TMI Blog1986 (2) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... olding that the Appellate Assistant Commissioner of Income-tax was justified in allowing the relief, as the bills to that extent had not yet been accepted and hence it could not be said that the right of the assessee had accrued in respect of that amount ? " The relevant facts of the case may be culled from the statement of the case and the various relevant orders of the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal. The assessee is a private limited company deriving income from contract work for the construction of an earthen dam and a spillway at Getalsud in the District of Ranchi. The assessment year involved is assessment year 1970-71. While making assessment, the Income-tax Officer found that the assessee had shown in the profit and loss account gross receipts for the value of the work done at Rs. 1,10,38,639. The Income-tax Officer found that in fact the total value of the work done was Rs. 1,12,63,067 and thus the assessee had not included Rs. 1,64,428 in the bills shown as receivable. It was explained before the Income-tax Officer that these amounts had been withheld by the Irrigation Department pending verification of the satisfactory conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such claims. He, therefore, calculated 25 per cent. of the amount of Rs. 92,24,315 as the income of the assessee which came to Rs. 23,06,079 and this was added back for similar reasons as in the assessment year 1969-70. A copy of the assessment order of the Income-tax Officer for the assessment year 1970-71 has been annexed and marked as annexure A forming part of the statement of the case. When the matter came before the Appellate Assistant Commissioner, it was submitted on behalf of the assessee that the amount of Rs. 1,64,428 was not sanctioned by the authorities and they did not admit the bills as valid though the bills were prepared for the work done in this regard and as the claims were not admitted by the Department, they were not shown on the receipts side or as received or as bills receivable or as work-in-progress. It was also urged that it was not known as to whether the entire amount or any portion of it or none of it could be allowed to the assessee by the Government in respect of the work done in this year. The assessee admitted before the Appellate Assistant Commissioner that a sum of Rs. 80,585 had been received in respect of those bills in the subsequent yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent had not yet been accepted and, therefore, it cannot be said that the right to the assessee had accrued in respect of that amount and merely because there was a claim by the assessee, it could not result in the conclusion that the amount was due to the assessee. The Tribunal, therefore declined to interfere with the order of the Appellate Assistant Commissioner with respect to the relief of Rs. 84,243 allowed by the Appellate Assistant Commissioner. The Tribunal also considered the relief allowed by the Appellate Assistant Commissioner to the extent of Rs. 23,06,079. The Tribunal found that the Appellate Assistant Commissioner had decided this ground by following his order for the earlier year where similar additions were deleted by him. It was also argued before the Tribunal that in the earlier years, the matter had come to the Tribunal and the matter was considered in detail and the Tribunal held that the addition and its basis were not justified and that the Appellate Assistant Commissioner was justified in deleting the addition in that year. The Tribunal found that the facts in the present case were the same and the addition had been made on similar grounds and so the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the value of work done at Rs. 1,10,38,639 but the Income-tax Officer found that the gross receipts for this year amounted to Rs. 1,12,63,067 and thus he found a difference of Rs. 1,64,428. However, he found that gross bills for this year amounted to Rs. 21,28,091 for spillway work and Rs. 90,74,976 for dam and dyke work and the amount not shown by the assessee out of the spillway work was Rs. 10,000 and out of the dam and dyke work was Rs. 1,54,428 and thus the total amount came to Rs. 1,64,428. The figure of gross receipt of Rs. 1, 12,63,067 appears to be wrong. If we add Rs. 21,28,091 to Rs. 90,74,976, the total gross receipts will come to Rs. 1,12,63,067 and then the difference of Rs. 1,64,428 can be held to be correct. The assessee explained to the Income-tax Officer that these amounts were withheld by the Irrigation Department pending verification of the satisfactory conclusion of the work pertaining to these amounts and that these amounts, however, were paid back to the assessee in the subsequent years on satisfactory verification of the work by the Irrigation Department. It goes to show that this amount of Rs. 1,64,428 related to the bills presented to the Irrigation Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch bills, it was the system of the assessee that the assessee used to show only when the bill was accepted in principle by the Government or the authority concerned and this system had been accepted by the Tribunal in the earlier