One appeal is preferred by revenue and other by assessee. They relate to assessment year 1981-82. 2. first item in revenue's appeal is with regard to sum of Rs. 1,53,410 payable to Andhra Pradesh State Electricity Board. As per Purchase Order No. 4198 dated 10-2-1978, assessee was to supply LT PVC cables with delivery schedule to complete supplies before 31-8-1978. Under clause 10 of that order, Electricity Board may at its option demand and recover amount equivalent to half per cent of value of materials not delivered within prescribed time limit per every week of delay or part thereof subject to maximum of 5 per cent of total value of contract. heading of this clause is described as 'Penalty'. As there was delay in supplying material as per above order, assessee was required to pay Rs. 61,775, Rs. 49,539 and Rs. 42,097 totalling Rs. 1,53,411. above demand was received by assessee during accounting year relevant to assessment year 1981-82 under appeal. assessee made provision in accounts for above demand. amount was paid on 6-7-1981. assessee claimed said amount as deduction. ITO disallowed amount on ground that delay in supply of goods occurred in year 1977 and amounts were paid only in year 1981. On appeal, Commissioner (Appeals) held that penalty demands raised during previous year ending 31-3-1980 were attributable to terms of contract in form of purchase order. assessee had not disputed liability. contractual liability to pay penalties had crystallised during calendar year 1980. liability had accrued or arisen during calendar year 1980 and, accordingly it would be allowable as deduction. Thus, he deleted addition of Rs. 1,53,410. 3. learned departmental representative kly urged that penalty levied is for infraction of law. electricity Board is statutory corporation. For default committed by assessee in supplying material within stipulated time of purchase order, penalties have been levied by Electricity Board, and such penalties levied under clause 10 of order cannot be allowed as revenue expenditure as they were levied for infraction of law. default in supplying material occurred in earlier year and so provision should have been made in that year and it cannot be allowed in this year. Alternatively, he urged that if provision is not made in that year, it can be allowed only in year of payment. He further urged that levy of penalty is optional as per clause 10 of order. Once it is optional, levy made is nothing but penalty. In this connection, he placed reliance on decisions in CIT v. Malwa Vanaspati & Chemical Co. Ltd. (1982) 135 ITR 221 (MP) and Chaudhary Cotton Ginning & Pressing Factory v. ITO (1984) 7 ITD 337 (Chd.) 4. learned counsel for assessee kly urged that it is on account of breach of contract, assessee was required to pay damages as per clause 10 of purchase order. So, it does not amount to levy of penalty for any infraction of law. In heading, it is mentioned as "Penalty" but in body of clause, it is made very clear that it is only damages at fixed percentage for breach of contract. Under clause 10, it was optional on part of Board to levy or not to levy damages. Hence, assessee did not make any provision in year of default but when assessee received demand in year 1980, provision was made in books. liability had arisen during this year and it could not be claimed in any other year. liability is very much connected with assessee's business and it is allowable as revenue expenditure. He placed reliance on decisions in CIT v. Inden Biselers (1973) 91 ITR 427 (Mad.). 5. We have considered rival submissions. As per Purchase Order No. 4198 dated 10-2-1978, assessee was to supply LT PVC cables to Electricity Board within stipulated time which was before 31-3-1978. There was delay in respect of some consignments. Under clause 10, Electricity Board has option to demand and recover amount fixed at certain percentage. said clause, which is relevant for our purpose, reads as under: "The time for and dates for delivery mentioned above shall be deemed t o be essence of contract. In case of delay in delivery of materials at destination, whatever be reason, Board may at its option, demand and recover from you amount equivalent to half per cent of value of materials not delivered within prescribed time limit for every week of delay or part thereof, subject to maximum of 5 per cent of total value of contract. This right of Board shall be without prejudice to its rights under law including right to cancel he contract, forfeit deposit and/or recover damages for breach of contract. No doubt, heading is described as 'Penalty'. But reading of above clause makes it clear that Electricity Board may at its option demand and recover amount equivalent to half per cent of value of materials