This is appeal filed by assessee against order of Commissioner of Income-tax (Appeals), Visakhapatnam dt. 26-12-1984 and it relates to asst. year 1981-82. only question involved in this appeal is whether damages claimed by Food Corporation of India against assessee-company for non-fulfillment of its contractual obligations under contract dt. 5-2-1977 which assessee entered into with Food Corporation of India is deductible during accounting year relevant to asst. year 1981-82. facts briefly stated are as follows: 2. assessee is private limited company engaged in manufacture o f cattle feed, poultry feed, fats and rice bran oil for export and sale thereof. It exports bran oil outside India. Food Corporation of India (FCI for short) called for tenders to lift and remove rice bran and germs stocks which were lying in 42 mills in State of Andhra Pradesh. tenders were floated on 23-10- 1976. assessee-company submitted tenders to lift bran from 42 mills and germs stocks from 38 mills within period of 3 months from 5-2-1977 and 4-5- 1977. tenders were opened on 25-11-1976 and assessee's tender was accepted. acceptance of tender was telegraphically communicated to t h e assessee by FCI on 23-12-1976. So also acceptance of assessee-company's tender was intimated to assessee-company by FCI b y its letter dt. 7-1-1977. In said letter itself assessee was asked to deposit amount of Rs. 42,000 towards earnest money. Bran and germs already produced and held as on 4-2-1977 and likely to be produced in co- operative/private rice mills mentioned in Annexure to agreement and belonging to FCI for period of 3 months from 5-2-1977, were products agreed to be purchased by assessee-company from FCI. According to another term of agreement existing stocks as on 4-2-1977 should be lifted by assessee-company within week from date of agreement. However, assessee-company failed to lift these stocks but began asking time to do so by addressing series of letters to FCI. last of such letters was addressed by assessee-company to FCI on 11-4-1977. FCI finally granted 15 days' extension from 25-7-1977 for removal of stocks. However, assessee-company failed to lift these stocks even within extended time which expires on 8-8-1977. As assessee-company failed to lift stocks even during extended time limit, FCI was constrained to retender stocks at risk and cost of assessee-company. For that purpose tenders were received up to 17-9-1977 and they were accepted on 17-11-1977. In respect of balance of stocks another retender was called and it was opened on 29-3-1978 and they were accepted on 29-4-1978 and 3-5-1978. FCI sent telegram on 2-8-1980 to assessee-company calling upon it to give its consent for reference to arbitration. assessee-company sent evasive reply on 12-9-1980. In meanwhile FCI sent notice dt. 19-7-1980 calling upon assessee to pay sum of Rs. 11,07,176.33 ps. on account of loss incurred by FCI on retender. 3. FCI filed application u/s 20 of Arbitration Act, 1940, on 8-8- 1980 before VI Additional Judge, City Civil Court, Hyderabad, which was re- numbered as OS 278 of 1982 on his file. This suit was tried along with another suit filed by assessee-company against FCI by means of judgment and decree dt. 28-3-1983. Additional Chief Judge, City Civil Court, Hyderabad, while granting decree to FCI in suit filed by it against assessee-company directed Managing Director, FCI, New Delhi, to appoint arbitrator to make order referring dispute as per terms of agreement dt. 5-2-1977. assessee-company preferred appeal in AP High Court against decree dt. 28-3-1983 referred to supra. For some time High Court stayed operation of decree, but subsequently stay was vacated. assessee-company also took out letters patent appeal. But it was dismissed and with result there was no impediment placed either for appointment of arbitrator or for arbitrator to proceed with subject matter of arbitration according to terms of decree dt. 28-3-1983 referred t o supra. One Shri G. Venkata Subrahmanyam, who retired as Joint Secretary and Legal Adviser to Government of India, was appointed arbitrator and after observing every formality required and after receiving claim, counter as well as rejoinder and also after hearing counsels on both sides, learned arbitrator made award dt. 26-2-1986. arbitrator held that it was not open to FCI to extend time for performance of contract and to plead that breach occurred on 8-8-1977, i.e., after expiry of 15 days from 25-7- 1977. He had recorded that assessee-company committed breach of agreement on 5-5-1977 itself. In another part of award arbitrator found that FCI can claim only sum of Rs. 1,07,531 against assessee- company towards damages sustained by reason of breach of agreement (Rs. 1,06,381 + Rs. 1,150). He also held that FCI was entitled to claim interest at 12 per cent on said sum from date of award till date of appointment. However, dealing with issue whether claim was barred by limitation arbitrator clearly found in his award as follows (as per para 38 of award): " ...As already stated by me in action for breach of contract, cause of action is only breach which according to my finding on issue 1 occurred on 5- 5-1977. claimant having failed to commence arbitration within period of three years from aforesaid date of breach, I am not left with any alternative except to hold that claim is barred by limitation. " Consequently, arbitrator dismissed claim of FCI as