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TMI Blog2000 (4) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... tion towers in the various mega plants such as Fertilizers, Petroleum, Chemical etc. The assessee manufactures the products under technical collaboration of M/s. Norton Chemical Process Products Corporation of U.S.A. According to the assessee the products are highly sophisticated and specialised and are of utmost necessity for cost efficient and optimum use of fertilizers, petrochemical, petroleum refinery and other chemical plants. It is further stated that tower packings are not uniform items mass produced for supply to the customers but are tailor made to the requirements of each mega plant. For different towers of the same plant, the calculations, specifications and design of the products involve a crucial and technically intensive exercise and any deviation from predicted performance would result in malfunctioning of the plant, thus exposing the assessee to arrange rectification or replacement of the defective equipment. Contracts for the supply of tower packings are secured by the assessee in response to globally floated tenders which are overseen by reputed global consultants. The tender documents as well as the purchase orders provide for retention of upto 10% of the sale v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Rs. 1984-85 51,629 Nil 1985-86 7,26,646 Nil 1986-87 1,55,366 Nil 1987-88 8,40,867 8,13,165 1988-89 4,15,238 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 914 has been credited to the trading account on account of expiration of the bank guarantee earlier furnished in the preceding years. 6. Before the Assessing Officer the assessee submitted that a regular and consistent method of accounting is being followed for the last many years whereby the amount of 10% of the sale value for which unconditional, irrevocable and unqualified bank guarantee has been furnished to the customer has been excluded from the sale receipts on the ground that the amount does not become due to the assessee and there is ho entitlement until after satisfactory performance of the tower packings supplied by the assessee under the contract. The assessee further explained that the bank guarantee is not a mere idle formality and has been enforced on a number of occasions by the customers without making any reference to the assessee. According to the assessee the amount covered by the bank guarantee, even though received by the assessee, remains under the control of the customers. The Assessing Officer however, rejected the contensions of the assessee and held that the entire provision of Rs. 98,24,911 by which the assessee has reduced its sales for the year under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44 and held that since, the method of accounting followed by the assessee is not the correct method, the Assessing Officer is entitled to reject the same by invoking the provisions of section 145 of the Act. The ld. CIT(A) accordingly upheld the addition. 9. Shri S.N. Soparkar, the ld. counsel for the assessee assailing the orders of the tax authorities below, strongly argued that a method of accounting, regularly followed by the assessee right since assessment year 1984-85 and accepted and acknowledged by the tax authorities after detailed scrutiny of the accounts in the earlier years, has been unjustifiably rejected by the Assessing Officer for the assessment year under appeal without bringing on record any fresh material. The ld. counsel argued that since the Department has accepted the method of accounting of the assessee for the past many years, there is no justification for making a departure for the assessment year under reference when the facts and circumstances of the assessee's case are identical with the earlier years and no new facts have been brought on record by the Income-tax Department in support of its view that the method of accounting followed by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r any loss resulting from the supplier's failure to complete its obligations under the purchase order without prejudice to any of the rights or remedies the owners/consultant may be entitled to as per terms and conditions of purchase order." The ld. counsel submitted that the performance bank guarantee provided by the assessee is irrevocable, unqualified and unconditional and the said guarantee is liable to be encashed by the customer without recourse to the assessee and even without bringing out any default on the part of the assessee in the matter of quality of materials supplied and performance thereof. The ld. counsel referred to pages 55 to 58 of the paper book containing the bank guarantee document. This bank guarantee is in respect of 5% of the value of the purchase order of National Fertilizers Ltd. Clause 1 of the guarantee is relevant: Clause 1: In pursuance of the said Purchase Order and in consideration of the promise, the Bank hereby guarantees to the Owner due observance and fulfilment by the Supplier of the terms of the said Purchase Order relating to the said Goods and of the performance warranty which is a part of the said Purchase Order and agrees and undertakes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessing Officer and argued that on a number of occasions, bank guarantees have been encashed by the customers without recourse to the assessee and without any default whatsoever on the part of the assessee in the matter of quality and performance of the material supplied. In this connection, the ld. counsel referred to encashment of bank guarantees by the Associated Cement Co. Ltd. at page 40 and Indian Acrylics Ltd. at page 42 and Gas Authority of India Ltd. at page 54 of the paper book. The ld. counsel further referred to pages 36 and 41 of the paper book and submitted that there have been instances when the customers have insisted upon renewal of the bank guarantee contrary to the express provisions in the purchase order. The ld. counsel emphasized that the products supplied by the assessee are highly sophisticated involving exacting specifications tailor made to the specific requirements of the customers and on a number of occasions the assessee has been called upon to replace defective material. The ld. counsel in this connection referred to pages 37, 38, 39, 43 and 44 of the paper book whereby the customers have called upon the assessee to provide replacement of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court held that a receipt will not constitute income until the uncertainty is removed and the assessee acquired right and entitlement to claim the money as his own. 12. Shri Rakesh Gupta, the learned Senior Departmental Representative supporting the order of the ld. CIT(A) strongly urged that the income covered by the bank guarantee has already been received by the assessee and is liable to be included on accrual basis since the assessee has adopted mercantile system of accounting. The ld. DR was at pains to say that the warranty provision made in the books of account represented a contingent liability and no deduction in respect thereof would be allowable under the Income-tax Act. Referring to the provisions of section 19 of the Sales of Goods Act, the ld. DR submitted that on the facts of the assessee's case sale transaction has been concluded after supply of goods and receipt of sale proceeds thereof. It is further submitted that the title over the goods supplied by the assessee rightfully vested with the customer and with the transfer of title to the customer, right to receive value under the sales contract has undoubtedly accrued to the assessee. The ld. DR further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ific evaluation may be allowed to be deducted. 