Facts of the Case

The appeal was filed by the Revenue challenging the order passed by the Income Tax Appellate Tribunal dated 31.01.2018.

The dispute pertained to deletion of an addition amounting to ₹3,24,11,982, which was made by the Assessing Officer on account of provision for liquidated damages claimed by the assessee in its profit and loss account.

The Assessing Officer treated the provision as an unascertained liability, thereby disallowing the claim under the provisions of the Income Tax Act, 1961.

The Tribunal, however, deleted the addition, leading to the present appeal before the High Court.

Issues Involved

  1. Whether provision for liquidated damages qualifies as an ascertained liability and is allowable as deduction.
  2. Whether the Tribunal erred in deleting the addition despite the assessee following the mercantile system of accounting.
  3. Whether reliance on earlier orders in assessee’s own case is valid despite the principle that res judicata does not apply to income tax proceedings.

Petitioner’s Arguments (Revenue)

  • The provision for liquidated damages was unascertained in nature and therefore not allowable as deduction.
  • Under the mercantile system, only crystallized liabilities can be claimed as expenditure.
  • The Tribunal erred in relying on previous decisions without considering that each assessment year is independent.

Respondent’s Arguments (Assessee)

  • The provision for liquidated damages was made based on contractual obligations, hence it constituted a legitimate business liability.
  • The issue had already been adjudicated in earlier years in favour of the assessee.
  • The Tribunal rightly followed consistency in judicial approach.

Court Findings / Order

The Delhi High Court observed that:

  • The issue involved in the present appeal was identical to another appeal (ITA No. 761/2018) decided on the same day.
  • In the connected matter, the Court had remanded the issue back to the Tribunal for reconsideration.
  • Applying the same reasoning, the Court held that the present matter should also be reconsidered.

Final Order:

  • The impugned order dated 31.01.2018 was set aside.
  • The matter was remanded back to the Tribunal for fresh adjudication.
  • Parties were directed to appear before the Tribunal on 28.08.2023.

Important Clarification

  • The Court did not decide the issue on merits but emphasized procedural consistency.
  • It reinforced that similar issues pending in connected matters should be handled uniformly.
  • The judgment highlights the importance of proper examination of liability classification (ascertained vs unascertained) by the Tribunal.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/60828072023ITA8232018_130534.pdf

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