TMI Blog1970 (9) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... s are as under : The assessee is a firm doing business of keeping private contracts for buildings. The rates at which the contract work is undertaken by the assessee are settled with different customers. But it is an admitted position that very often it so happens that the assessee is called upon to carry out some additional work, which is not covered by the contract between the parties. For the sake of convenience, we shall call the work covered by the contract as " tender " work and the additional work which is not covered by the contract as " non-tender " work. Now, whenever an occasion for undertaking non-tender work arises, the rates are very often not settled between the assessee and its customers. However, the assessee executes the extra work covering non-tender items, and, it is found from evidence, that it later on submits its bills for the extra work done by it. The rates which are mentioned in these bills for non-tender work are pitched a little high because it has been the experience of the assessee that at the time of ultimate settlement of these bills, the customers would insist on making allowance for some deductions. It is an admitted position that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar found in the works account of the assessee could not be deducted because the assessee was maintaining the mercantile system of accounting and, therefore, the amounts of the bills preferred by it and credited to the works account accrued to the assessee during the respective periods. According to the department, the assessee's estimate of the amount, which it was likely to receive from its customers, and posting of the profit and loss account on that basis would not alter the fact that the whole amount of the bill preferred by the assessee and credited to the works account represented its accrued right to receive the same from its customers. In this view of the matter, the kasar amounts for the assessment year in question were not allowed to be deducted by the department. So far as the assessment year, which is relevant for the purpose of this petition is concerned, the kasar amount is of Rs. 26,000. The contention of the assessee is that this amount should not be added back for the purpose of assessing its income during the accounting period. Being dissatisfied with this decision of the Income-tax Officer, the assessee preferred an appeal before the concerned Appellate Assista ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the fact that under the mercantile system of accounting, the amount which is credited at the initial stage furnishes very strong evidence to show that that amount had accrued to the assessee. Mercantile system of accounting has been explained in many cases. This system brings into credit what is due, immediately it becomes legally due, and before it is actually received, and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. Therefore, the central idea which is involved in this system is that, if a certain amount has actually accrued due to the assessee, then it does not matter that it is not actually received. The accrual of the amount would justify the assessee in crediting the same in his account books. If he does so, then the evidence of that credit entry would, in ordinary circumstances, be considered as sufficient evidence to show that the assessee concerned has earned that amount. However, mere posting of an entry in the account books of the assessee would not always supply a conclusive nature of evidence on the question whether the disputed amount has accrued to the assessee or not. If there ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the mercantile system of accounting, they cannot supply conclusive evidence as regards the real income of the assessee. The High Court of Bombay has observed in Commissioner of Income-tax v. Shoorji Vallabhdas and Co. that the question whether the income has accrued or not is not a mere matter of cogency of the entries made in the account books of the assessee, but is essentially one of substance and of the real nature of what happened because a book entry is not conclusive proof of the question whether the assessee had become entitled to the sums or not. In that case the said High Court was dealing with an assessee who followed the mercantile system of accounting This decision is affirmed by the Supreme Court in Commissioner of Income-tax v. Shoorji Vallabhdas and Co. holding that, if income does not result at all, there cannot be a tax, though in book-keeping an entry is made about a " hypothetical income ", which does not materialise. Their Lordships have in this case further observed that, when the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Advocate-General pointed out to a possibility that, if this view is taken, the assessee would be at liberty to adjust his profit and loss account suitably with a view to evade tax liability. It is, however, obvious that if, for any accounting period, the assessee is found to have made unreasonable estimates with a view to avoid tax liability, it would always be open to the concerned assessing authorities to reject the estimates which are carried to the profit and loss account and to come to proper conclusions as regards the real income earned by the assessee. So far as the accounting year in question is concerned, we find that it is an admitted position that the estimates which are carried by the assessee to the profit and loss account are reasonable and bona fide. That being the position, we find that the view which is taken by the Tribunal is correct. Our answer to the question referred to us is, therefore, in the affirmative. This reference is disposed of accordingly and the matter is sent back to the Tribunal to be dealt with according to law. The Commissioner shall bear the costs of the respondent-assessee in this reference. Question answered in the affirmative. - - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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