TMI Blog2000 (4) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... on towers in the various mega plants such as Fertilizers, Petroleum, Chemical etc. The assessee manufactures the products under technical collaboration of M/s. Norton Chemical Process Products Corporation of U.S.A. According to the assessee the products are highly sophisticated and specialised and are of utmost necessity for cost efficient and optimum use of fertilizers, petrochemical, petroleum refinery and other chemical plants. It is further stated that tower packings are not uniform items mass produced for supply to the customers but are tailor made to the requirements of each mega plant. For different towers of the same plant, the calculations, specifications and design of the products involve a crucial and technically intensive exercise and any deviation from predicted performance would result in malfunctioning of the plant, thus exposing the assessee to arrange rectification or replacement of the defective equipment. Contracts for the supply of tower packings are secured by the assessee in response to globally floated tenders which are overseen by reputed global consultants. The tender documents as well as the purchase orders provide for retention of upto 10% of the sale val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,14,248 3,50,896 1996-97 98,24,911 15,47,914 From the aforesaid figures it would be seen that provision has been made in the books of account equivalent to the amount of performance bank guarantee, during the year when the bank guarantee is furnished and such provision is reversed during the year of expiration of the bank guarantee. 5. For assessment year 1996-97 under appeal, the assessee has thus made provision for an amount of Rs. 98,24,911 whereas an amount of Rs. 15,47,914 has been credited to the trading account on account of expiration of the bank guarantee earlier furnished in the preceding years. 6. Before the Assessing Officer the assessee submitted that a regular and consistent method of accounting is being followed for the last many years whereby the amount of 10% of the sale value for which unconditional, irrevocable and unqualified bank guarantee has been furnished to the customer has been excluded from the sale receipts on the ground that the amount does not become due to the assessee and there is ho entitlement until after satisfactory performance of the tower packings supplied by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any adjustment with regard to the amount of Rs. 15,47,914 credited to the sales account on account of reversal of the provision. 8. The assessee carried the matter in appeal before the CIT(A). The CIT(A) endorsed the conclusion of the Assessing Officer and held that the amount of provision represented by-the performance bank guarantee has accrued to the assessee and is liable to be added back in the total income. The ld. CIT(A) placed reliance upon the decision of the Hon'ble Supreme Court in the case of CIT v. British Paints (India) Ltd. [1991] 188 ITR 44 and held that since, the method of accounting followed by the assessee is not the correct method, the Assessing Officer is entitled to reject the same by invoking the provisions of section 145 of the Act. The ld. CIT(A) accordingly upheld the addition. 9. Shri S.N. Soparkar, the ld. counsel for the assessee assailing the orders of the tax authorities below, strongly argued that a method of accounting, regularly followed by the assessee right since assessment year 1984-85 and accepted and acknowledged by the tax authorities after detailed scrutiny of the accounts in the earlier years, has been unjustifiably rejected by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase order. Clause 9 of the Attachment II of the purchase order dealing with the performance bank guarantee reads as under:- "9.1 Within 30 days after receipt of purchase order by supplier, the supplier shall furnish to the owners/consultant a performance bank guarantee issued or counter confirmed by one of the banks at Attachment-II for an amount equivalent to 5% of the value of purchase order as specified in the special conditions of purchase. 9.2 The proceeds of performance bank guarantee shall be appropriated by the owners/consultant as compensation for any loss resulting from the supplier's failure to complete its obligations under the purchase order without prejudice to any of the rights or remedies the owners/consultant may be entitled to as per terms and conditions of purchase order." The ld. counsel submitted that the performance bank guarantee provided by the assessee is irrevocable, unqualified and unconditional and the said guarantee is liable to be encashed by the customer without recourse to the assessee and even without bringing out any default on the part of the assessee in the matter of quality of materials supplied and performance thereof. The ld. counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd conditions including the bank guarantee in respect of 10% of the sale value represent genuine commercial transactions and it is wrong for the Assessing Officer to allege that mere idle formalities have been incorporated into the agreements by way of manipulation by the assessee so as to suit its ulterior motive of excluding 10% of the income from taxation. The ld. counsel, referring to the profiles of the customers, being big Government Undertakings as well as Corporate giants in the Private Sector, strongly refuted what the ld. counsel called "false insinuation" of the Assessing Officer and argued that on a number of occasions, bank guarantees have been encashed by the customers without recourse to the assessee and without any default whatsoever on the part of the assessee in the matter of quality and performance of the material supplied. In this connection, the ld. counsel referred to encashment of bank guarantees by the Associated Cement Co. Ltd. at page 40 and Indian Acrylics Ltd. at page 42 and Gas Authority of India Ltd. at page 54 of the paper book. The ld. counsel further referred to pages 36 and 41 of the paper book and submitted that there have been instances when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x., According to the ld. counsel the amount received from the customer against the irrevocable and unconditinal bank guarantee does not represent accrued income of, the assessee and cannot be brought to tax merely on the ground of receipt thereof. Further referring to the decision of the Hon'ble Supreme Court in the case, of CIT v. Hindustan Housing Land Developmemt Trust Ltd [1986] 161 ITR 524 the ld. counsel argued that even though in that case money was made available to the assessee under a strict bank guarantee with likelihood of revocation and return