ORDER
S. Kannan, Accountant Member
1. These three appeals were heard together and are disposed of by a common order.
2. The issue that arises for consideration in these cases is best appreciated against the backdrop of the material facts of the case. It is, therefore, necessary to look at the fact-situation.
3. Messrs Gordon Woodroffe Ltd. were earlier representing two U.K. firms, namely, M/s. Cazyer Irvine Co. Ltd. and M/s. Clan Line Steamers Ltd. At the relevant point of time, one C.D. Gopinath was functioning as a senior Director of M/s. Gordon Woodroffe Ltd. The aforesaid two foreign principals transferred their business connections to M/s. International Services, a firm consisting of three partners, namely, Smt. Comala Gopinath, wife of C.D. Gopinath, Mrs. Kamini Gopinath, daughter of C.D. Gopinath and Arvind Gopinath, son of C.D. Gopinath. Thereupon, M/s. Gordon Woodroffe Ltd. filed suit bearing C.S. No. 450 of 1977 and C.S. No. 26 of 1978 alleging, inter alia, that the said Gopinath had in a clandestine manner got hold of the business of the foreign principals and claiming, inter alia, liquidated damages. And by their order dated 30-4-1982, the High Court of Madras awarded to the plaintiff a sum of Rs. 42 lakhs as and by way of liquidated damages, together with interest thereon at the rate of 6 per cent per annum from the date of the order till the date of realisation.
4. The said order predictably engendered further litigation, two significant aspects of which are noteworthy. First, on the interlocutory petition made by C.D. Gopinath and three others, the High Court of Madras, by their order dated 6-7-1982, stayed the operation of the judgment and Decree of the Original Side of the High Court dated 30-4-1982, on the following terms:
There will be stay as prayed for on condition that the petitioners in these petitions furnish bank guarantee for a sum of Rs. 42,00,000 (Forty two lakhs) within three months from this date to the satisfaction of the First Assistant Registrar, Original Side, High Court….
Secondly, on 28-10-1991, a Memorandum of Compromise was entered into by the parties to the dispute, under which the appellants-defendants paid a sum of Rs. 17 lakhs to M/s. Gordon Woodroffe Ltd. in full and final compromise settlement of the claims and counterclaims involved in the dispute. Thereupon, by their order dated 31-10-1991 (in O.S.A. Nos. 94 and 95 of 1982 and Cross Objections), the High Court of Madras, confirmed the said memo of compromise.
5. Meanwhile, in its assessment for the assessment year 1983-84 (accounting period ending on 31-10-1982 being the relevant previous year), M/s. International Services set up a claim for revenue deduction, on provision basis, in a sum of Rs. 14 lakhs. The said provision came to be made on the basis that the liquidated damages of Rs. 42 lakhs awarded by the High Court on 30-4-1982 was to be shared equally by the assessee-firm and its two foreign principals.
6. The Assessing Officer negatived the assessee’s claim. In this regard, the following considerations weighed with him:
(i) The liability to pay the liquidated damages in question did not arise out of the business of the assessee as there was no contract between the assessee and the said M/s. Gordon Woodroffe Ltd.
(ii) In any event, the provision made in a sum of Rs. 14 lakhs was nothing but a contingent liability and that secondly, no revenue deduction was admissible.
(iii) Without prejudice to the foregoing, the outlay in question was on capital account and not on revenue account.
7. The CIT(Appeals) declined to interfere in the matter for the following reasons:
(i) In the proceedings before it, the High Court has clearly observed that the assessee-firm’s liability arose by virtue of acquisition of agency on account of breach of contract committed by C.D. Gopinath. Therefore, the Assessing Officer was not justified in giving the finding that the liability to pay the damages did not arise out of the business of the assessee-firm.
(ii) Even so, “the expenditure” in question had not been laid out by the assessee firm in the character of a trader. One of the tests laid down by the Supreme Court in the case of Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 was that there should be a direct and intimate
connection between the expenditure and the business. In other words, the expenditure ought to have been incurred by the assessee in its capacity as a trader. This test is not satisfied in this case. In this regard, he also referred to and relied upon the decision in the case of Andrew Yule and Co. Ltd. v. CIT [1963] 49 ITR 57 (Cal.)
(iii) The liability to pay the damages did not arise in the normal course of the business of the assessee-firm but it arose out of something that happened before the setting up of the business. Hence “the expenditure” in question could not be classified as an expenditure for preservation of the asset. Therefore, the expenditure could not be allowed under Section 37 of the IT Act, 1961.
(iv) Above all “the Court itself has decreed that if any amount is realised in one suit, it is bound to give credit of such realisation in the other suit which has been decreed for a like amount. In other words, the liability cannot be treated as accrued. On these considerations, I hold that the provision of Rs. 14 lakhs cannot be deducted.
8. It is in these circumstances that both the assessee-firm and two of its partners are now before us.
9. Giving the highlights of the case, Shri Ramamani, the learned counsel for the assessee, contended that by reason of the High Court order dated 30-4-1982, the liability to pay a sum of Rs. 14 lakhs got fastened on to the assessee-firm and that, therefore, it was justified in making a provision therefor and in claiming a revenue deduction in respect thereof. In this regard, Shri Ramamani sought to argue that the fact that the assessee had taken up the matter in further appeal was not relevant and would not obliterate the liability that had already accrued.
