue in favour of the assessee. It was further brought to our notice that when the assessee had approached for stay of collection of demand in these appeals, the stay was granted by the Tribunal in its order dt. 12th July, 2002, by holding that the issue was fully covered in favour of the assessee by the Special Bench decision reported in 35 ITD 18 [sic–(1990) 34 ITD 50 (Hyd)(SB) (supra)]. He, thus submitted that the decision of the Tribunal suffers from non-conformity with the decisions of the Hon’ble Supreme Court, Hon’ble jurisdictional High Court mentioned above as well as non-conformity with the decisions of the Special Bench and co-ordinate Benches. It was also mentioned that method of accounting followed by the assessee is mercantile system and the claim is crystallised, liability on accrual basis ought to have been allowed.
9. Shri K.R. Pradeep submitted that when an order of the Tribunal is not in conformity with the decision of the Hon’ble Supreme Court, it should be rectified under Section 254(2) of the Act as held in 233 ITR 415. He further brought to our attention the recent decision of the Delhi ‘D’ Third Member Bench in the case of Mohan Meakins Ltd. v. ITO (2004) 84 TTJ (Del)(TM) 1 : (2004) 89 ITD 179 (Del)(TM), wherein the Tribunal has rectified its earlier order after holding at p. 186 as under :
“According to judicial discipline, the cases of Special Bench are binding on all Benches unless contrary view is expressed by the jurisdictional High Court or Supreme Court.”
On these arguments, it was submitted that the mistake apparent in the order of the Tribunal dt. 12th Dec., 2002, read with order dt. 24th Sept., 2003, should be rectified in the interests of justice.
10. In reply, Shri Janardhanan, the learned Departmental Representative, submitted that the order of the Tribunal is final and is not open for reconsideration. The question of law involved in this case has already been settled by the decisions of Hon’ble apex Court and jurisdictional High Court relied on by the assessee. Since the Tribunal chose not to apply these decisions while deciding the issue the same cannot be reconsidered again. He further submitted that the question involved is not as much whether there is a mistake or not but real question is, can the Tribunal rectify its order. He submitted that the order of the Tribunal had become final and hence should not be rectified.
11. We have heard the rival parties and gone through the records, and case law relied upon by the parties. We find that the Tribunal in its order dt. 12th Dec., 2002, read with order dt. 24th Sept., 2003, has committed a mistake in not deciding the issue in conformity with the decisions of the Hon’ble Supreme Court, jurisdictional High Court and Special Bench cited supra as well as the decision of the co-ordinate Benches mentioned supra. It is settled law that contractual liability should be allowed on the basis of the contract and the obligation incurred by the assessee is binding in nature. There have been any number of cases in support of this proposition. The issue of allowability of a liability is laid to rest by the decision of the Hon’ble Supreme Court has not been applied in deciding the appeal by the Tribunal.
12. Similar issue decided by the Special Bench and co-ordinate Bench is already in favour of the assessee and must be relied on in deciding the issue. We find that this has not been done as can be found in the findings given in its order in para 14 which is extracted hereunder :
“14. In these two cases the assessee-company has claimed for damages as a deduction in computing its income as soon as the delay in the supply are noticed and the case of under-performance so made out. The case of delay as well as the case of under-performance remained at the end of the respective previous years with a large contour of provisional liability. The delay has not been discussed and settled between the parties and under-performance has not been evaluated between the parties. Discussions and negotiations have not been completed. The final amount of breach and the final amount of damages have not been ascertained. Before finalising all the above procedures, it is very premature to jump into a conclusion that the assessee-company has incurred a liability for the payment of liquidated damages as exactly provided for in the respective contract agreements.”
