JUDGMENT C.S.P. Singh, J.
1. The Income-tax Appellate Tribunal, Delhi Bench, Delhi, has referred the following four questions for the opinion of this court.
"1. Whether the Tribunal was in law justified in allowing the assessee's claim in respect of interest on the arrears of sales tax in computing the assessee's income for the year under consideration ?
2. Whether the interest on the outstanding balance of sales tax was an allowable deduction under the Income-tax Act ?
3. Whether there was material on record justifying the Tribunal's finding that the liability of Rs. 69,383 for damages had crystallised in the accounting period relevant to the assessment year under consideration ?
4. Whether the claim of the assessee for damages could be held to be an allowable deduction in computing the assessee's income liable to assessment for the year under consideration ? "
2. So far as the first two questions are concerned, they are clearly covered by the decision of this court in the case of Saraya Sugar Mills P. Ltd, v. CIT [1972] 116 ITR 387 (FB) and in view of that decision the assessee's claim for interest on the arrears of sales tax and interest on the outstanding balance of the sales tax was not an allowable deduction. Coming now to the facts relevant for answering the third and fourth questions.
3. The assessee entered into a contract on the 21st of September, 1968, for the supply of 5,000 Kms. of A.C.S.R. Weasel conductor with the U.P. Electricity Board. The supplies were to be completed by July, 1969, but as the raw material, according to the assessee, was not available, it did not supply the contracted quantity, and sought extension for a period of six months, which was refused by the U.P. Electricity Board. Under the agreement entered into between the assessee and the Electricity Board in respect of this supply, Clause 27 thereof contained a provision for reduction of the contract price. This clause of the contract ran as under :
" If the contractor shall fail in the due performance of his contract within the time fixed by the contract or any extension thereof, the Contractor agrees to accept a reduction of the contract price by half per cent. per week reckoned on the contract value of sueh portion only of the plant as cannot in consequence of the delay be used commercially and efficiently during each week between the appointed or extended time, as the case may be, and the actual time of acceptance under Clause 29 and such reduction shall be in full satisfaction of the contractor's liability for delay but shall not in any case exceed 10 per cent. of the contract value of such portion of the plant."
4. Nothing appears to have been done by the Electricity Board in pursuance of this clause in the relevant previous year which began on the Dasahara of 1970, and ended on the Dasahara of 1971. Subsequently on 14th June, 1972, the Superintending Engineer, Electricity Stores Procurement Circle, U.P. State Electricity Board, Lucknow, by letter No. 6286-SP (T)/I/CEH-315/67 (L.M.) made a demand for Rs. 69,383 for breach of the contract. The letter sont is to the following effect :
" A contract No. SP/433/68 dated 21-9-68 was executed by you with the Board.........In accordance with the terms of the contract the supplies were to be completed by July, 1969......... Out of 5,000 only 3,976.649 Km.
supplied so far. For the balance you have expressed your inability to execute the order. You are, therefore, guilty of breach of contract and are liable to pay damages on the material unsupplied to the extent of 10% value of such material which comes to Rs. 69,383. A bank draft for Rs. 69,383 be sent within 15 days........."
5. The assessee did not pay this amount, but when he took a second contract, the Electricity Board deducted the amount. It appears that the assessee pressed for waiver of the amount, which was ultimately acceded to by the Electricity Board, and the assessee included this amount in his return for the assessment year 1975-76. The assessee claimed deduction of this amount for the previous year relevant to the assessment year 1974-75. The ITO rejected the claim on three considerations, the first being that as the contract was to be executed by July, 1969, and the previous year relevant for the assessment year in question started on Dasahara, 1970, the damages were not relevant to the year under consideration. The other reason given was that the liability to pay these damages arose not in the previous year under consideration but on the 14th June, 1972, when a demand for it was made by the Superintending Engineer, Electricity Stores. The last was that the assessee had only passed a cross entry, and had not made a provision for payment of this amount. The AAC agreed with the view of the ITO, but on appeal the Tribunal, on the view that the damages crystallized, and had been quantified in the accounting period, allowed the same. We are of the view that the decision of the Tribunal cannot be upheld. Before a claim for damages can be allowed even in cases where the assessee follows the mercantile system, the liability must be in praesenti, i.e., it must be an actual liability, and not one which may arise in future. Contingent liability which may or may not arise cannot be allowed as deduction. The decisions of this court in the cases of A.P.S. Cold Storage and Ice Factory v. CIT [1979] 119 ITR 709, Kanpur Tannery Ltd. v. CIT [1958] 34 ITR 863, New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395, CIT v. Mattwlal Baldeo Prasad [1961] 42 ITR 517 establish this principle, as also the pronouncement of the Supreme Court in the case of CIT v. Swadeshi Cotton and Flour Mills P. Ltd. [1964] 53 ITR 134 (SC). Counsel for the assessee urged that Clause 27 of the agreement created an ascertained liability. We are not inclined to accept this argument, for, although Clause 27, which we have already extracted earlier, permitted a reduction of the contract price by half per cent. per week of the contract value of such portion of the plant as had not been supplied, but not exceeding ten per cent. of the contract value of such plant by the State Electricity Board, the provision does not finally set out the liquidated amount of ascertained liability. Before a deduction under Clause 27 can be made by the U.P. Electricity Board, an investigation of certain facts has to be made. The Electricity Board has to find out the contract value of that portion of the plant which as a result of the delay could not be commercially and efficiently used during each week between the appointed time, and the actual time of acceptance. Further, the half per cent. deduction to be made under this clause has to be scaled down if it exceeds ten per cent. of the contract value of such portion of the plant. Clause 27 thus does not straightaway create any liability in praesenti. The liability is created only after the period for which the Electricity Board has not been able to work the plant commercially and efficiently, ascertained. Now, the assessee would in these circumstances be unaware of the period of time for which the State Electricity Board has not been able to work its plant commercially and efficiently and neither would the Electricity Board be in a position to know the period of deficient commercial and efficient working of its plant on account of non-performance of the contract in full by the assessee. A time lag would be there before such ascertainment is possible. Further, the liability under the clause arises only in case of non-working of the plant efficiently and commercially and not otherwise. Thus, mere breach of the contract does not in all cases create a liability. This apart, as the assessee pressed for waiver of the amount which was ultimately allowed, the liability under Clause 27 could not be said to have crystallized till such time as the waiver issue was decided by the Electricity Board. In the present case, as has been seen, the amount was ultimately waived. The Madhya Pradesh High Court had occasion to consider the accrual of liability for damages in cases where there was a waiver clause in the case of National Newsprint and Paper Mills Ltd. v. CIT [1978] 114 ITR 172 (MP) and with respect rightly held that the liability in such cases would not crystallize till the waiver matter was disposed of. We are, therefore, of the view that the liability for Rs. 69,383 did not crystallize in the accounting period relevant to the assessment year in question. This disposes of the third question.
6. So far as the fourth question is concerned, the claim for deduction of damages could not be allowed, as a deduction, as it had not arisen in the previous year relevant to the assessment year. We, accordingly, answer the first and the third questions in the negative, and the second question is answered by saying that the interest on outstanding balance of sales tax was not an allowable deduction. The fourth question is answered by saying that the assessee's claim for damages was not an allowable deduction in computing the assessee's income for the assessment year under consideration. The department is entitled to its costs, which is assessed at Rs. 200. The counsel's fee is also assessed at the same figure.