Ajit K.Sengupta, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue, the following question has been referred by the Tribunal to this court for its opinion for the assessment year 1972-73 : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the claim of the assessee-company for deduction of Rs. 3,16,061 on account of demand made by the Director-General of Supplies and Disposals for failure of the assessee to carry out the terms of, the contract for supply of refractories in working out the business income should be allowed"
(2.) The facts leading to the reference are as under : The assessee, a limited company, was awarded a contract by the Director-General of Supplies and Disposals for supply of refractories to Chittaranjan Locomotive Works but, due to increase in the prices of raw materials and the higher price sought by the assessee-company not being given, the assessee-company did not supply the refractories according to the terms of the contract. The Director-General of Supplies and Disposals, therefore, cancelled the contract at the risk and cost of the assessee and placed the contract with Messrs. Bharat Mining Corporation Ltd. at an enhanced rate. The extra expenditure involved as a result of what was described by the Director-General of Supplies and Disposals as repurchase amounted to Rs. 3,16,061 which was demanded from the assessee-company by a letter of the Director-General of Supplies and Disposals dated January 13, 1971. This was not accepted by the assessee-company and the matter was, therefore, referred to arbitration and the arbitration proceedings were still pending. The assessee-company claimed this amount of Rs. 3,16,061 as a deduction in working out the business income describing it as penalty for non-fulfilment of the contract. This was, however, not allowed by the Income-tax Officer.
(3.) The assessee-company filed an appeal to the Appellate Assistant Commissioner against the said disallowance made by the Income-tax Officer who held that the assessee's liability in regard to the sum of Rs. 3,16,061 had not been determined during the previous year under appeal inasmuch as the matter was still pending in arbitration proceedings.;