A.S.Narang, J. - (1.) IN this case an application under section 245Q(1) of the Income -tax Act, 1961 (for short 'the Act') in Form No. 34E (meant for notified residents) has been filed in this office on 18 -11 -2004 by the applicant - Mahanagar Telephone Nigam Ltd. (for short 'MTNL') which is a Public Sector Company as defined in section 2(36A) of 'the Act'. Originally the application was filed on 20 -11 -2002 but the same was rejected on the ground that clearance from the Committee on Disputes (COD) had not been obtained by the applicant and it was left open to the applicant to make a fresh application after obtaining the necessary approval. The necessary permission has now been granted by the COD as per minutes (of the High Power Committee on Disputes) dated 25 -10 -2005 and the present application has been admitted vide Order dated 14 -11 -2005. Indian Telephone Industry Ltd. (for short 'ITI') is also a Public Sector Company and is one of the suppliers of plant and machinery to MTNL. The terms of the purchase order/agreement provide that if ITI Ltd. fails to deliver equipments within the stipulated time, MTNL would be entitled to liquidate damages (for short 'LD') . Accordingly, for the period 1987 -88 to 1995 -96, MTNL recovered from the bills of ITI Ltd. liquidated damages amounting to Rs. 2,14,129,382. The amount recovered was adjusted against the cost of assets in some years and shown as income of MTNL in other years and tax was paid on such income in the respective years. Subsequently representations were received by MTNL for waiver of LD, as according to ITI, they were not liable to pay such LD, as supplies could not be made within stipulated time due to various reasons beyond their control. However, in this regard MTNL received a direction from the Telecom Commission vide letter dated 17 -3 -1997 and 18 -11 -1997 for waiver of these liquidated damages already recovered by MTNL. Accordingly, the Board of Directors of MTNL following directions of the Telecom Commission and on account of business exigencies and expediency decided that it would be appropriate to waive the liquidated damages in respect of the aforesaid delayed supply of equipments. Therefore, against the deductions made on account of such liquidated damages from bills, certain amounts were refunded to ITI Ltd. by MTNL during the financial year 2001 -02 (assessment year 2002 -03) and the same were claimed as deduction from its income of that year. However, the Assessing Officer added back to the total income of the assessee an amount of Rs. 12.32 crores on account of disallowance of refund of Liquidated Damages to ITI Ltd. MTNL filed appeal against the order of Assessing Officer. Commissioner of Income -tax (Appeals) has ordered the Assessing Officer to rectify the assessment on receipt of order of Authority For Advance Rulings. As the amount deducted/appropriated towards liquidated damages by MTNL in the earlier years had been shown as income, and tax paid thereon, the amount now refunded to ITI Ltd., deserves to be allowed as deduction from its business in the assessment year 2002 -03. On the facts stated above, the applicant has sought advance ruling of the Authority on the question set forth as follows : Whether, on the stated facts of the case, the amount refunded by the applicant -company to ITI Ltd. on account of waiver of liquidated damages is an allowable deduction from its business income under the Income -tax Act, 1961 in its assessment for assessment year 2002 -03 ? The jurisdictional Commissioner in his comments dated 5 -7 -2006 has stated as under : In order to examine the claim of the assessee, it was specifically asked to furnish year wise break -up of Liquidated damages received from ITI and also to show the schedule of Profit & Loss Account of each assessment years wherein the aforesaid receipt has been shown as income. MTNL in his reply has stated that liquidated damages recovered from ITI for the period 1987 -88 to 1995 -96 were grouped under the sub -head 'Others' in the head 'Other income' but could not furnish the break -up of sub -head 'Others'. Further the Profit & Loss Account and the Tax Audit Report do not certify the claim of the assessee that Liquidated damages were shown as income as is evident from following instances : 1. The assessee has shown to have received LD charges of Rs. 4.18 crores during the financial year 1992 -93 but it has shown Rs. 2.21 crores only under the sub -head 'Others' in Schedule -O.