having been barred by time. 4. On ground that FCI made demand for Rs. 11,07,176 against it assessee-company by its letter dt. 19-7-1980 claimed it as liability against profits in accounting year relevant to asst. year 1981-82 in adjusted profit & loss account filed for income-tax purposes. accounting year for previous year relevant to asst. year 1981-82 ended by 31-4-1981. So corresponding year for asst. year 1981-82 is from 1-5-1980 to 31-4-1981. ITO found that pending suit before Additional Chief Judge, City Civil Court, Hyderabad, assessee-company was advised to keep this liability only as contingent liability and it was not taken into profit and loss account as clear liability against profits of accounting year relevant to this asst. year. ITO rejected assessee's claim for following reasons: Firstly he stated that claim for damages made against assessee- company was in nature of non-statutory liability and such liability arises only on date of adjudication of award by arbitrator. Even according to assessee liability which is under review was treated nothing more than contingent liability. ITO relied upon Calcutta High Court's decision in CIT v. Soorajmull Nagarmull [1981] 129 ITR 169 wherein it was purported to have been held that claims relating to breach of contracts and liabilities flowing from it could be said to be crystallised only on date of arbitration award, or if consented to on date of admission of claim, but not on date of receipt of demand of claim, by assessee. breach of contract occurred in this case after close of 15 days from 5-2-1977 and, therefore, said breach falls in asst. year 1977-78. ITO also stated that what all FCI did on 19-7-1980 was to intimate quantum of liability which was crystallised much earlier to said date. Thus he had disallowed claim for Rs. 11,07,176. said disallowance was upheld by learned Commissioner of Income-tax (Appeals) in his impugned orders dt. 26-12-1984. Hence second appeal by assessee. 5. We have heard Shri C. V. K. Prasad of Brahmaiah & Co., learned advocate for assessee, and Shri N. Santhanam, learned Departmental Representative for department. On behalf of assessee paper book containing 230 pages was filed before us. On pages 1 to 7 of paper book copy of agreement dt. 5-2-1977 entered into between assessee-company and FCI was provided. On pages 9 to 11 letter dt. 19-7-1980 demanding payment of Rs. 11,07,176.33 from assessee-company by FCI was provided. At pages 13 to 18 plaint copy filed in OS 756 of 1980 on file of VI Additional Judge, City Civil Court, Hyderabad, was furnished. At pages 19 to 41 written statement filed by assessee-company in OS 756 of 1980, referred to above, was furnished. At page 43 to page 139 was provided certified copy of judgment dt. 28-3-1983 passed, inter alia, in OS 278 of 1982 on file of Additional Chief Judge, City Civil Court, Hyderabad (the suit in OS 756 of 1980 was renumbered as such). At pages 141 to 143 decree dt. 28-3-1983 passed i n OS 278 of 1982 on file of Additional Chief Judge, City Civil Court, Hyderabad was provided. At pages 145 to 153 copy of CMA 506 of 1983 filed before AP High Court u/s 39 of Arbitration Act, 1940 was furnished. At pages 155 to 157 copy of letter dt. 26-2-1986 addressed by arbitrator to parties and their counsels, etc., intimating notice of making and signing award was furnished. At pages 159 to 161 arbitrator furnished statement of account of amount paid to him. At pages 163 to 204 photostat copy of award in arbitration case No. 2/83 was furnished. As already stated Shri G. V. Subramanyam was sole arbitrator. OP 202 of 1986 was filed before First Additional Judge, City Civil Court, Hyderabad to set aside award dt. 26-2-1986. Petition copy is furnished at pages 213 to 223. counter filed on behalf of assessee-company in OP 202 of 1986 was furnished at pages 225 to 230. Ultimately, it can be seen that present stage of proceedings is that award dt. 26-2-1986 is being questioned before 1st Addl. Judge, City Civil Court, Hyderabad and those proceedings are still pending. 6. Before us Shri C. V. K. Prasad very much stressed upon term found in clause 1(c) of agreement which is as follows: " 1(c) buyer has furnished within week of acceptance of tender as security deposit of Rs. 30,000 (Rs. thirty thousand only) by adjustment from Earnest Money Deposit in favour of Regional Manager, Food Corporation of India, Hyderabad. Security Deposit furnished by buyer would be subject to terms and conditions laid down for sale of rice, by-products and Food Corporation of India will not be liable for payment of any interest on security deposit or any depreciation thereof. If buyer fails or neglects to observe or perform any of his obligations under contract, it shall be lawful for Food Corporation of India to forfeit either in whole or in part, in its absolute discretion, security deposit furnished by buyer towards satisfaction of any sum due to be claimed from buyer for any damages, losses, charges, expenses or costs that may be suffered or incurred by Food Corporation of India. decision of Regional Manager, Food Corporation of India, Hyderabad, in this respect shall be final and binding on buyer. In event of security deposit being insufficient or if security has been wholly forfeited, balance or total sum recoverable, as case may be, shall be deducted from any sum then due or which at any time thereafter may become due to buyer under this or any