not delivered within prescribed time limit for every week of delay or part thereof subject to maximum of 5 per cent of total value of contract. This would clearly indicate that for breach of contract for supplying material within stipulated time, Electricity Board has option as stated above to demand liquidated damages fixed at certain percentage. Accordingly, during accounting year ending 31-12-1980, Electricity Board issued three demand notices totalling Rs. 1,53,410 being amount levied under clause 10. assessee was required to pay demand within 15 days, otherwise amount would be recovered from permanent security deposit bank guarantee. In fact, amount was paid on 6-7-1981. assessee has made provision during accounting year ending 31-12-1980 as demand was raised in this year. In our view, demand of Rs. 1,53,410 is nothing but damages for breach of contract in not supplying material within stipulated time and it cannot be treated as penalty levied for any infraction of law. Supply of LT PVC cables is business of assessee. default was committed in supplying that material within stipulated time on account of which Electricity Board levied and demanded Rs. 1,53,410 as damages at stipulated rate as per clause 10. said demand cannot be treated as penalty. In our view, sum of Rs. 1,53,410 being contractual liability for breach of contract under clause 10, is allowable as revenue deduction. 6. We may refer to case law on point at issue. In CIT v. Reliable Water Supply Service of India (P.) Ltd. (1980) 124 ITR 199 (All.), assessee undertakes contracts for construction of tube wells and supplying of store. Due to breach of terms of contract in not finishing contract work within stipulated time, Government levied penalties which were claimed as deduction. On those facts, Allahabad High Court held that amount of Rs. 1,13,732 paid as penalty and damages to Government for delay in 1,13,732 paid as penalty and damages to Government for delay in execution of contracts was deductible in computing assessee's profits. 7. In CIT v. R. D. Sharma & Co. (1982) 137 ITR 333 (Bom.), assessee, contractor, claimed deduction of Rs. 30,800 being penalty levied by Garrison Engineer, Dehu Road, for non-completion of work within stipulated time. On those facts, Bombay High Court held that it is allowable deduction. contention of revenue that liability has arisen due to failure to carry out terms of contract and such failure is not incidental to business was not accepted. It was held that assessee carries on business of building contracts and it is not unusual that in performance of such contracts delay might occur for several reasons and if delay occurs, there is breach of condition relating to completion of contract work within stipulated time. Such failure, if it occurs, is clearly incidental to business of assessee. In that case also, amount claimed as deduction was described as 'penalty' but Bombay High Court held that through amount claimed as deduction is described as penalty, it is in fact compensation payable by contractor to Government and nature thereof is wholly different from penalty which arises from breach of statutory provision and said liability must, therefore, be construed as having arisen on account of delay in performance and on account of compensation payable to Government and not strictly in nature of penalty as in case of breach of penalty provision of law. 8. above two decisions, which are directly on point, squarely apply to facts of instant case. We may also refer to few other decisions. 9. In CIT v. Prafulla Kumar Mallick. (1969) 73 ITR 119 (Ori.) assessee, who worked as paddy procurement agent, was required to supply to Government paddy and rice of standard known as fair average quality. Penalties were levied for supply paddy and rice which were not of standard prescribed. On those facts, it was held by Orissa High Court that sum of Rs. 25,700 paid by assessee by way of penalty to Government was admissible deduction in computing profits. It was held that payment by assessee of such penalty by way of damages for breach of warranty is incidental to assessee's business. 10. above decision was followed by same Court in Govind Choudhury & sons. v. CIT  79 ITR 493. In this case also, assessee claimed deduction of Rs. 1,233 paid as penalty to Government for supply o f inferior quality of paddy and rice. It was held that said amount was deductible from income itself. 11. In Hind Mercantile Corpn. Ltd. v. CIT  49 ITR 23 (Mad.) in consequence of breach of contract assessee had to pay Rs. 2,35,758 as damages. This was claimed as deduction. Madras HIgh Court held that loss was incurred in usual course of business and was incidental to conduct of business for earning profit and was allowable in computing profits of assessee's business. 