13. In rejoinder, the ld. counsel for the assessee argued that once the Revenue has accepted in principle that discounted value of the liability on account of guarantees and warranties provided by the assessee is deductible, the claim made by the assessee on the basis of perception and judgment of both the parties to the transaction, namely, assessee supplier and the purchaser should be adopted. The ld. counsel pointed out that bid documents and purchase orders provide for furnishing of performance bank guarantee by the assessee equal to 5% in the case of IFFCO and NFL and 10% in the remaining cases, and the basis adopted by the assessee for accounting for the receipts and the method of accounting followed consistently and regularly should not be disturbed by taking recourse to the provisions of section 145 of the Act. 14. We have carefully considered the facts and circumstances of the case as well as rival submissions made by the ld. representatives of both the sides. Various judicial authorities of High Courts as well as Hon'ble Supreme Court cited before us by the ld. representatives of both sides have been carefully gone through. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst criterion is concerned, the basic requirement, implicit in the provision of section 145 as well as the general commercial world is that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory provision to this effect. However, what constitutes true and fair view of the financial results of an enterprise ? The pronouncement of the Institute of Chartered Accountants of India seek to describe the accounting principles and the methods of applying these principles in the preparation and presentation of financial statements so that they gave a true and fair view. The Institute has issued accounting standards and made it mandatory for the members of the Institute to comply with these standards while conducting auditing work. Such accounting standards have been formulated in conformity with the laws, customs, usages and business environment of the country. The Hon'ble Supreme Court has endorsed and approved the authoritative nature of the accounting standards formulated by the Institute being a body of professional experts in the field of accountan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is fully justified in excluding the amount of bank guarantee for the purpose of recognising the revenue. The accounting policy followed by the assessee is thus in conformity with the Accounting Standard 9 formulated by the Institute of Chartered Accountants of India. 16. Even if the assessee is to account for the entire sale value including the 10% of the sale value covered by the bank guarantee, the liabilities arising from the warranties and guarantees as well as the uncertainties involving the possible encashment of bank guarantee by the customer have to be taken care of for the purpose of presenting a true and fair view of financial results of the enterprise. Looked at from this angle, Accounting Standard 4 issued by the Institute of Chartered Accountants of India would be relevant. Para 10 of the Accounting Standard 4 deals with the contingencies and reads as under:- "The amount of a contingent loss should be provided for by a charge in the statement of profit & loss if; (a) it is probable that future events will confirm that after taking into account any related probable recovery an asset has been impaired or a liability has been incurred as at the balance sheet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits of the business. 18. Regarding the reliance placed by the Revenue on the decision of the Supreme Court in British Paints (I) Ltd. 's case we feel that the said decision does not support the case of the revenue. Undoubtedly -the fact that the method of accounting has been accepted in the pas t would not debar the Assessing Officer to take a contrary view if the accounts are found to be incorrect. In the instant case, nothing has been brought on record by the Assessing Officer in support of his conclusion that the method of accounting followed by the assessee is in conflict with the statutory provisions of the I.T. Act or that the accounts are incorrect or that true profits cannot be deduced therefrom. What the Assessing Officer has done is to change his opinion about the method of accounting adopted by the assessee without bringing any material on record justifying the departure in his approach British Paints (I) Ltd.'s case would obviously not be applicable in the facts of the case. 19. With regard to the various judicial authorities cited by the Assessing Officer in the assessment order concerning the liability being contingent, we have carefully have gone through the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inguishing feature referred to by the ld. DR is of no consequence inasmuch as in so far as 10% of the sale value is concerned, even though payment has been received by the assessee yet the control and ownership of the amount vest with the customer and the amount can be recovered by the customer at any time by unilateral encashment of bank guarantee without any reference to the assessee and without pointing out any default on the part of the assessee in the matter of quality and performance of the goods supplied under the contract. Thus, mere payment against furnishing of bank guarantee is of no consequence whatsoever except that it may enhance the liquidity of the assessee. The decision of Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust case supports the view taken by us. 24. The decisions of various Benches of the Tribunal cited by the ld counsel indicated below involve substantially similar set of facts and fully support the view taken by us in the instant case. (1) Voltas Ltd. v. Dy. CIT[1998] 64ITD 232 (Mum.) (2) Alfa Transformers Ltd. v. Dy. CIT [1999] 105 Taxman 200 (Cuttack) (3) Corrosion Control Services (P.) Ltd. 's case, (4) Paramount ..... X X X X Extracts X X X X X X X X Extracts X X X X
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