(2.) IN the 'Notes to Accounts' of Tax Audit Report for the financial years 1992 -93 and 1993 -94, the auditors had given following remarks : 'Claim for liquidated damages from contractors for delayed execution of work is accounted for when the amount is finally determined and agreed upon. The same is adjusted to capital for revenue account, as the case may be but it is not clear what treatment was given to the "LD" charges i.e. capital or revenue. As per details filed on records, the assessee has stated that they had received LD charges to the extent of Rs. 4.77 crores from ITI during the year 1993 -94 whereas Rs. 4.14 crores only has been shown in Schedule -O (Other Income) .
(3.) SCHEDULE O (Other Income) of the P&L Account for the years 1994 -95 and 1995 -96 reveals that the assessee has accounted for LD charges received during the year under a separate sub - head 'Liquidated Damages' and not grouped under the sub -head 'Others'. Note : 1. It is clear from the above chart that MTNL is not able to prove that Liquidated damages received from ITI has been shown as income in that year. (Annex -A) 2. The details obtained from ITI and submitted by the assessee reveals that the ITI has received back only Rs. 5.50 crores upto the assessment year 2002 -03 whereas the MTNL, has claimed Rs. 12.32 crores. (Annex -B) " 2. The applicant in his rejoinder dated 20 -7 -2006 has stated as under : "1.and 2.****** 3. The applicant entered into an agreement with the ITI for the supply of telecommunication and other associated equipment vide agreement dated 4 -2 -1987. A copy of the said agreement has been placed at pages 1 - 12 of the paper book filed by the applicant including the supplementary agreement entered on 25 -9 -1987. As per the said agreement the ITI was to supply telephone subscribers apparatus, telephone and telegraphy switching equipment, transmission equipment of all types, testing instruments, miscellaneous apparatus, etc. Clause 12 of the said agreement at page 8 of the paper book provided for the payment terms and delivery schedule. 4. Clause 12.4 of the said agreement (PB Pg. 8) reads as under : 12.4 Liquidated damages at the rate of 1/2 per cent of pro rata value of supplies delayed per week (or part) of delayed delivery, subject to force majeure shall be levied on the contractor for supplies delayed in delivery beyond the contracted delivery dates or extensions thereto. This shall be limited to 5 per cent of the base contract price. This clause will not apply for delayed delivery due to delay in inspection by the Purchaser's representative. 5. During the financial year 1987 -88 till the financial year 1995 -96, the ITI Ltd. made various supplies to the applicant. 6. There were delays in the supplies and accordingly the applicant has been deducting LD in terms of the above -said clause 12.4 from the bills submitted by the ITI. The issue of deduction of these amounts is evident from the fact that the supplier ITI has been seeking refund of these amounts only. Since the payments were deducted from the bills on account of the LD, the same have been accounted for in the books of account and appropriately dealt with in the books of account and the same has gone to increase the income of the applicant. The details of such charges recovered from the ITI for each of the years at Mumbai and Delhi are given at page 16 of the paper book..... 7. ****** 8. The ITI has been pursuing the applicant that these LD should be refunded to it as according to them they were not liable for such LD as supplies could not be made within the stipulated time due to various reasons beyond their control. The reasons cited by the ITI for the delay in supplies include insufficient lead time for execution of the contract, load on production capacity, foreign exchange crunch, late receipt of engineering details, non -payment of advance, problem in procurement due to obsolescence of items, single source, non -availability of critical components, etc. The Board of Directors of the applicant looking to these circumstances and on account of business exigency and expediency such as the ITI is the bulk supplier of the MTNL, decided on 30 -1 -2002, i.e., the year under consideration that it would refund the LD which it has recovered in the past. Following the resolution of the Board, the applicant refunded to the ITI. Details of such payment are in the form of a certificate from the ITI, placed at page 26 of the paper book. On going through the above certificate your Lordships will notice that a sum of Rs. 5,50,88,695 has been paid on 31 -3 -2002, i.e., in the financial year, i.e., assessment year 2002 -03 and the balance amount of Rs. 6,58,96,999 has been paid in the financial year 2002 -03, i.e., assessment year 2003 -04. 9. Since the resolution was passed in January 2002 and the amount was agreed to be refunded, the applicant which is following mercantile system of accounting accounted for this expenditure in the financial year 2001 -02, i.e., assessment year 2002 -03 and accordingly, made a claim of the same in its Profit & Loss Account and filed an application before the Hon'ble Authority for adjudication on this issue. ;