2011 (2) TMI 1409 - AT - Income Tax

Summary

Issues involved:
The judgment involves two main issues:
1. Recognition of income under the mercantile system of accounting for a price rise in raw material, and
2. Disallowance of provisions for raw material and components purchased by the assessee.

Issue 1 - Recognition of Income:
The Revenue appealed against the CIT(A)'s order regarding the recognition of income under the mercantile system of accounting for a price rise in raw material. The A.O. preponed the recognition of income earned by the assessee to the A.Y. 2004-05, which the CIT(A) later overturned. The negotiation for the price rise was finalized in May 2004, and the CIT(A) held that the income accrued in A.Y. 2005-06, not in the impugned year. The CIT(A) emphasized that income accrues when the assessee gets an enforceable right to receive it, and the Supreme Court judgment in E.D. Sassoon & Company Ltd. was cited to support this view. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's grounds.

Issue 2 - Disallowance of Provisions:
The second issue pertained to the disallowance of provisions for raw material and components purchased by the assessee. The A.O. disallowed an amount for excess provision made for open GRNS, which the CIT(A) reversed. The CIT(A) found that the liability was not false or fictitious and was identifiable to specific parties. The Tribunal noted conflicting interpretations and lack of clarity on whether the amount was an excess provision or a cessation of liabilities. Referring to the Supreme Court judgment in Bharat Earth Movers, the Tribunal set aside the issue for the A.O. to reexamine after considering relevant invoices and book entries. The appeal of the Revenue was partly allowed.

Separate Judgment:
The judgment was delivered by the Appellate Tribunal ITAT Pune, with Shri I.C. Sudhir and Shri D. Karunakara Rao presiding over the case. The issues involved detailed examination of the mercantile system of accounting for income recognition and the disallowance of provisions for raw material and components purchased by the assessee. The Tribunal's decision provided clarity on the application of accounting principles and the necessity for accurate income recognition and provision assessment.