10. At this stage, the Bench desired to know whether the considerations which might be apposite in a case of statutory imposts could validly be imported into a case of breach of agreement inter partes, or even to a case of breach of faith. In particular, the Bench desired to know whether it would not be more appropriate to say that the liability accrued either on 28-10-1991 when the memo of compromise was entered into or even on 31 -10-1991 when the High Court confirmed the said memo of compromise. Shri Ramamani responded by fairly stating that should the Bench take the view that the liability actually accrued or arose on 28-10-1991/31-10-1991, then the Bench might consider the desirability of making it clear that the Bench having taken the aforesaid view, it would not be open to the Department to take the line that the liability accrued only on 30-4-1982. Elucidating the position, Mr. Ramamani stated that such a safety valve is necessary, as otherwise the assessee would be driven from pillar to post.
11. On his part, Shri Bose, the learned Departmental Representative, did not raise any serious objection to the proposal made by Shri Ramamani.
12. As we see it, the issue before us has two inter-related aspects. The first question is: When exactly did the liability to pay the liquidated damages arise? The second and related question is: Did the liability arise on revenue account, in which event it will be revenue deductible, or on capital account, in which event it would not be?
13. The case before us is a specie of the larger genus of “conversion cases”. The case of M/s. Gordon Woodroffe Ltd. was that C.D. Gopinath was in its employ as the senior Director and that consequently, his fidelity was to be available exclusively to the company. Yet, in breach of faith, the said Gopinath managed to wean the aforesaid two foreign principals away from the company and towards a firm consisting of his relatives. For this breach of faith, the company filed suits claiming inter alia, liquidated damages. And as pointed out earlier, on 30-4-1982, the Court awarded a sum of Rs. 42 lakhs as and by way of liquidated damages. It is also a matter of record that the operation of the said judgment and Decree was stayed by the Division Bench of the High Court. The question that arises for consideration is: Did the liability to pay the liquidated damages arise on 30-4-1982 ?
14. As we see it, there is a difference between a statutory liability and a liability arising on account of a breach of contract or breach of faith. Statutory liability arises on the happening of the taxable event. Such liability arises by reason of the statute itself and merely because the assessee disputes the liability, its accrual does not get postponed. The law on this point is well-settled by the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363.
15. This, however, is not a case where a claim is made for damages on account of breach of contract or breach of faith. In such cases, the liability does not arise merely because a claim for damages is made. The liability arises the moment the assessee accepts the claim. If, on the contrary, the assessee disputes the claim, the liability arises in the year in which adjudication takes place. Thus a claim for contractual breach cannot be equated with statutory liability. Where the claim is disputed, the liability does not accrue till the claim is adjudicated upon or when it is accepted by the assessee.
16. The case before us is one of breach of faith. True, on 30-4-1982, the High Court awarded damages. At the first blush, it would appear the liability to pay the damages got fastened on to the assessee on that day. But a closer look at the facts of the case would indicate to the contrary. As pointed out earlier, the parties to the dispute subscribed to a memo of compromise dated 28-10-1991. This would mean that it was only on that day that the assessee accepted its liability to pay liquidated damages. It is significant to note that by the act and deed of subscribing to a memo of compromise, both the parties to the dispute had not acted upon the order dated 30-4-1982. And the memo of compromise dated 28-10-1991 signals the acceptance by both the parties to the dispute of the mode and mechanics of resolution of the disputes between them. Secondly, there is also the significant fact that the Division Bench of the High Court stayed the judgment and Decree dated 30-4-1982, The effect of the terms on which the stay was granted is that M/s, Gordon Woodroffe Ltd. did not have any absolute right to receive the amount of Rs. 42 lakhs at that stage. Since the right to receive and the corresponding liability to pay a certain amount are co-eval, co-extensive and concomitant, the assessee could not be regarded as having been visited with an enforceable liability to pay the sum awarded by way of damages. If any authority for this proposition is needed, it is to be found in the Supreme Court case of CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 27 Taxman 450A., in which the Court has observed:
There is a clear distinction between cases such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles.
And the case before us is clearly one where the right to receive payment is in dispute.
17. In view of the foregoing, therefore, we hold that as respects the assessee-firm, the liability to pay its share of the liquidated damages arose on 31-10-1991 when the Memo of Compromise was made the decree of the Court. It should, therefore, follow that as regards the assessment for the assessment year 1983-84, which is now before us, the assessee’s claim must fail.
18. As pointed out supra, the related question centres on the merits of the case. In the view that we have taken of the matter relating to the accrual of the liability, we do not consider it necessary to examine the merits of the case.
19. In view of the foregoing, therefore, we hold that the liability to pay the assessee’s share of the damages as finally quantified on compromise will have to be dealt with in the assessment year relevant to the previous year in which the date 31-10-1991 falls. To keep the records straight, we may add that while making the assessment for the said assessment year, the Assessing Officer will proceed on the footing that the liability had arisen in the previous year relevant to that assessment year. He is of course free to examine on merits the question whether the assessee is entitled to revenue deduction in respect of its share of the damages as quantified on compromise basis.
20. In the result, subject to the foregoing observations, the assessee’s appeal is dismissed.
21. This brings us on to the two appeals filed, one by each of the two partners of the firm. These appeals will have to be dismissed for two reasons. First, under the scheme of the Act, the partner is not entitled to prefer an appeal on matters relating to the assessment of the firm. Secondly, we have dismissed the appeal filed by the firm. We, therefore, dismiss the two appeals filed by the partners.