of the money, the Supreme Court held that a receipt will not constitute income until the uncertainty is removed and the assessee acquired right and entitlement to claim the money as his own. 12. Shri Rakesh Gupta, the learned Senior Departmental Representative supporting the order of the ld. CIT(A) strongly urged that the income covered by the bank guarantee has already been received by the assessee and is liable to be included on accrual basis since the assessee has adopted mercantile system of accounting. The ld. DR was at pains to say that the warranty provision made in the books of account represented a contingent liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 53 should be allowed as a deduction. Towards the conclusion of his arguments, the ld. DR fairly conceded that a scientific evaluation of the liability of the assessee may be made on the basis of facts of the case including the past history and deduction in respect thereof may be allowed as against 10 per cent of the sale value claimed by the assessee as a deduction. The ld. DR thus took the view that the deduction of 10 per cent of the sale value claimed by the assessee on the basis of a bank guarantee is excessive and a reasonable estimate on the basis of rational and scientific evaluation may be allowed to be deducted. 13. In rejoinder, the ld. counsel for the assessee argued that once the Revenue has accepted in principle that discounted value of the liability on account of guarantees and warranties provided by the assessee is deductible, the claim made by the assessee on the basis of perception and judgment of both the parties to the transaction, namely, assessee supplier and the purchaser should be adopted. The ld. counsel pointed out that bid documents and purchase orders provide for furnishing of performance bank guarantee by the assessee equal to 5% in the case of IFFC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Departmental Authorities on the view that he should have adopted a different method of accounting. Section 145 envisages that any method of accounting adopted by the assessee must satisfy the following conditions: (1) The method must be such that income can be properly deduced therefrom. In other words it must be a method recognised by the accounting principles and sanctioned by the commercial practice. (2) The system of accounting must be regularly followed by the assessee. (3) The accounts maintained under the said system must be complete and correct. In so far as the first criterion is concerned, the basic requirement, implicit in the provision of section 145 as well as the general commercial world is that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory provision to this effect. However, what constitutes true and fair view of the financial results of an enterprise ? The pronouncement of the Institute of Chartered Accountants of India seek to describe the accounting principles and the methods of applying these principles i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e customers have in fact encashed the bank guarantees in a unilateral fashion with the result that the guarantee amount has been lost to the assessee. Furthermore instances have been cited before us by the ld. counsel referring to pages 36 and 41 of the paper book whereby bank guarantees have been got renewed by the parties. The ld. counsel has also referred to pages 37, 38, 39, 43 and 44 of the paper book bringing out numerous instances when the assessee has been called upon to replace or rectify the defective material supplied to the customers. In the light of these facts, we feel that the assessee is fully justified in excluding the amount of bank guarantee for the purpose of recognising the revenue. The accounting policy followed by the assessee is thus in conformity with the Accounting Standard 9 formulated by the Institute of Chartered Accountants of India. 16. Even if the assessee is to account for the entire sale value including the 10% of the sale value covered by the bank guarantee, the liabilities arising from the warranties and guarantees as well as the uncertainties involving the possible encashment of bank guarantee by the customer have to be taken care of for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions arising out of the Income-tax Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary of perverse and if it had been arrived at after due inquiry. Certainty and finality are the most essential attributes of mature and developed tax jurisprudence. We do not approve of the approach of the Revenue to turn a somersault during the year under consideration in utter disregard of the aforementioned principles of jurisprudence and taking a view that the method of accounting regularly followed and accepted in past years does not give a true picture of the profits of the business. 18. Regarding the reliance placed by the Revenue on the decision of the Supreme Court in British Paints (I) Ltd. 's case we feel that the said decision does not support the case of the revenue. Undoubtedly -the fact that the method of accounting has been accepted in the pas t would not debar the Assessing Officer to take a contrary view if the accounts are found to be incorrect. In the instant case, nothing has been brought on record by the Assessing Officer in support of his conclusion that the method of accounting followed by the assessee is in conflict with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication of satisfactory execution of the contract, the amount can be included in the total income. The ratio laid down by the High Courts in these decisions apply with equal force to the facts of the present case before us. The only distinction, referred to by the ld. DR, is that in these cases the retention money has been withheld by the principal till the satisfactory completion of the contract and final approval thereof whereas in the instant case the retention amount has been released by the customers subject to furnishing of irrevocable and unconditional bank guarantee. In our opinion, the distinguishing feature referred to by the ld. DR is of no consequence inasmuch as in so far as 10% of the sale value is concerned, even though payment has been received by the assessee yet the control and ownership of the amount vest with the customer and the amount can be recovered by the customer at any time by unilateral encashment of bank guarantee without any reference to the assessee and without pointing out any default on the part of the assessee in the matter of quality and performance of the goods supplied under the contract. Thus, mere payment against furnishing of bank guarantee i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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