other contract with Food Corporation of India. Should that sum also not be sufficient to cover full amount recoverable, buyer shall pay to Food Corporation of India on demand balance due. " Shri C. V. K. Prasad stressed before us term which constituted last sentence of term of contract extracted above which obliges assessee- company to pay to FCI on demand balance due, should security deposit was found to be insufficient to cover full amount. It is contention of Shri Prasad that in pursuance of term of contract found in clause 1(c) of agreement assessee is obliged to make good deficient demand made by FCI against assessee-company. Having accepted such liability assessee-company is quite within its rights to provide for liability as it had incurred liability on date of demand, viz., 19-7-1980 and as said date had fallen within relevant accounting year claim of assessee for deduction is quite legitimate and should be allowed, as assessee has been following mercantile system of accounting. In support of stand taken by assessee learned counsel for assessee relied upon following decisions: (1) Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) (2) Laxmi Ginning & Oil Mills v. CIT [1971] 82 ITR 958 (Punj. & Har.) (3) Central Wines v. ITO [1986] 15 ITD 332 (Hyd.) Ultimately it was argued by learned counsel for assessee that claim made by assessee-company constitutes lawful deduction from profits earned by assessee-company for asst. year 1981-82 and, therefore, it should be allowed and impugned order passed by CIT (Appeals) is liable to be set aside. 7. learned Departmental Representative contended that decisions cited on behalf of assessee-company were quite distinguishable. He states that in case of Calcutta Co. Ltd. liability was admitted by assessee- company and said liability was constituted as recital in registered sale deeds executed by assessee-company in favour of vendees of various parcels of land. Further, deduction was allowed by Hon'ble Supreme Court not u/s 10(2) of Indian-Income-tax Act, 1922, but u/s 10(1) of said Act. So also, Punjab decision relied upon by assessee is also distinguishable inasmuch as in that case also loss suffered by assessee- company was not only entered in account books of assessee-firm under proper head but also said liability was not disputed. At page 960 of reported decision following is what is observed by Punjab High Court: " ... This loss was suffered by assessee-company during accounting year relevant to year 1953-54 and exact amount of loss suffered was entered in books of account of assessee-firm under proper head which has not been disputed. It cannot be said that amount of loss would have crystallised only after litigation between assessee-firm and Amrit Banaspati Company Ltd. had been finally decided. loss was suffered by assessee-firm in accounting year relevant to asst. year 1953-54, and if, as result of litigation, it was found entitled to less amount than amount claimed, difference could be included in assessable income of assessee for year during which final decision of litigation was made. " Thus it can be seen, argued learned DR that loss claimed was not disputed. Further, there was clear finding from facts of that case that loss was suffered by assessee-firm in accounting year relevant to asst. year 1953-54. However, facts in that case and present case before us are quite different. From very beginning liability was never admitted, but it was always disputed. Hence, ratio of said decision cannot be of any help to assessee. Lastly, coming to this Tribunal decision in case of Central Wines it can be seen that it has dealt with claim for additional sales tax liability. This Tribunal held ordinarily though liability to pay sales tax arises at point of sale itself it was found by Tribunal that just like any other tax liability even sales tax liability is not simple matter. There may be points of complexity on which understanding of provisions of liability by assessee and sales tax department could be different. There is preponderance of judicial opinion which shows that in cases like present one, one had to look into question from commercial point of view and also taking into account reality of situation. If these were taken into account, impugned liability would arise only during accounting year in which additional demand was raised by sales tax department. liability to pay additional sales tax was statutory liability, but not contractual liability. learned DR points out that as far as question of deductibility or liability of learned DR points out that as far as question of deductibility or liability of sum claimed as deduction are concerned, there is well marked distinction recognised by decided authorities between statutory liability on one hand and contractual liability on other. Generally stated whether specific provision is made or not in books of account of firm statutory liability arises out of provisions of statute itself, and does not depend upon fact whether provision is made for that purpose or not in account books. This position is made very clear even in case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 by Hon'ble Supreme Court. But if it is contractual liability then liability would be crystallised and would be allowed to be deducted either in accounting year in which liability is admitted by assessee or liability is crystallised by means of decree or award which ultimately becomes final and enforceable. Till then liability would remain merely as contingent liability. In support of his submissions learned DR brought to our notice following authorities: 1. CIT v. Roberts McLeane & Co. Ltd. [1978] 111 ITR 489 (Cal.). 2. Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC). 3. A. P. S. Cold Storage & Ice Factory v. CIT [1979] 119 ITR 709 (All.). 4. CIT v. Oriental Motor Car Co. (P.) Ltd. [1980] 124 ITR 74 (All.). 5. Soorajmull Nagarmull's case. 6. CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 (SC). 8. Having heard arguments on both sides and having gone through whole record pertaining to this appeal, we are of opinion that lower authorities are perfectly justified in rejecting claim made by assessee as deduction on ground that it does not create specific liability against assessee-company in accounting year relevant to asst. year 1981-82. In first instance let us see validity of contention of assessee that liability to pay Rs. 11,07,176.33 arose even under terms of contract for which it had invited our attention to clause 1(c) which we have already extracted above. In our opinion distinction is to be drawn between breach of term in contract for which liquidated damages were prescribed and wholesale breach of contract itself. When whole contract is broken there is no question of one of terms of contract governing quantification of damages. Further, in order to understand real meaning of agreement terms of agreement should be read as whole and one of terms should not be truncated from other terms and its meaning should not be attempted to be found in isolated manner. If we do that exercise it would lead us only to misleading conception. terms of contract did not provide for contingency as to how much damages are to be paid by defaulting party if contract as whole is broken or contravened. Clause 1(c) certainly is not clause dealing with any such situation. Only clause which can be invoked is clause 1(n) which is as follows: " (n) Arbitration: All disputes and differences arising out of or in any way touching or concerning this agreement, whatsoever, (except as to any matter decision of which is expressly provided for in contract) shall be referred to sole arbitration of any person, appointed by Managing Director of Food Corporation of India.... " Therefore, perhaps Food Corporation of India telegraphically intimated assessee-company to give its consent to appoint arbitrator by Managing Director of FCI. Further, if clause 1(c) applies to breach of whole contract then Food Corporation is entitled to deduct Rs. 30,000 from total claim of Rs. 11,07,176.33 ps. which it had never done. Further, authority to determine damages suffered for breach of whole contract was not solely conferred on FCI under terms of contract dt. 5-2-1977. assessee never admitted its liability either to pay whole or any part of Rs. 11,07,176.33 ps. Our conclusion on this matter is found to have been approved by Calcutta High Court in case of Soorajmull Nagarmull's case. At page 175 of reported decision their Lordships stated as follows: " Section 56 of Contract Act itself provides that for bargain and in certain contingencies of non-performance liquidated damages might be provided for in contract, but liquidated damages proceed on basis that contract has been breached by conduct of parties, i.e., rights of parties are adjusted in manner contemplated by parties at time of bargain. After considering several other decisions this view was expressed by this Court in case of CIT v. Pioneer Trading Co. (P.) Ltd. [1968] 70 ITR 347, where this Court held that claim based on breach of contract did not come within meaning of " Contract settled " as used in Expln. 2 of s. 24(1) of Indian Income-tax Act, 1922. 'Contract settled' meant contract settled before breach. After breach of contract, cause of action was no longer based on contract itself but on its breach.... " In our view above ratio aptly applies to reject contention of assessee advanced before us and to fortify our decision that terms of clause 1(c) extracted above do not apply to case of breach of contract itself. As can be seen from voluminous record produced on behalf of assessee, assessee-company never attempted to admit any part of claim put forward by FCI in which case matter would have been otherwise to extent of admitted amount. In case of Calcutta Co. Ltd. itself assessee entered into foreign exchange contracts in 1952 with Hindusthan Mercantile Bank. difference payable by assessee on forward contract was determined i n December 1952, but assessee disputed its liability. That dispute was settled in 1955 and its account in bank was debited in June 1955. assessee claimed this loss amounting to Rs. 80,491 as revenue expenditure in asst. year 1956-57. Calcutta High Court ultimately held that this amount can be held as revenue expenditure. gist of this decision is as follows: " That though claim related to breach alleged to have occurred in 1952, settlement of liability was done by agreement between parties in year of account relevant to asst. year 1956-57. amount of Rs. 80,491 was allowable in asst. year 1956-57. " For applying above ratio to facts on hand there must be admission o f liability on part of assessee either in full or in part. However, in this case there was no admission on part of assessee-company to pay Rs. 11,07,176.33 or any part thereof at any time. Even at present parties