12. In CIT v. Loke Nath & Co. (Construction)  147 ITR 624 (Delhi) assessee had to pay sum of Rs. 4 lakhs for getting revised plan passed by NDMC. On those facts, Delhi High Court held that payment was not in nature of penalty for infraction of law and was permissible deduction in arriving at business profit of assessee. 13. In Inden Biselers' case (supra) on account of non-compliance with terms of contract to supply manganese ore within specified time, assessee paid Rs. 1,18,875 which was claimed as dedication. Madras High Court held that amount was allowable as deduction. 14. In Addl. CIT v. Rustam Jehangir Vakil Mills. Ltd.  103 ITR 298 (Guj.) under clause 21A (1) of Cotton Textiles (Control) Order, 1948, Textile Commissioner may direct any producer with spinning plant to pack such minimum quantity of such cloth and during such period as may be specified in direction. On account of failure to comply with same, assessee had to pay certain amount which was claimed as deduction. Gujrat High Court held that payments made by assessee were not in nature of penalty and were incidental to carrying on of assessee's business. payments were business expenditure allowable under section 37 of Income-tax act, 1961 ('the Act'). 15. In CIT v. Chemicals & Fibres of India Ltd.  142 ITR 413 (Bom.), assessee was granted advance import license under which it had to export art silk fabrics of value of nearly Rs. 21 1/2 lakhs by 8-11-1966. assessee fulfilled major part of its obligation except for shortfall of about Rs. 2.74 lakhs which was made up after delay of one month. Central Government forfeited guaranteed amount to extent of about Rs. 2.74 lakhs which assessee claimed as deduction. On those facts, Bombay High Court held that breach committed by assessee was not celebrate and it occurred by reason of sheer inability of assessee to complete its export obligation in time. amount which assessee had to pay under bond was calculated on footing of shortfall and it could hardly be looked upon as penalty for infraction of law or any statutory obligation or public policy, but must me regarded as damages paid under contract. sum paid by assessee to Government was, therefore, admissible deduction. 16. ratio laid down in above cases squarely applies to instant case. liability of Rs. 1,53,410 is nothing but damages for breach of contract in not supplying material within stipulated time. It is not penalty for any infraction of law. Due to default under terms of contract, assessee has to pay damages and it is contractual liability. Though it is described as 'penalty' it must be regarded as damages paid under contract. demand was received during accounting year ending 31-12-1980 and, thus, liability has arisen in this year. It could not be anticipated in year 1978 as Electricity Board had option to levy or not to levy. Hence, it cannot be provided in books in year 1978. Since Electricity Board issued demand for Rs. 1,53,410 in year 1980, assessee made provision and, thus, liability has accrued in this year and it is allowable as deduction. In this connection we may refer to decision of Allahabad High Court in Swadeshi Cotton Mill Co. Ltd. v. CIT  125 ITR 33 where again it was held that if liability is based on some contractual obligation, it arises only when it is ascertained. Unless liability has become ascertained sum of money, it no doubt exists, but proceedings have yet to be taken to determine exact amount. vague liability to make payment cannot be entered in accounts. In CIT v. Soorajmull Nagarmull  129 ITR 169, Calcutta High Court held that though claim related breach alleged to have occurred in 1952, settlement of liability was done by agreement between parties in year of account relevant to assessment year 1956-57 and amount was allowable in that year. 17. decision of Madhya Pradesh HIgh Court in Malwa Vansapathi & Chemical Co. Ltd.'s case (supra) relied on by departmental representative is clearly distinguishable as in that case penalty was levied for breach of law. 18. contention of learned departmental representative that once it is optional, levy amounts to penalty, cannot be accepted. In instant case, under clause 10 amount to be levied is at fixed percentage. Thus, what is levied is damages for breach of contract and cannot be treated as penalty. 