2016 (12) TMI 400 - AT - Income Tax

Sales computation - assessment year - method of valuation - Held that - There is ostensibly no sale agreement/s in-as-much as there is no reference thereto. The goods under reference are under transit as on 31.03.2011, the last date of the relevant previous year, and the physical delivery of the goods effected only in the following year. How, then, we wonder, could be goods be regarded as sold in/during the current year? Surely, it could not merely be on the basis of raising sale invoices or of passing entries recording sales in the books of account, which may be done as a matter of course or as a matter of expediency. We agree that the accounting policy, using the word coincide , is not very appropriately worded, but then the same is not to be read strictly, as one would read a provision of law, giving due emphasis to every word, but as conveying broadly the intent, as of transfer of ownership of goods in the present case. Then, again, could an accounting policy override substance when no sale, either in law or as per the accounting norms, can be said to have taken place? Surely, not. Revenue has not raised any issue qua the valuation of the goods under reference, which is stated by the ld. A.R. as being in conformity with the method of valuation regularly followed, so the same cannot be regarded as open for review. The matter, in view of the foregoing, shall travel to the file of A.O. for determination on the terms afore-said, i.e., with reference to the insurable interest in the goods under transit as at the year-end. We may also clarify that in the event of the assessee s claim being not allowable on the said terms; it having offered the income under reference to tax for the following year (Gd. 3), it is at liberty to press its claim for the said year u/s. 154 in-as-much as the issue at heart, therefore, is the correct year of assessability of the income under reference; each year being a separate and independent unit of assessment (refer CIT v. British Paints India Ltd., 1990 (12) TMI 2 - SUPREME Court

Issues Involved:
- Correct reversal of sales by the assessee
- Transfer of ownership and income recognition upon dispatch of goods
- Interpretation of accounting policy and legal principles
- Constructive delivery and insurable interest in goods under transit

Detailed Analysis:

Issue 1: Correct Reversal of Sales by the Assessee
The primary issue in this case was whether the assessee correctly reversed its sales to the extent of ?83.93 lakhs and adjusted the corresponding income of ?32.36 lakhs by valuing the relevant goods as part of the closing inventory. The dispute arose because the goods were dispatched to customers in the next year after the sale entries were recorded, leading to a difference in income. The Revenue contested this reversal, arguing that the assessee's accounting policy recognized sales upon dispatch to customers. However, the assessee claimed that ownership of goods was not transferred until received by the buyer, maintaining control over the goods until the end of the relevant year.

Issue 2: Transfer of Ownership and Income Recognition Upon Dispatch of Goods
The Tribunal analyzed the legal and accounting principles governing the transfer of ownership and income recognition upon the delivery of goods. It was established that under the mercantile system of accounting and Accounting Standard (AS) 9, income accrues to the seller only upon the delivery of goods to the buyer, signifying the transfer of significant risks and rewards associated with ownership. The Tribunal emphasized that a sale is complete only upon the delivery and acceptance of goods by the buyer, entitling the seller to adjust income for sales not accompanied by actual delivery.

Issue 3: Interpretation of Accounting Policy and Legal Principles
The Tribunal delved into the interpretation of the assessee's accounting policy, which stated that sales are recognized upon dispatch to customers. Despite the word "generally" in the policy, the Tribunal concluded that sales should be recognized upon actual delivery, not just based on invoice issuance. The Tribunal also considered the concept of constructive delivery and insurable interest in goods under transit to determine the transfer of ownership and the correct timing of income recognition.

Issue 4: Constructive Delivery and Insurable Interest in Goods Under Transit
The Tribunal examined whether the goods under transit were effectively sold during the relevant year based on the concept of constructive delivery. It was crucial to establish the party holding the insurable interest in the goods to determine the transfer of ownership. The absence of clarity on insurable interest led the Tribunal to order a reassessment by the Assessing Officer to ascertain the correct year of assessability of the income under reference. The Tribunal allowed the assessee to press its claim for the following year if the current year's claim was not allowable, emphasizing each year as a separate unit of assessment.

In conclusion, the Tribunal allowed the assessee's appeal for statistical purposes, directing a reassessment based on the insurable interest in the goods under transit to determine the correct timing of income recognition.

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