TMI Blog1997 (12) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... see, Shri M.K. Kesavan. Their arguments are taken into consideration. We have also gone through the annual reports for the years 1991-92, 1992-93, 1993-94 and 1994-95. We have also looked into the relevant contents in the papers pointed out by both sides. 4. The relevant facts pertaining to the dispute of shortage cover are that the assessee-company entered into an agreement with the Tamil Nadu Electricity Board for a period of three years from 1-11-1991 to 31-10-1994 to transport coal from Madras Harbour to Ennore and Mettur Thermal Stations and also in Tuticorin Port to Tuticorin Thermal Station. Clause (5) of the contract stipulates the mode of arriving at the shortages. The shortage of coal occurs during the transit from harbour to thermal stations. The Tamil Nadu Electricity Board as well as the assessee-company had agreed to quantify the shortages of coal on the day of completion of the contract. In short, the parties to the agreement were to quantify the shortage of coal taking place during the transit after the completion of the contract on 31-10-1994. The completion of the contract is relevant for the assessment year 1995-96. 5. The shortage has to be determined with r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration is whether the receipt of Rs. 29 per ton being the shortage cover is taxable in the hands of the assessee-company for the assessment years under appeals. It is necessary to consider the actual receipt and actual liability in this respect. The parties to the agreement have contemplated determination of the shortage cover only at the end of the term of the contract which is for three years from 1-11-1991 to 31-10-1994. It is not in dispute that the assessee-company follows mercantile system of accounting and in accordance with the said system of accounting, in the ordinary course, the assessee-company is expected to account the entire amount accrued to it in the relevant accounting period. But, under the extra-ordinary circumstances, as contemplated by both parties to the agreement, the shortage of coal and its price at the rate of Rs. 29 per ton has been taken as a liability. Because of this understanding, it would be correct on the part of the assessee-company, not to account the liability at the rate of Rs. 29 per ton on the notional shortage of 1.5% of total coal loaded at the ports for being transported to the different thermal power stations. 10. There is substance i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l receipts have to be accounted for in accordance with this system of accounting. He submitted that the billed amount is fully received by the assessee-company. Therefore, the amount which is fully received by the assessee has to be accounted. The terms and conditions of the agreement are between the parties to the agreement and the department has nothing to do with those terms and conditions agreed upon between the parties. He further submitted that the assessee's contention to determine the profits on the basis of contract completed method is not correct. It is the further contention of the learned departmental representative that the assessee cannot claim to follow contract completed method. According to the learned departmental representative every year the liability accrues but not quantified. The department has not imposed cash system of accounting. He submitted that it would not be correct to determine the income at the time of finality of the agreement. The assessee is required to account the income every year. He has drawn our attention to paragraphs 9 and 10 of the assessment order for the assessment year 1992-93 and submitted that there is no question of accrual of Rs. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted that the Tamil Nadu Electricity Board made full payments in advance because of providing working capital. The assessee made a turnover of over Rs. 100 crores. The assessee has to ascertain its profits according to commercial principles. He has pointed out that how and under what circumstances the different liabilities arise to the assessee. He also pointed out that there is a commercial liability and a contractual liability. According to him, there is also a contingent liability and a legal liability. He submitted that it would not be correct to say that the commercial and contractual liability has not arisen in the type of business carried on by the assessee-company. He further pointed out certain facts from page 36 of the paper book in this respect. He has also submitted that Rs. 29 per metric ton for shortage cover would be of approximately 5% of Rs. 600 per metric ton. He has also pointed out that if the unaccrued liability is not be considered in every assessment year, in that event, it would amount to taxing the receipts and not the income. If the liability is determined at the end of the contract, then, only income would be taxed in the hands of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in that case held that "in the case of a partnership, where the accounts are to be made at stated intervals, the right of a partner to demand his share of the profits does not arise until the contingency which by operation of law or under a covenant of the partnership deed gives rise to that right has arisen." According to Sri Kesavan, the assessee's right in this case to profit did not arise until the contract is completed and, therefore, the contingent income cannot be brought to tax in its hands. 17. On the point of accrual of liability, the learned counsel for the assessee relied on the decision of the Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746/91 Taxman 351. The Supreme Court considered the principle of real income. In that case, the electricity company enhanced the rate of power supplied per unit. The enhanced rate was shown as receipts in its accounts, but amounts not realised due to litigation and subsequent take over of the undertaking by the Government. The Supreme Court held that the amount due on such enhancement had not accrued and was not assessable because it was not a real income under the Income-tax Act, 1961. Sri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for purchase tax and had also claimed before the sales tax authorities total exemption from purchase tax, the Tribunal was justified in allowing the claim for deduction of purchase tax." Sri Kesavan further submitted that there was a reasonable bona fide apprehension on the part of the assessee that the liability would be determined at the end of the contract and therefore the assessee-company correctly did not account for Rs. 29 per metric ton during the assessment years under appeal. 19. After examining the facts, the terms and conditions of the agreement between the assessee-company and the Tamil Nadu Electricity Board, particularly clause (5) of the said agreement, the fact that inspite of following mercantile system of accounting, the assessee-company's conduct was in adopting the contract completed method in respect of the unascertained liability to be ascertained only at the end of the contract, the arguments advanced on the different aspects of the dispute and the supporting case law, we are inclined to hold that there was a reasonable bona fide apprehension on the part of the assessee, and therefore, the assessee's deviation from the mercantile system of accounting in ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