19. decision of Tribunal in Elphinstone Spg. & Wvg. Mills Co. Ltd. v. ITO  7 ITD 333 (Bom.) relied on by departmental representative, is also distinguishable. That was case of levy of penalty under section 14 of Employees' Provident Funds and Family Pension Fund Act, 1952. On facts of that case, it was held that levy was for breach of statutory provision and it is penal in character. That is not position here. In our view, Commissioner (Appeals) was perfectly justified in allowing sum of Rs. 1,53,410 as revenue expenditure in this year. 20. next item is with regard to relief under section 80J of Act. assessee had given certain figures before ITO for computing capital. But, before Commissioner (Appeals), he gave different statement which he accepted without putting same to ITO. Since statement filed before Commissioner (Appeals) was not put to ITO we think it proper to restore this item to file of Commissioner (Appeals). He may put this statement furnished by assessee to ITO and after giving opportunity of hearing to both parties matter may be decided afresh in accordance with law. 21. next ground is with regard to addition of Rs. 6,001 made under rule 6D of Income-tax Rules, 1962 but deleted by Commissioner (Appeals). learned counsel for assessee agreed to that addition has to be restored. Accordingly, we restore addition of Rs. 6,001. 22. next common growth in departmental appeal as well as assessee's appeal, which we now take up, is with regard to sales tax liability. assessee-company has taken over business of firm of Radiant Engg. Co. on 10-3-1978 with all it assets and liabilities as going concern. said business carried on by firm was continued by assessee. Originally sales tax assessment for assessment years 1974-75 to 1977-78 were completed on firm. Subsequently, those assessments were received. So far as assessment years 1974-75 and 1975-76 are concerned, show-cause notice was issued on 20-3-1980 and assessments were completed and demand itself for those two years was raised on 29-4-1980 in previous year relevant to assessment year under appeal. For assessment years 1976-77 and 1977- 78, show-cause notices were issued on 13-5-1981. In view of demand raised for 1974-75 and 1975-76 assessee made provision for Rs. 2,33,588.32 in accounts for sales tax liability for assessment years 1974-75 to 1977-78, i.e., up to 9-3-1978 and also Rs. 1,30,870 of period 10- 3-1978 to 30-12-1980. said amounts were claimed as allowable deduction. ITO rejected assessee's claim on ground that liability does not relate to this year, demand was raised and paid after accounting year. On appeal, Commissioner (Appeals) upheld disallowance of Rs. 2,33,588. He, however, observed that ITO should allow deduction of liability of Rs. 2,33,588 in year in which relevant sales tax demand is paid. With respect to Rs. 1,30,870 he held that tax liability pertaining to sales effected between 1-1-1980 to 31-12-1980 is allowable in this year. But, regarding sales effected between 10-3-1978 to 31-12-1979, sales tax liability should be allowed in year of actual payment. Against said order, revenue as well as assessee has come up in appeal. 23. It is contended by learned departmental representative that sales tax liability relating to period prior to taking over by assessee of business of firm of Radiant Engg. Co., is not liability of assessee but of its predecessor in business and it cannot be allowed in hands of assessee. At any rate, said liability of previous firm will be capital expenditure and cannot be allowed as deduction. Commissioner (Appeals) also was not justified in giving direction to allow sales tax liability in year in which it is paid. Since there is no demand raised in this year, it cannot be allowed. It is allowable only in year when sales had taken place. Reliance was placed on decisions in Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363 (SC), CIT v. V. Krishnan  121 ITR 859 (Mad.) and L. Kunhamu Haji v. State of Kerala  155 ITR 516 (Ker.). 24. learned counsel for assessee submitted that business of firm was taken over by assessee with assets and liabilities and same business was carried on by assessee. Hence, sales tax liability of previous firm is allowable in hands of assessee as business of firm was taken over with its liabilities. demand for 1974-75 and 1975-76 was raised in this year and on basis of those demands provisions was made for liability of assessment years 1976-77 and 1977-78. Thus, total liability of Rs. 2,33,588 for period up to 9-3-1978 is allowable. This year on same basis provision was made for sales tax liability for period from 10-3-1978 to 31-12-1980 which is allowable in this year. He placed reliance on decisions in Iyanar Coffee & Tea Co. v. CIT  78 ITR 775 (Mad.), CIT v. Hind Motor Cycle Works  134 ITR 348 (All.), Associated Printers (Madras) (P.) Ltd. v. CIT  43 ITR 281 (Mad.) and CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co.  155 ITR 152 (SC). Alternatively, it is urged that sales tax liability should be allowed at least when demand is raised but not when it is paid. 25. We have considered rival submissions. assessee-company took over business of firm on 10-3-1978 with all