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2015 (12) TMI 183 - ITAT MUMBAI

2015 (12) TMI 183 - ITAT MUMBAI - TMI - Accrual of income - termination of contract - method of accounting - Held that:- There is no dispute to the fact that there was termination of contract and full uncertainty was there with respect to recoverability of the amount invoiced. In fact, the assessee has rightly followed the accounting principle by not recording the said impugned amount in the books of account. As per Accounting Standard ('AS') - 9 i.e. Revenue recognition, if there is uncertainty .....

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its claim then it would not have received even ₹ 7,30 crores, which is merely 8.58 percent of total claim after a long legal fight. The fact that (i) the Assessee recovered only 8.58% of the total claim, and that too after a period of 4 years and that (ii) the addition confirmed by CIT(A) in this year had been allowed as a deduction by the AO in AY 2006-07 clearly shows that the said amount could not be said to have accrued in favour of assessee in the relevant assessment year under consi .....

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cross objection by the assessee against the order of CIT(A), Mumbai, for the assessment year 2002-03. 2. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a closely held company incorporated in USA. In India, assessee has entered into contracts with Dabhol Power Company (DPC) and Haldia Petrochemicals Ltd. (HPL). The contract with DPC was in respect of construction of power project in District Ratnagiri, Maharashtra. Contract was in two phases. Contrac .....

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to termination of contract with DPC, the assessee raised a claim of USD 17.73 million (Rs. 85.99 crores) which comprises of following: Sr.No. Particulars Amount (in Rs) 1 For the contractual work performed till date of termination i.e. June 2001 26,47,94,234 2 For demobilization in winding up of site operations post termination of the contract 59,51,15,766 Total 85,99,10,000 Above bill amount was not credited to its profit and loss account for the year ending on 31-3-2002, on the plea that the .....

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6.47 crores and for demobilization in winding up of site operation of ₹ 59.51 crores. 4. By the impugned order the CIT(A) confirmed the action of the AO for adding amount of ₹ 26.47 crores in respect of contractual work till date of termination i.e. June 2001, however, he deleted the addition of ₹ 59.51 crores made by the AO on account of mobilization in winding up of site operation on the plea that invoice in this respect was never accepted by the DPC consequently same amount .....

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005. In accordance with this deed, no claims / demands for taxes or tax assessments relating to the DPC in excess of USD 3 million including amounts already paid, can be made upon any assessee. As per ld. AR in line with the Deed of Release issued by the Government of India, the demand raised by the AO is contrary to the Deed of Release issued by Government of India. It was the contention of ld. AR that even though the right to receive is important pre-requisite for taxing particular income, the .....

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e pendency of suit/dispute. For this Purpose reliance was placed on the following cases :- Sr. No. Case Laws Citation 1 CIT v. Motor Credit Co. P. Ltd. [1981] (127 ITR 572) (mad) 2 SLP by the Department against the decision of Madras High Court in the case of CIT v. Motor Credit Co. P. Ltd reported in 127 ITR 572 (Mad) dismissed [1983] (144 ITR (St) 50) 3 CIT v. Ferozepur Finance (P) Ltd. [1980] (124 ITR 619) (P&H) 4 SLP by the Department against the decision of P&H High Court in the cas .....

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poration [1993] (201 ITR 595) (Ori.) 11 UCO Bank vs. CIT [2014] (43 taxmann.com 294) (Cal HC) 12 Maruti Securities Ltd. vs. ACIT ITA No. 468/Hyd/2009 13 CIT vs. Excel Industries Ltd. [2013] (358 ITR 295) (SC) 6. With regard to amount of ₹ 59.51 crores on account of mobilization and winding up of site operation bill, the contention of ld. AR was that the bills raised were never accepted by the DPC, therefore, the amount did not accrue nor any right to receive was in favour of the assessee. .....

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time bound manner as per the agreement after certification of work done and actual payment may be made at later date i.e. within 30 days of the certification of the work.. Reliance was placed on the decision of Honble Bombay High Court in the case of Navin Kamani, 185 ITR 408, wherein it was observed that the concept of real income cannot be employed so as to defeat the provisions of the Act. She further contended that the assessee showed payments in earlier years on accrual basis. Since work c .....

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received would also not detract from or efface the accrual of income, although when the factum of non receipt is established, then in appropriate cases the assessee may be entitled to claim deduction as bad debts on satisfaction of requisite conditions. She further contended that assessee had a legally enforceable right as it has already rendered the services before termination of contract and pendency of litigation does not efface the accrual/right to receive. 8. We have considered rival conte .....

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was terminated by the assessee on 17 June 2001 on account of non-payment of bills by DPC. DPC was a company based in India, formed to manage and- operate Dabhol Power Plant. Enron was the major shareholders of DPC. Enron had entered into Memorandum of Understanding ('MOU') with the government of the state of Maharashtra for the project which was followed by execution of Power purchase agreement ('PPA') for 20 years with Maharashtra State Electricity Board ('MSEB'). The te .....

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ing its intention to terminate the contract, vide letter dated 17 April 2001 (i.e. in the beginning of the previous year), the assessee eventually terminated its contract on 17 June 2001. The assessee is one of the victims of the Enron debacle which occurred in India almost about 15 years back. As a consequence, the assessee incurred huge losses due to non-receipt of ₹ 85.99 crs from Dabhol Power Company ('DPC'), an Enron company which had entered into a contract with the assessee .....

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se of non-payment of earlier dues by DPC, the assessee terminated contract on 17-6-2001. Thereafter two bills were raised. The AO held that since the assessee is following mercantile system of accounting and since the bills were raised, income accrues to the assessee, therefore, both amounts of bills were added by the AO in the assessees income. The CIT(A) deleted the addition of ₹ 59.51 crores on the plea that bills were not accepted by the DPC and there is no liability to make payment to .....

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g the Accounting Standard-9 i.e. the Revenue recognition, has not credited abovementioned amount to its profit and loss account for year ending on 31 March, 2002, since the ultimate collection of the said amount was not certain while raising the claim. Precarious financial position of DPC resulted in continuous defaults in payments to assessee. The assessee terminated the contract due to non payment of claims and on a realistic/prudent basis did not make any entry for the improbable contract rev .....

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tion of contract. The CIT(A) has held that the invoices in relation to the same were never accepted by DPC and that consequently the said amount never accrued to the assessee. The fact of nonacceptance of the invoices has not been disputed by the department. In the given circumstance CIT(A) has rightly held that since the assessee had no right to receive the said amount, the said amount had not accrued to the assessee. In light of findings given by CIT(A) on page no 17-21, there is no reason to .....

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during the pendency of suit/dispute. 10. Honble Supreme Court in the case of CIT Vs. Excel industries Ltd. 358 ITR 295, had laid down three tests to determine when income can be said to have accrued. : (a) Whether the income is real or hypothetical; (b) Whether there is a corresponding liability of the other party to pay the amount to the assessee; (c) the probability or improbability of realisation of the income by the assessee has to be considered from a realistic and practical point of view. .....

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there was termination of contract and full uncertainty was there with respect to recoverability of the amount invoiced. In fact, the assessee has rightly followed the accounting principle by not recording the said impugned amount in the books of account. As per Accounting Standard ('AS') - 9 i.e. Revenue recognition, if there is uncertainty with regard to the collection of amount then recognition of said amount should be deferred in the books of account. The assessee being company has t .....

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