TMI Blog2011 (4) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... g - appeals are allowed by way of remand - TAX APPEAL NOS. 42 TO 46 OF 2001 - - - Dated:- 29-4-2011 - BHAGWATI PRASAD, AND NARENDRA NATH TIWARI, JJ. Biren Poddar for the Appellant. Deepak Roshan for the Respondent. ORDER Narendra Nath Tiwari, J. This batch of appeals was admitted for hearing on the following substantial questions of law : "(i) Whether under the mercantile system of accounting deduction has to be allowed in respect of a business liability in the year in which the same arises, even if not actually quantified, on the basis of a reasonable estimate? (ii) Whether the Tribunal was justified in law in proceeding on the basis that it was required to examine the nature of the payments made by the appellant to the sub-contractor and in failing to address itself to the real question viz. As to whether the appellant was entitled to deduction in respect of the liability reasonably estimated to be due to the sub-contractor in the assessment years 1991-92 to 1995-96 notwithstanding its actual quantification in a subsequent year? (iii) Whether the Tribunal misdirected itself in law in holding that the additional liability due to the sub-contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modernization of the coal handling plant, the work related to structural fabrication, erection, dismantling and modification. 4.3 The appellant had given works to two sub-contractors, M/s. Pioneer Engineering Company (PECO) and one other. After commencement of the work, PECO and the other sub-contractor found that sub-contracts were not profitable and there was likelihood of increasing heavy losses. The other sub-contractor expressed inability and abandoned the work. PECO was also contemplating to do so. The project which was to be completed within 12 months was getting delayed for various reasons. It ultimately took 36 months, resulting in to cost escalation. 4.4 In order to retain PECO to complete the work, the appellant agreed to enhance the stipulated rates and assured to extend all possible assistance. The quantum of enhancement of rates was in absolute terms. 4.5 The appellant agreed to provide the following additional facilities to the PECO : (a) Labour payment; (b) Supply of consumables like gas and electrodes; and (c) Repairing of machines. 4.6 The value of the said facilities was to be adjusted against the revised rates. 4.7 It was agreed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not treated the additional amount paid by the appellant, as its income in the relevant assessment year, but had claimed that the same accrued as its income in July, 1994 when the appellant agreed that the additional payments should be treated as the enhanced rates and no further amount was due to or payable by either party. The Assessing Officer accepted the stand taken by the PECO and sought to reopen the appellant's assessment for the assessment years 1991-92 to 1994-95 taking the view that the additional liability could not have been claimed by the appellant as deduction in the said assessment years. 4.15 In the reopened assessments for the assessment years 1991-92 to 1994-95 and in the assessment for the assessment year 1995-96, the Assessing Officer disallowed the deduction of additional liability aggregating to Rs. 80,56,791 claimed by the appellant. The Assessing Officer assumed that the appellant was not liable to pay the PECO any amount over and above the rates stipulated in the original purchase orders. 4.16 Aggrieved by the refusal of claim of the deduction of the additional liability in the assessment years 1991-92 to 1995-96, the appellant preferred appeals before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of contract with PECO. 8. Learned counsel urged that the Tribunal has erroneously interpreted the term 'Recoverable' used in the minutes of the meeting held on 25-5-1992 and has held the said additional payment made by the appellant as an advance, recoverable by the appellant from PECO. The term 'Recoverable' does not mean 'Refundable'. The amounts paid were not intended to be refunded. The recovery of the additional amount was to be made against the claim of PECO at the enhanced rates and it cannot be considered as temporary assistance in the form of advance or loan. The nomenclature used in the contract is not the criteria for testing the nature of the transaction, rather it has to be ascertained on the basis of the intention and acts of the parties. The substance of transaction has to be assessed from the businessman's point of view and not on its nomenclature. Learned counsel submitted that under the provisions of section 194C of the Act, the assessee is liable to deduct tax at source for carrying out any work in pursuance of a contract. If the payments were made over and above the contract or were in the nature of loan, then there is no obligation on the assessee to deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Taxman 422 (SC) IV. CIT v. Development Trust (P.) Ltd. [2003] 131 Taxman 824 (All.) V. Tata Iron Steel Co. Ltd. v. D.V. Bapat, ITO [1975] 101 ITR 292 (Bom) VI. Kelvinator of India Ltd. v. CIT [1994] 210 ITR 933/76 Taxman 309 (Delhi) VII. Nagasuri Raghaveswara Rao v. CIT [1967] 66 ITR 496 (AP) VIII. CIT v. State Bank of Indore [1988] 172 ITR 24/[1987] 35 Taxman 491 (MP) IX. Ex-Soldiers' Motor Transport Co. v. CIT [1963] 47 ITR 913 (All.) X. CIT v. Panipat Woollen General Mills Co. Ltd. [1976] 103 ITR 66 (SC) XI. CIT v. Krishna Industrial Corpn. Ltd. [1973] 92 ITR 261 (AP) XII. Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307 (SC) XIII. CIT v. Glenmark Pharmaceuticals Ltd. [2010] 324 ITR 199/191 Taxman 455 (Bom.) XIV. Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) XV. Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102/126 Taxman 544 (Bom.) XVI. CIT v. Industrial Finance Corpn. of India Ltd. [2009] 185 Taxman 296 (Delhi) XVII. Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) XVIII. Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) XIX. CIT v. Shoorji V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments as advance. They were transferable to revenue account at the end of the month/year and were again transferred back to the advance account in the beginning of the next month or the year. The enhanced claim of PECO was not in a fluid state of affair and the assessee was keeping its all option open in the settlement and it has taken a final shape by way of settlement in July, 1997 that the payments were adjusted as payments against the acceptance of enhanced claim of PECO in July, 1997. 13. Learned Tribunal has discussed every aspect and has rightly rejected the claim of the assessee for the aforementioned assessment years. There is, thus, no merit in these appeals and the grounds taken by the appellant are liable to be rejected. 14. Having heard the rival contentions of learned counsel for the parties, I find that the main issue for decision is as to what is the nature of the payment made by the appellant to the PECO. Whether the payment made by the assessee partakes the character of revenue expenditure or the same is by way of advance? 15. The real character of the revenue differs according to the mode of the accounting system. There are two recognized mode of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in course of the proceeding under section 131 which would not have been possible unless the payments were intended to be advance payments. 17. What has been said above by the learned Tribunal appears to be quite plausible and proper. If the same is tested on cash basis accounting, but it does not appeal to the reason, if the same is viewed on accrual or mercantile basis accounting under which a business liability is incurred in the year in which the same has arisen irrespective of the fact that the liability may be quantified and discharged on a future date. 18. In Bharat Earth Movers' case (supra), the Apex Court has held as follows : "If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the expression 'profits and gains' has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted there from even if the expenditure is actually incurred or the liability in respect thereof has to be discharged at some future date. 28. The Bombay High Court in its decision in Taparia Tools Ltd.'s case (supra), has also held that under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). This matching is required to be done on accrual basis. This matching concept, revenue and income earned during an accounting period, irrespective of actual cash inflow, is required to be compared with expenses incurred during the same period, irrespective of actual outflow of cash. The same view has been taken in Rotork Controls India (P.) Ltd.'s case (supra). 29. Further an entry made by an assessee in his books of account is not determinative of whether the assessee has earned any profit or suffered any loss, it is neces ..... X X X X Extracts X X X X X X X X Extracts X X X X
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