are at loggerheads and still fighting litigation inasmuch FCI filed petition seeking to set aside award and assessee-company seeking to justify legality and correctness of award. Thus inasmuch as any part of Rs. 11,07,176.33 was admitted liability of assessee-company and much less assessee-company sent reply to FCI admitting its liability, no part of said amount can be said to form legal liability of assessee-company in accounting year relevant to asst. year 1981-82. It is not out of place to mention that ultimately arbitrator found that even if it is found that there is breach assessee-company was liable to pay only Rs. 1,07,531 (vide para No. 10 of award at page 195 of paper book). So also, learned arbitrator held that claim of FCI against assessee-company was wholly time-barred (vide finding of arbitrator at close of para 38 of his award found on page 238 of paper book). No doubt, limitation does not destroy right or obliterate such right but only bars remedy. Further, this position does not advance case of assessee inasmuch as assessee- company did not even admit liability of Rs. 1,07,531 in any proceedings whatsoever. Now remains question whether claim for damages arising out of contractual liability unless admitted represents only contingent liability till it is finally decided by competent authority or settled by arbitrator by means of award. This question was answered by Allahabad High Court in case of Oriental Motor Car Co. (P.) Ltd. In that case assessee was agent of Escorts Ltd. Under agency agreement assessee is entitled to sell tractors of Escorts make only in certain districts. It is not entitled to sell Escorts' tractors outside stipulated districts. However, it had sold 42 tractors to Public Works Department. assessee's principal 'Escorts' require assessee to pay infringement commission on sale of these tractors to various dealers in other districts, as those dealers were entitled to commission on sale of these tractors. demand at rate of Rs. 930 per tractor was made by principal, but assessee did not agree to this. Subsequently, on May 11, 1972 matter was settled and assessee was asked to pay infringement commission to dealers in other districts at Rs. 650 per tractor. assessee accepted claim, paid amount which worked out to Rs. 32,650 and claimed deduction of same. assessee claimed Rs. 32,650 as deduction in asst. year 1972-73. Allahabad High Court held that liability was of contractual nature and crystallised only when assessee agreed to payment of Rs. 650 per tractor, and not on any point of time earlier. Therefore, deduction of sum of Rs. 32,650 on account of infringement commission in accounting period relevant to asst. year 1972-73 could not be allowed as liability was not arising in relevant a/c. year. ratio of case cited above fully applies to facts of case under consideration. Here also liability is contractual and till now there is no admission of liability and so there is no question of considering deductibility of any part of liability that has arisen in accounting year relevant to asst. year 1981-82. In case of A. P. S. Cold Storage & Ice Factory assessee ran cold storage plant. One of parties called 'S' stored his potatoes in assessee's cold storage plant and they were found damaged. With result assessee disposed them of for nominal amount. 'S' filed suit against assessee for damages amounting to Rs. 30,991. During pendency of suit matter was referred to arbitrator who awarded Rs. 30,000 as damages against assessee. 'S' moved application seeking to make award rule of Court. assessee objected and succeeded in his objection on ground that award was insufficiently stamped. assessee claimed Rs. 30,000 as deduction in asst. year 1966- 67. Ultimately, Allahabad High Court held that as award given by arbitrator had not been made rule of Court and as no decree had been passed against assessee in respect of sum awarded it was not enforceable against assessee. As no decree was passed on award by Court no liability in praesenti was existing against assessee and liability being merely contingent no deduction in respect thereof could be made from income of assessee. Therefore, Tribunal was right in not allowing alleged loss of Rs. 30,000. decision of Calcutta High Court in case of Roberts McLean & Co. Ltd. relied upon by learned Departmental Representative also fortifies his contention. Supreme Court in case of Indian Molasses Co. (P.) Ltd., giving true meaning of word " expenditure " held that expenditure is what is paid out or away and is something which is gone irretrievably. Expenditure, which is deductible for income-tax purposes, is one which is towards liability actually existing at time, but putting aside of money which may become expenditure on happening of event is not expenditure. income-tax law makes distinction between actual liability in praesenti and liability de futuro which, for time being, is only contingent. former is deductible but not latter. 9. On conspectus view of whole matter it appeared to us that deduction sought for represents only contingent liability and as such it is not deductible from profits of accounting year relevant to asst. year 1981-82. In our opinion lower authorities are perfectly justified in not allowing deduction and dismissing claim of assessee. appeal is found to be devoid of merits and hence it is dismissed. *** FOODS, FATS & FERTILISERS LTD. v. INSPECTING ASSISTANT COMMISSIONER