years also. The Tribunal also clearly pointed out that the claim for Rs. 84,243 of the assessee had not been accepted and, therefore, it cannot be said that the right had accrued to the assessee in respect of that amount and merely because there was a claim by the assessee, it could not result in the conclusion that the amount was due to the assessee. Mr. B. P. Rajgarhia, for the Revenue, has submitted that the assessee follows mercantile system of accounting and so the mere presentation of the bill amounts to a claim by the assessee and it will be deemed that the amount has accrued to the assessee and has become due to him. For this purpose, Mr. B. P. Rajgarhia, for the Revenue, has relied on the case of E. M. Muthappa Chettiar v. ITO [1961] 41 ITR 1 (SC), which is a decision of their Lordships of the Supreme Court. In this case, it was held that the fact that the managed company did not disburse the firm's remuneration in cash, made no difference to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count ", being a part of the excess amount paid to it and reserved to be returned to the consumers. In those circumstances, it was held by their Lordships of the Supreme Court that these amounts did not form part of the appellant's real profits; and to arrive at the taxable income of the appellant from business under section 10(1) of the Indian Income-tax Act, 1922, the amounts had to be deducted. In that connection, it was also observed that, as the appellant had adopted the mercantile system of accounting, the amounts so reserved for future payments were deductible in computing the income, profits and gains from the appellant's business for the relevant years, since the liability had accrued in those years. Thus, it is evident that if an assessee follows the mercantile system of accounting, then he is entitled to deduct expenses made during a particular accounting period. Mr. B. P. Rajgarhia has also relied on the case of CIT v. A. Gajapathy Naidu [1964] 53 ITR 114. In this case, their Lordships of the Supreme Court have held that when an Income-tax Officer proceeds to include particular income in the assessment, he should ask himself, inter alia, two questions, namely: (i) wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at if accounts are maintained according to the mercantile system, whenever the right to receive money in the course of a trading transaction accrues or arises, even though income is not realised, income embedded in the receipt is deemed to accrue or arise. Thus, according to this decision also, the question has to be considered whether the right to receive the amount has accrued or arisen to the assessee who is following the mercantile system of accounting. Mr. B.P. Rajgarhia has also relied on the case of Morvi Industries Ltd. v. CIT [1971] 82 ITR 835. In this case, the assessee, which was the managing agent of its subsidiary company, maintained its accounts on the mercantile system and it was entitled to receive an office allowance of Rs. 1,000 per month, a commission at 121 per cent. of the net profits of the managed company and an additional commission of 1 1/2 per cent. on all purchases of cotton and sales of cloth and yarn. In the accounting years ended on December 31, 1954, and December 31, 1955, the managed company suffered losses and the assessee earned only commission on the sale of cloth and yarn for the two years. The total amounts including the office allowance which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctually received and, similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. It has also been held in this decision that where accounts are kept on the mercantile basis, the profits or gains are credited though they are not actually realised, and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. It cannot be doubted that on the basis of this decision of their Lordships of the Supreme Court, it has to be seen whether the assessee becomes entitled to the amount immediately after the bills relating to the contract work are presented and claims are made or it will become legally due when the Department admits the claim and passes the bills. Mr. B. P. Rajgarhia has also relied on the case of Vishnu Agencies Private Ltd. v. CIT [1963] 48 ITR 444, which is a decision of the Bombay High Court. In this case, the assessee, which maintained its accounts on the mercantile system, acted as transport contractor to the Government. After transporting sugar from the docks to the godowns for some time, the assessee found that su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted and accepted by the Government Department, the income will not accrue to the assessee as the assessee will have no legal right to recover money unless the claim is admitted and accepted by the Government Department, and so although the assessee is following the mercantile system of accounting, the amount cannot be legally recovered by the assessee unless the Government Department admits and accepts the claim of the assessee. Learned counsel for the assessee relied, before the Tribunal, on the case of E. D. Sassoon and Company Ltd. v. CIT [1954] 26 ITR 27 (SC). In this case, the S company were the managing agents of the U company. Under the managing