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I. T. A. No. 136(1‑B) of 1983‑84, decided on 27th April, 1985.

‑‑‑ S. 62‑Assessment‑Deduction on account of risk purchase- Assessee entering into a contract with Government for supply of store making all reasonable efforts to fulfil contract but somehow prevented from doing it on account of rather rigid and Unreasonable attitude exhibited by concerned department‑Liability occurring on account of risk purchase not occasioned by any deliberate or dis honest breach of contract‑Deduction made on account of risk purchase, held, was not fine but a deduction relating to business activities of assessee and an item of profit and loss expenditure and assessee was entitled to such deduction.

Maqbool Hussain Shah, D. R. for Appellant.

Amir Alam Khan, F. C. A. for Respondent.

Date of hearing: 10th April, 1985.

.‑This departmental appeal is directed against the impugned order of the learned C. I. T. (Appeals) by virtue of which he allowed relief to the assessee on account of risk purchases made on his behalf by the Ministry of Defence. It was accord ingly prayed that relief allowed by him may be ordered to be vacated by the Tribunal.

2. The assessee, a registered firm, derives income from the manu facture and supply of defence stores to the Ministry of Defence. In respect of the charge year 1981‑82 the Ministry of Defence deducted a sum of Rs. 1,44,V81 on account of risk purchases made on behalf of the assessee. This amount was claimed by the assessee as a P & L expenditure for the relevant year. However, claim of the assessee was turned down at the assessment stage in the following words:‑

"According to law penalties imposed for breach of miles is an in admissible expenditure. Similar is the position of the late delivery amount etc."

3. Against the disallowance of Rs. 1,44,087 on account of risk purchases made on behalf of the assessee, an appeal was tiled before the learned C. I. T. (Appeals) who by virtue of Appeal No. 392, dated 28‑5‑1983 allowed the amount as a P & L expenditure in the following words:‑

"I have no doubt in my mind that the firm did its best to fulfil the terms of contract and even offered better and latest stores on the same cost and rates but could not succeed in its efforts due to a very rigid and unreasonable attitude of the department. The loss sustained by the firm by recovery of the risk purchases amount out of the gross contract payments was actually a business loss suffered during the course of its business and under no circumstances loss could be termed as a fine not admissible under the statute.

4. The learned DR on behalf of the department has reiterated that a sum of Rs. 1,44,087 deducted from payments of the assessee bang in the nature of fine is not admissible. This has been strongly contested by the leaned counsel of the assessee. In this connection, he has invited our attention to pages 466 and 467 of the commentary of Kanga and Palkhiwala (Seventh edition), according to which assessee was entitled to Rs. 1,44,087 as a deduction. He has also in. support of his contention invited our attention to a case cited as Additional Commissioner of Income‑tax, Gujrat v Messrs Aruna Mills Limited. In a nutshell his plea is that the assessee was entitled to Rs. 1,44,08; as a deduction against its gross income.

5. On the basis of the evidence that has been led before us we find that the assessee was given Contract No. 1312‑3090/64195/DDP/P‑14, dated 30th June, 1976 for the supply of Tool Kit to the Ministry of Defence. Somehow in spite of best efforts of the assessee it could not ful fil the contract, which was eventually cancelled by the Ministry of Defence. In this view of the matter risk purchases were made on behalf of the assessee as a result of which a deduction was made from its payments. The question for consideration accordingly before is whether a sum of Rs. 1,44087 is tine or not. The facts as they are have led us to conclude that the deduction is not fine. On the other band according to us this deduction is related to the business activity of the assessee. In support of this conclusion we have also sought support from the terms of the contract, According to para. 15(a) the Ministry of Defence could make risk purchases on behalf of the assessee if it failed to deliver the stores or any consign ment thereof within the period prescribed or any extension thereof. The relevant para as it is set out below:‑

(15) Failure and Termination. Should the supplier fail to deliver the stores of any consignment thereof within the period prescribed or any extension thereof, the purchaser shall be entitled at his option to take either of the following action :‑

(a) To cancel the contract and to purchase else where stores not delivered at the risk and expense of the supplier and without notice to him. The supplier shall be liable for any loss which purchase may sustain on this account but shall not be entitled to any gain on repurchase.

(b) To make the supplier liable to pay the stipulated liquidated damages for the period of delay in supply upto the rate of 2%, but not less than 1 % of the value of the unsupplied quantity of the stores per month or part of a month for the period exceeding the original delivery period subject to a provision that the total liquidated damages thus leviable will not exceed 10% of the total contract value of the particular stores."

6 The Ministry of Defence, as is evident from the content of para. 15(7) made risk purchases on behalf of the assessee and thereafter made deduction of Rs. 1,44,087 from the payments made to it. This deduction is held to relate to the business activities of the assessee and is accordingly an item of P and L expenditure.

7. Another reason which has induced us to conclude that the assessee is entitled to Rs. 1,44,087 on account of risk purchases refers to the fact that liability for this amount was not occasioned by any deliberate or dishonest breaches of contract. As has been stated above, the assessee made all reasonable efforts to fulfil the contract but somehow was prevented from doing it on account of rather rigid and unreasonable attitude exhibited by the concerned department. The deduction is accordingly in the nature of a business expenditure. In support of this fact, we refer to pages 46 and 467 of the commentary by Kanga and Palkhiwala (Seven Edition):‑

"Compensation payable as a result of negligence, of the assessee or his employees, in carrying on the business is allowable. Moneys paid by the firm of Accountants in settlement of a claim for damages arising out of the negligence of their employees would be a proper deduction. Similarly, damages paid for a breach of warranty or for failure to perform a trading contract, or payment made to procure extension of time for performance of such contract, are allowable. But liability for damages occasioned by deliberate and dishonest breaches of contract, or an amount paid by a Director of q company in liquidation for compounding misfeasance proceed ings started against him by the liquidator, or payment under a decree passed against a company for misfeasance committed by its Directors, has been held not to be deductible ‑as business expenditure."

9. In view of the above discussion, there is no manner of doubt left with us that the assessee is entitled to a deduction of Rs: 1,40,087 on account of risk purchases made on its behalf according to the terms of contract. In this view of the matter, appeal of the department being devoid of any merit is hereby dismissed. .

M. Y. H Appeal dismissed.

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