2012 (5) TMI 369 - HC - Income Tax

Treatment of an amount as income even though the assessee has disclosed the value of goods as part of closing stock - held that - Tribunal misconstrued the clauses in the agreement to hold that the value of the closing stock had to be treated as income of the assessee. - Decided in favor of assessee.

Summary

Issues:
1. Treatment of sum as income despite disclosure in closing stock
2. Role of assessee as bailee and the value of goods supplied

Issue 1: Treatment of sum as income despite disclosure in closing stock

The case involved a dispute regarding the treatment of a sum of Rs.55,72,981 as income by the Tribunal, even though the assessee had disclosed the value of goods as part of the closing stock. The assessee argued that the value of closing stock, specifically cement and steel, should not be included as part of its income as per the terms of the contract with Naval Science and Technological Laboratory (NSTL). The contract required the assessee to provide materials, labor, and tools for the execution of work to NSTL. The contract also detailed the terms of payment, including advance payments for materials like cement and steel. The Assessing Authority initially disagreed with the assessee's claim, stating that the closing stock should be treated as income since NSTL had already debited the assessee's account with the amount paid for the materials. However, the Commissioner of Income Tax (Appeals) ruled in favor of the assessee, emphasizing that the assessee had to pay for the materials supplied by NSTL, and hence, there should be no separate addition to income.

Issue 2: Role of assessee as bailee and the value of goods supplied

The second substantial question of law raised by the assessee was whether the value of goods supplied by the supplier should be considered as income in its hands, given that the assessee's role was that of a bailee. However, the assessee decided not to press this question, focusing solely on the first substantial question. The Tribunal, in its decision, highlighted that since the assessee had undertaken a labor contract, debiting the cost of material without corresponding earnings was not justified. The Tribunal agreed with the Revenue's contention that the cost of material could not be claimed by the assessee in the accounts without showing corresponding earnings. Consequently, the Tribunal allowed the Revenue's appeal and restored the assessment, leading the assessee to appeal before the High Court.

In the High Court's judgment, it was clarified that the payment made by NSTL for materials was an advance to the assessee, who was responsible for procuring the materials for the contract execution. The court emphasized that the clauses in the agreement clearly indicated that the assessee had to pay for the cement and steel used in the contract, and the advance amount received from NSTL was adjustable in the final bill. The court found that the Tribunal had misconstrued the clauses in the agreement and wrongly treated the value of closing stock as income. Therefore, the High Court set aside the Tribunal's order, allowing the Tax Case Appeal in favor of the assessee.