its assets and liabilities as going concern and or business carried on by firm was continued by assessee. question for consideration is whether sales tax liability of firm for period prior to 9-3-1978 is allowable in hands of assessee after business of firm was taken over by assessee. In our view sales tax liability of firm for period prior to 9-3-1978 is allowable in hands of assessee as assessee has taken over business of firm with all its assets and liabilities as going concern and said business of firm was continued by assessee. In Associated Printers (Mad.) (P.) Ltd.'s case (supra) assessee-company took over business of its predecessor company from 1-1-1950. assessee debited in its accounts amount of bonus payable as per award for 1949-50. On those facts, Madras HIgh Court held that liability to pay bonus for 1949-50 became accrued liability law imposed that liability on assessee and, thus, it was its own liability which assessee-company discharged when it provided for bonus payment in year of account 1951-52. It was expenditure incurred not for acquisition of business but for its continuance. It was certainly not expenditure of capital in nature. In Iyanar Coffee & Tea Co.'s case (supra) in 1960 assessee- company took over assets and liabilities of firm running coffee business. assessment to sales tax in respect of sales of coffee made during 1958-59 was made on 31-1-1961 raising demand of Rs. 20,507. question arose whether said amount is allowable as deduction in hands of assessee. Madras High Court held that assessee had stepped into shoes of firm in respect of coffee business having taken over entire assets and liabilities and being mere reflection of firm it was entitled to deduct sum of Rs. 20,507 in its assessment for 1962-63. In Hind Motor Cycle Work's case (supra) assessee took over business carried on by another firm. assessee claimed trade liability of erstwhile firm as deduction. On those facts, Allahabad High court held that as firm has taken over entire assets and liabilities of erstwhile firm, liability to pay sum of Rs. 14,250 under Court decree was trading liability and was allowable as deduction. In CIT v. Amalgamated Development Ltd.  65 ITR 395 (SC) assessee-company purchased assets and liabilities of firm. consideration was paid by issue of shares to vendor in share capital of assessee-company. assessee-company took over debts as well as liabilities. During assessment years 1950-51 and 1951- 52 assessee-company spent certain amount for development of plots already sold by firm which was claimed as allowable deduction. Supreme Court held that amounts spent for development of plots sold by firm before assessee-company took over business were allowable deduction under section 10(2) (xv) of Indian Income-tax Act, 1922, in computing profits of assessee-company. In T. Veerbhadra Rao's case (supra), assessee succeeded to business of predecessor firm, taking over all latter's assets and liabilities including debt due from Laxmi Trading Co. business carried on by predecessor firm was carried on by assessee. In respect of debt due from Laxmi Trading Co. there was settlement on 31-3-1965 under which sum of Rs. 25,000 was accepted by assessee in full settlement of debt and balance of Rs. 15,100 was written off as irrecoverable. assessee claimed deduction of sum of Rs. 15,100 as bad debt. On those facts Supreme Court held that if business along with its assets and liabilities is transferred by one owner to another, debt so transferred would be entitled to same treatment in hands of successor. If law permits transferor to treat whole or part of debt as irrecoverable and to claim deduction on that account, same right should be recognised in transferee. It is merely incident flowing from transfer of business together with its assets and liabilites from previous owner to transferee. Thus, it was held that assessee was entitled to deduction of Rs. 15,100 as bad debt. 26. ratio laid down in above cases clearly applies to instant case. assessee has taken over assets and liabilities of former firm and business of that firm was continued by assessee. sales tax liability of former firm is allowable as deduction in hands of assessee. sales tax liability of former firm is not capital expenditure. 