TMI Blog2001 (11) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... e was received by the assessee in Indian rupees amounting to Rs. 15,68,50,000. However, the assessee treated this amount as advance in its books of account and only a sum of Rs. 3,72,44,848 was credited to Profit and Loss account, being the amount attributable to the period from15-7-1995to31-3-1996. The balance amount was shown as liability in the year under consideration and the same has been offered as income in the subsequent years proportionate to the period of user. 3. The submissions of the assessee vide letter dated8-9-1998before the Assessing Officer were as under: Section 5(1) of the Income-tax Act, 1961 ('the Act') stipulates that the total income of any person, in any previous year includes all income which accrue or arise or is deemed to arise to him inIndiaduring such year. Further, section 145 of the Act stipulates that income chargeable under the head "Profits and gains of business or profession" shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. In view of the above, in order to determine the income of a person for a year, it is necessary to ascertain whether the income accrued to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself. Once the right to recover the sum accrues, the period of licence to use the technology is irrelevant. The order of Assessing Officer was, therefore, confirmed. Aggrieved by the same, the assessee is in further appeal before the Tribunal. 6. The learned counsel for the assessee Mr. Ganeshan has vehemently assailed the order of CIT(A) by contending that accrual of income has to be seen in the light of the method of accounting adopted by the assessee. According to him, the total income of the assessee under section 5 includes all income which accrues or arises or is deemed to accrue or arise inIndiaduring the previous year. Further, section 145 gives option to the assessee to adopt any system of accounting. Since section 5 is subject to other provisions of the Act, it was argued by him that accrual of income has to be seen with reference to the method of accounting adopted by the assessee. Proceeding further, it was submitted by him that as the assessee has opted to follow the mercantile system of accounting, it is assessable only on the income which had accrued to the assessee in this year. Proceeding further, it was submitted that the amount of Rs. 15,68,50,000 was receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived in India; (ii) accrues or arises or is deemed to accrue or arise in India; (iii) accrues or arises outside India. Such income is to be computed under various heads. In respect of business income and income from other sources, the assessee is allowed under section 145 to adopt the method of accounting of its choice. In the present case, the assessee has been following the mercantile method of accounting. According to this method, the income is booked on the basis of accrual. However, it is pertinent to note that once the income has accrued, the incidence of taxation cannot be postponed to future years by making entries in the books of account. Therefore, we are of the view that once the date of accrual is identified then the income has to be assessed under section 4 in the year in which such date of accrual falls and the same cannot be deferred by the accounting entries. Reference can also be made to the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT[1997] 227 ITR 172 wherein it was held that the accountants might have taken some other view but the accounting practice was not necessarily good law. Thus, it was held that accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereinbelow (hereinafter 'Escrow Account'). (b) New Holland will deliver all the share certificates of the shares along with duly executed transfer deeds and the registration interest of the New Holland nominated (3) directors on the Board of ETL, to be effective from the date of their release from the Escrow Account if any, to the Escrow Agent into the Escrow Account within 7 days of Binding date. (c) Escorts will pay the purchase price into the Escrow Account with the Escrow Agent within 7 days of the Binding date. (d) Escorts will pay the 'Technical fee' into the Escrow Account with the Escrow Agent within 24 hours of the Binding date. (e) New Holland, NH India and Escorts shall give irrevocable instructions to the Escrow Agent to release the said share certificates of the Shares, transfer deeds and resignation letters to Escorts or the nominee(s) and the Purchase Price to New Holland and Technical Fee to NH India upon given conditions being satisfied, all of which as set forth in the document entitled Escrow Agent Instructions, a copy of which is attached hereto as Exhibit 'D'. 4.01 Binding Date--Within two working days of the signing of the Agreement the parties will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance or contingent receipt. Consequently, the contention of the assessee that money received by the assessee was in the nature of advance, cannot be accepted. It is settled legal position that accounting entries do not determine the character of the receipt. Therefore, if the income has accrued, it has to be taxed and taxability cannot be postponed on the basis of the entries made in the books of account. Even the parties to the agreement do not describe the payment in the nature of advance as there is no such covenant in the agreement. According to the commercial practice, the advance is given either to facilitate the recipient to perform his obligation or with a view that obligation shall be performed by the recipient in time in accordance with the agreement. Such advances are, therefore, appropriated towards income as and when the obligation is performed or the work is completed according to the specifications. However, if any part of the obligation is not performed to the satisfaction of the payer then such amount is bound to be returned/refunded. In such case, no enforceable debt is created on the mere receipt of the advance and income, therefore, accrues only on the fulfilmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext decision relied upon by assessee's counsel is in the case of U.P. State Industrial Development Corpn. In that case, the assessee was engaged in financing the new companies on the condition that it would take 2% under-writing commission on the sale of shares to the public. The controversy before the Hon'ble High Court was as to whether underwriting commission on the sale of shares accrued to the assessee on the date when the agreement was entered into or during the period when the public issue was opened and closed. Their Lordships held that no income accrued on the date of agreement but it accrued with the opening of banking hours and ceased with the close of the banking hours of the last date of subscription in as much as the commission related to the services to be rendered by the assessee. Hence, it was further held that commission on unsold shares went to reduce the cost of shares in the hands of the assessee. So it is clear from the above judgment that accrual of income related to the obligation of the assessee to sell shares to the public and therefore, mere agreement was not enough to tax such commission. This case also, in our opinion, does not help the assessee since a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total discount came to Rs. 3 lakhs. The dispute arose whether such expenditure could be allowed in one year or it could be spread over the period of 12 years. It is in view of these facts, the aforesaid observations were made by their Lordships. After going through the entire judgment, we are of the view that it is not an authority for the proposition that in each case where an expenditure is incurred in lump sum, it must be spread over the years to which it relates. On the contrary, the legal position has been reiterated to the effect that it must be allowed in the year in which it is incurred and the same cannot be spread over a number of years even if the assessee writes off in his books over a period of years, However, on the peculiar facts of the case, the Supreme Court decided that it should be allowed to spread over since allowing the entire expenditure in one year might give a distorted picture of profits. Therefore, the decision in that case has to be restricted to the facts of that case only. There is one more distinguishing feature in as much as in that case no actual expenditure has been incurred by the assessee in the first year and probably considering this aspect, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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