agency agreement, the S company were entitled to receive as their remuneration, subject to a minimum, a commission of certain per cent. per annum on the annual net profits of the U company which was due to them on the 31st March every year. On 1st December, 1943, the S company assigned to A their office as managing agents and all their rights and benefits under the managing agency agreement and the consideration received by them was transferred by them to the capital reserve account. The accounts of the managing agency commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit arising from the said transaction was adjudicated and determined in favour of the partnership and the partnership was declared to be entitled to the said claim, the profit could not be said to have accrued to the partnership and that mere assertion of the claim by Valia on behalf of the partnership to the profit was not such claim so as to accrue to the partnership firm. On this basis, Mr. K. N. Jain has submitted that the presentation of the bill by the assessee was only claim by the assessee and unless the claim is admitted and accepted by the Government Department, income will not accrue. Mr K. N. Jain has relied on CIT v. Mehar Singh Sampuran Singh Chawla [1973] 90 ITR 219. It is a decision of the Delhi High Court. The assessee, the managing director of a company, who was entitled to a salary which was made payable at the end of the accounting year though computed on the basis of Rs. 5,000 per month, and also commission and bonus, had forgone all these three items during the relevant accounting year and prior to the year coming to an end. In those circumstances, it was held by the Delhi High Court that the salary, commission and bonus had not accrued to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ril 10, 1944, the Government suspended the contract. There were meetings between the assessee and military authorities about payment for the materials taken over by the authorities. On February 20, 1945, the basis for the payment was fixed and the amount payable to the assessee was determined at Rs. 1,77,000 and a part payment was made. The balance was not paid and on January 28, 1946, the compensation payable was finally fixed at Rs. 1,73,767. The Income-tax Officer determined the profit of the assessee at Rs. 43,582 which was assessed to tax in the assessment year 1945-46 for the reason that as the basis of compensation was fixed at the meeting on February 20, 1945, the profit accrued to the assessee in the assessment year 1945-46 and not in 1946-47. In those circumstances, the Allahabad High Court held that though the basis for payment of compensation was fixed on February 20, 1945, the authorities at Delhi did not approve the amount of compensation. This led to the meeting on January 28, 1946, at which the amount was finally fixed at Rs. 1,73,767 and, so, the amount became ascertained only on that date and since that date fell in the accounting year relating to the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the explanation given by the executive engineer in this case indicated that at least part of the money retained was of that kind. In the present case before us, the assessee clearly asserted before the Income-tax Officer, relating to the amount of Rs. 1,64,428, that this amount was withheld by the Irrigation Department pending verification of satisfactory conclusion of the work pertaining to these amounts. Thus, it is evident that until verification of the satisfactory Conclusion of the work was done, the amount had been withheld by the Irrigation Department. The Income-tax Officer has accepted this position that the amount was withheld by the Irrigation Department for the purpose that it was to be paid after verification of satisfactory conclusion of the work. This clearly goes to show that the amount of Rs. 1,64,428 had not accrued to the assessee and that it could accrue only when, after the verification of satisfactory conclusion of the work, the Department admitted the claim. As the Appellate Assistant Commissioner had allowed relief only to the extent of Rs. 84,243, it has to be held, in view of the various decisions that the claim for this amount was not admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppears from the consolidated order of the Tribunal that the appeal was against the relief of Rs. 5,51,283 granted by the Appellate Assistant Commissioner in the assessment year 1968-69 and a similar relief of Rs. 1,40,500 in the assessment year 1969-70. The Income-tax Officer found that besides the normal bills submitted by the assessee in respect of its work, it had made certain claims against the Executive Engineer and in these claims the assessee had claimed certain payments from the Government (Irrigation Department) on the ground that the assessee had to execute certain works which were required of him by the supervisory authorities but which were not strictly given under the contract agreement. It was found that the claims to the extent of Rs. 1,50,00,000 by the assessee on different accounts had been made. The Income-tax Officer further learnt that in the later years, the assessee received certain payments in respect of these claims and the total payments