TMI Blog2014 (2) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... counting – Decided in favour of Revenue. - I. T. A. No 37 of 2002. - - - Dated:- 18-10-2013 - JOSEPH K. M. AND VINOD CHANDRAN K., JJ. JUDGEMENT K. M. Joseph J.- The purported substantial questions of law raised in appeal are as follows : "(i) Whether, on the facts and in the circumstances of the case and the system of accounting maintained by the assessee being mercantile, the Tribunal is right in law and fact in deleting the addition of Rs. 5,37,909 on the ground that there is no accrual of income because foreign exchange was not received on June 11, 1981, and the payments were received much later only through ECGC and is not the conclusion of the Tribunal wrong and against fundamentals? (ii) Whether, on the facts and in the circumstances of the case, is not the deletion of Rs. 5,37,909 by the Tribunal against facts and law ?" The respondent which is an assessee under the Income-tax Act which also deals with in exports, had credited to its profit and loss account a sum of Rs. 5,37,909 representing the estimated amount of exchange difference on outstanding Sudan export bills. But the respondent contended that the said amount did not represent any income received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal held that there was no accrual of income because foreign exchange was not received on June 11, 1981, but the payments were received much later only through ECGC. The Tribunal deleted the assessment of Rs. 5,37,909 credited by the assessee. We heard the learned senior counsel for the Revenue and the learned counsel for the assessee. Learned senior counsel for the Revenue would contend that the approach of the Tribunal is clearly insupportable. Admittedly, the respondent-assessee was maintaining its accounts by following the mercantile or double entry system of accounting, which meant that the income would be reflected on the basis of accrual and not receipt. In other words, it was not necessary that there should be actual receipt of income. In this case, admittedly, the assessee has itself credited its accounts with the sum in question. Learned senior counsel would then pose the question as to how it is open to the assessee to turn round and question the said amount being exigible to tax. The following case law was canvassed before us : (1) In Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC), the apex court held, inter alia, as follows (headnote) : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter arose under section 41 of the Income-tax Act, 1961. Section 41(2), inter alia, provided that the amount determined as provided therein shall be chargeable to income-tax, as the income of the business or profession of the previous year in which the money is payable for the building, machinery, plant or furniture became due. It was a case of a sale by way of compulsory acquisition. The balancing charge under section 41(2) is taxable in the previous year in which the money payable became due. That was a case where the board paid final compensation in a sum of Rs. 3,35,84,552. The assessee, however, was dissatisfied and took up the matter before the Arbitrator. Since the Arbitrator has failed to make an award, the matter was referred to an umpire. The Income-tax Officer took the amount of Rs. 3,35,84,552 and computed the written down value of those assets and further determined the profit under section 41(2) which was added to the income of the assessee. The apex court held as follows (headnote) : "that, presuming that the assessee was entitled to additional amounts other than what was paid by the acquiring authority, yet for the purpose of tax, moneys payable became ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NPA debited to the profit and loss account under the 1998 Directions is only a notional expense and, therefore, there would be added back to that extent in the computation of total income under the Income-tax Act." We must refer to the judgment of this court in ITR No. 152 of 1995, CIT v. Mahavir Plantations Ltd. [2000] 244 ITR 571 (Ker) pursuant to which the impugned order has been passed by the Tribunal. Therein the court had inter alia held as follows (page 572) : "The Tribunal held that exchange difference, as worked out by the assessee, did not relate to last day of the previous year, but was on an ad hoc basis. It further held that basic question at issue was whether the entries passed in the books of the assessee, which keeps its accounts on mercantile system of accounting taking credit for fluctuation in foreign exchange rate have really resulted in accrual of income to the assessee or in other words, whether any income arose to assessee as a result of such fluctuation. It was held that no income arose or accrual as a result of fluctuation in foreign exchange rates. The further issue before the Tribunal was whether the assessee was entitled to deduction on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, that actual income has to be assessed. But, when it had given figures which later on was claimed to be not relevant, requirement was placed on it to explain under what circumstances entries have been made and for what purpose. It is not open to an assessee to make irrelevant entries and then ask the Department to find out and tax annual income. Instead of answering the reference, we direct the Tribunal to hear the matter afresh keeping in view the observations made herein above." What the Tribunal held in the impugned orders are, the last shipment was on June 12, 1981. The credit entry was made on the previous date, i.e., on June 11, 1981. The Tribunal found that the previous year of the assessee ended on June 30, 1981. In fact the High Court has noted that the last date of the accounting period is March 31, 1981. The finding is further that there is no accrual of income because foreign exchange was not received on June 11, 1981, and the payments were received much later only through ECGC. We are of the view that the approach made by the Tribunal is insupportable. Admittedly, the respondent-assessee is maintaining its accounts on the mercantile system of accounting. Admitt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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