27. next question that arises for consideration is whether provision made in accounts for sales tax liability of Rs. 2,33,588 of assessment years 1974-75 to 1977-78 up to 9-3-1978 and provision for Rs. 1,30,870 for period from 10-3-1978 to 31-12-1980 is allowable as deduction in assessment year 1981-1982 now under appeal. original sales tax assessment for assessment years 1975-76 to 1977-78 of erstwhile firm were completed on said firm prior to 10-3-1978. assessee took over business of said firm with its assets and liabilities from 10-3-1978. After assessee took over business of said firm, Sales Tax Department issued notices on 20-3-1980 for assessment years 1974-75 and 1975-76 and revised original assessments for those years and issued demand notices dated 29-4-1980 raising additional demand of Rs. 43,383 and Rs. 22,930 for t h e assessment years 1974-75 and 1975-76, respectively, totalling to Rs. 66,313. On basis of additional demand raised for those two years, 66,313. On basis of additional demand raised for those two years, assessee made provision for said sum of Rs. 66,313 and also Rs. 1,57,275.32 relating to assessment years 1976-77 and 1977-78 which assessee anticipated would be additional sales tax demand for those two years. Thus, total provision made for all four years was Rs. 2,23,588.32 which was claimed by assessee as allowable deduction in assessment year 1981-82. On basis of above demand, it also made provision for Rs. 1,30,870 for period from 10-3-1978 to 31-12-1980 relating to assessment years 1978-79 to 1980-81 which was also claimed as allowable deduction. question for consideration is whether above two amounts are allowable as deduction in assessment year 1981-82. In our view assessee is entitled to deduction of Rs. 2,23,588.32 as well as Rs. 1,30,870 in assessment year 1981-82. On basis of additional sales tax liability raised for assessment years 1974-75 and 1975-76 by demand notices dated 29-4-1980 during accounting year relevant to assessment year 1981-82 under appeal assessee has made provision for sales tax liability of Rs. 2,23,588.32 and Rs. 1,30,870 for assessment years 1974-75 to 1980-81. above liability is allowable as deduction in assessment year 1981-82. assessee-company as well as previous firm were claiming that PVC compound and bear conductor should be considered as raw materials for purposes of sales assessment and not as manufactured product. In fact contention was accepted in original assessments made for assessment years 1974-75 to 1977-78. However, Sales Tax Department, subsequently, took view that they are manufactured products and, accordingly, sales tax at higher rate was levied and raised demand on 29-4-1980 for assessment years 1974-75 and 1975-76. It is under those circumstances that assessee has made provision for above amounts this year. It is only in this year that assessee could known that sales tax is leviable on PVC compound and bear conductor as Sales Tax Department was of view that they are manufactured items rejecting assessee's contention that they are raw materials. Under above circumstances, provision made by assessee for above sales tax liability is allowable deduction. In CIT v. Rajeshwari Distributors (P.) Ltd.  125 ITR 618 (Cal.) sales of certain categories of match boxes were not liable to sales tax. But by subsequent notification they were held to be liable. department initiated assessment proceedings. assessee contested its liability to sales tax. It, however, made provision in its accounts for estimated amount of sales tax. On those facts, Calcutta High Court held that liability to pay sales tax was not contingent because it was being disputed by assessee. In respect of ultimate results, claim by assessee could not be rejected. ITAT v. B. Hill & Co. (P.) Ltd.  142 ITR 185 (All.), sales tax authorities served notices dated 26-3-1966 to show cause why sales tax on goods imported and acquired in Bombay from 1-4-1969 onwards be not deemed to have been sold in Bombay. assessee disputed its liability and further proceedings were stayed by Bombay High Court. However, assessee made provision for Rs. 1,50,000 in assessment year 1967-68 which was claimed as deduction. Allahabad High Court held that assessee is entitled to deduction of Rs. 1,50,000 for which it had made provision in respect of sales tax liability. ratio in above cases squarely applies instant case. decision of Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) has been considered in above t w o decisions. decision of Madras High Court in V. Krishna's case (supra) is case where no provision has been made in accounts. It is on those facts Madras High Court held that assessee's claim for deduction would arise for consideration either in year in which assessee accepts liability or in year in which amount is paid. In instant case, provision has been made for sales tax liability. Thus, above case is distinguishable. 28. Thus, in our view provision of Rs. 2,23,588.32 and Rs. 1,30,870 made in accounts in respect of sales tax liability for assessment years 1974-75 to 1981-82 is allowable as deduction in assessment year 1981-82. 29. In result, assessee's appeal is allowed and departmental appeal is dismissed. *** INCOME TAX OFFICER v. RADIANT CABLES (P) LTD.