This conclusion is totally at variance with what is found in para 46(d) of the decision of the Tribunal in (1992) 43 ITD 527 (Mad) (supra). And is also at variance with the other decisions. When the Supreme Court has held that the liability arising out of contract should be allowed as and when it arises and should not be postponed to a later date, it is necessary for the Tribunal to render decision in conformity with the ratio laid down by the Hon’ble apex Court and not against or contrary to it. In this case the order of the Tribunal is contrary to the existing position of law as outlined above. Hence, there is a mistake by the Tribunal which is apparent from the record. Under Section 254(2) of the Act it is mandatory for the Tribunal to rectify all mistakes which are apparent on record. The Tribunal has sufficient jurisdiction to rectify such mistakes as held in (1.998) 233 ITR 450 (HP) (supra) Mrs. K.T.M.S. Umma Salma v. CIT (supra) as well as the decision of the Delhi ‘D1 Bench reported in (2004) 84 TTJ (Del)(TM) 1 : (2004) 89 ITD 179 (Del)(TM) (supra). Accordingly, to render the decision of the Tribunal in conformity with the aforesaid legal position, we rectify the order of this Tribunal dt. 12th Dec., 2002, by deleting paras 11 to 16 and substitute the following paragraphs:
13. Substituted para 11 : We have heard both sides in detail. In these two cases the assessee-company has claimed for damages as a deduction in computing its income as soon as the delays in the supply are noticed and the case of under-performance so made out. The case of delay as well as the case of under-performance remained at the end of the respective previous years. The claims in the books are based on the terms of the contract between the parties. Since the liability has arisen and is crystallised as a result of binding contract between the parties the same is allowable as held by the Hon’ble Supreme Court reported in Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC) and Bharat Earth-Movers v. CIT (2000) 245 ITR 428 (SC) as well as the decision of the Special Bench reported in 35 ITR 18 [(sic)–(1990) 34 ITD 50 (Hyd))(SB) (supra)] and (1992) 43 ITD 527 (Mad) (supra) and as conceded by the Department before the jurisdictional High Court in (2003) 130 Taxman 400 (Mad) (supra). We further hold that allowabiiity of the claim need not be postponed till the plea for waiver is considered or rejected by the customer. We also hold that in view of the decisions of the Hon’ble Supreme Court reported in (1959) 37 ITR 1 (SC) (supra), (2000) 245 ITR 428 (SC) (supra), (2003) 261 ITR 275 (SC) (supra) and (1999) 240 ITR 355 (SC) extracted above, the decisions of the (supra) Kerala High Court in N. Sunderswaran v. CIT (1997) 226 ITR 142 (Ker) and Asuma Cashew Co. v. CIT (1990) 182 ITR 175 (Ker) are not relevant in deciding the issue. Accordingly, we hold that the claim for liability arising on account of liquidated damages amounting to Rs. 74,43,308 and Rs. 3,14,77,555 is allowable in computing the income of the assessee. Hence, we direct the AO to allow the same. Accordingly, the original order dt. 12th Dec., 2002, stands rectified. The assessee succeeds on this issue and the appeal is allowed.
14. Before we part with the matter, we hasten to add that the issue involved in this case is repetitive in nature having a bearing on all the succeeding assessment years. This issue is so overwhelmingly covered in favour of the assessee that non-rectification of the same would have an impact on all the succeeding years and thus would have caused serious miscarriage of justice to the assessee. When such a mistake is noticed it is incumbent for the Tribunal to rectify the same. In rectification of the order we are also guided by the noble principle laid down by the Hon’ble apex Court in the case of Shivdeo Singh v. State of Punjab 1963 AIR SC 1909 relied on by the Hon’ble Allahabad High Court in ITO v. S.B. Singai Singh & Sons & Am. (1970) 75 ITR 646 (All) at p. 650 wherein it was held that :
“…. We now come to consider the second submission of Mr. Gopal Behari that a Tribunal has no inherent power even to rectify an error which it has inadvertently made to the prejudice of a party. Learned counsel contends on the basis of certain decided cases that it is only regular Courts of law which are vested with such powers and not a Tribunal. On the basis of the legal maxim that no party shall suffer prejudice by an act of a Court of a Tribunal, it has been held on occasions that the Court or a Tribunal has inherent jurisdiction to set aside an order which it has made by committing an error itself and which has caused prejudice to a party.”
“It is true that the normal rule is that the remedy of review is a creature of a statute and if the statute does not contain powers for review then the power cannot be exercised. Review proceedings of this kind are those where a party as of right can apply for reconsideration of the matter already decided upon after a fresh hearing on the merits of the controversy between the parties. Such a remedy must be provided by the statute. The inherent power to rectify a wrong committed by itself by a Court or Tribunal is not really speaking a power to review. It is the atonement to the wronged party by the Court or the Tribunal for the wrong that it has itself committed. The two powers operate in different fields and are different in essential quality or nature…..”.
We have also relied on the judgment of the Hon’ble Gujarat High Court in the case of CIT v. Subodchandra S. Patel (2004) 265 ITR 445 (Guj) in rectifying the mistakes apparent in the order of the Tribunal.
15. It is ordered accordingly.