received were found to be Rs. 7,30,219 received between November, 1968, to October, 1971. After looking into the details of the claims made by the assessee, the Income-tax Officer found that the total claims made in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner that the contract was for a single piece of work and there could not be any bifurcation of the work in different parts, and all the works done were in respect of one contract and it could not be stated that the assessee was doing some independent work apart from the contract entered into by it. It was also mentioned that as against the total value of contract of Rs. 6 crores, the assessee had claimed to the extent of Rs. 1,50,00,000 in the course of these years but ultimately after prolonged correspondence and dispute, the Government had admitted and paid the claims of the assessee to the extent of Rs. 7,30,219 only. It was explained that this constituted only about 5 per cent. of the total claim and these amounts have been shown in the years when the claim had been admitted by the Government of Bihar. It was also explained that out of the total claims made in the course of this year, the total payments received till the date of hearing by the Appellate Assistant Commissioner was only Rs. 47,211. The Appellate Assistant Commissioner after considering the facts of the case came to the conclusion that the claim could not be treated as income as the right to receive these amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the claim had accrued. It was pointed out on behalf of the assessee that the assessee had followed the same system in the immediately preceding year also when the company was floated. It was also argued before the Tribunal that the bills relating to the contract work are always prepared by the Government and the assessee signs those bills and those bills are shown on the credit side even if the receipt of the amount takes some time. As far as the claims of disputed items were concerned, it was submitted that they stood on a different footing and they could have been shown by the assessee only when the claim was accepted or admitted by the Government. Learned counsel for the assessee referred to the assessee's letter explaining the position before the Income-tax Officer and submitted that the system of accountancy followed by the assessee was made clear in that letter. It was submitted on behalf of the assessee that though in the assessee's letter dated December 13, 1971, it had stated that in respect of these claims it was following the cash system of accountancy, in fact, it was not so and even in respect of these claims the assessee continued to follow the mercantile system and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disputed and were not admitted by the Government. The Tribunal also held that the Income-tax Officer took an erroneous view that the claim made by the assessee became income under the mercantile system. The Tribunal held that the claims were not based on a prior agreement or undertaking and they were disputed items as it would be clear from the correspondence which were placed before the Tribunal by the assessee. From the letters, it was evident to the Tribunal that most of the claims were either withdrawn by the assessee or were rejected by the appellate authorities and some of the claims were partly accepted but that acceptance was after the close of the accounting period relevant to the assessment years 1968-69 and 1969-70. In respect of these claims, the assessee had to produce certain evidence in order to establish that they were required to be done by the appropriate authorities and they were over and above the contracted work, and if the authorities concerned were satisfied about these aspects, then they could agree to compensate the assessee for the extra expenses incurred by it in respect of the extra work. The Tribunal also pointed out that after certain claims were rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment years 1968-69 and 1969-70 have already been deleted by the Tribunal, the addition on the basis of the calculation in the manner done by the Income-tax Officer was not justified and so it has to be held that the Income-tax Officer had made the addition of Rs. 23,06,079 on the basis of the presentation of the bills and so the addition was rightly deleted by the Appellate Assistant Commissioner and the Tribunal. If the assessee failed to produce the materials as to when the claim of the assessee was admitted and accepted by the Department, the Income-tax Officer can find out from the Irrigation Department as to when the claim of a particular amount was admitted and accepted by the Irrigation Department of the Government of Bihar and the entire amount has to be added in the year when the claim is finally admitted and accepted by the Irrigation Department of the Government of Bihar and the addition cannot be made on the basis of the presentation of the bills. It also cannot be doubted that in the mercantile system the expenses are allowable when the expenses are incurred and it cannot be postponed as the contract work is one whole work and so the expenses incurred in a particu ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
