2017 (5) TMI 531 - AT - Income Tax

Accrual of income - applicability of AS-9 - whether pending disputed sale price, kept in contingent sales account is accrues to the assessee for the relevant financial year? - Held that - This appeal is squarely covered by the decision of ITAT, Visakhapatnam in assessee s own case for the assessment year 2009-10 wherein the coordinate bench has observed that the impugned contingent sale on account of differential sale price claimed by the assessee, which was pending before the Appellate Tribunal for Electricity is not accrued to the assessee as revenue for the relevant financial year. Also as decided in the case of Godara Electricity Company Limited Vs. CIT (1997 (4) TMI 4 - SUPREME Court) has held that the assessee has rightly treated difference between sale price claimed and price paid by the APTRANSCO as contingent sales, which is not accrued to the assessee for the relevant financial year. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the differential sale price claimed by the assessee but kept in the contingent sales account should be recognized as revenue for the relevant financial years.

Issue-wise Detailed Analysis:

1. Differential Sale Price and Revenue Recognition:

The primary issue in these appeals is whether the differential sale price, claimed by the assessee but kept in the contingent sales account due to pending disputes, should be recognized as revenue for the relevant financial years. The assessee, a public limited company engaged in manufacturing and power generation, had its case reopened under section 148 of the Income Tax Act, 1961, on the grounds that income chargeable to tax had escaped assessment. The dispute centered around an amount of ?76,95,720/- transferred to the contingent sales account, which the assessee argued was due to non-realization of sale price billed to customers because of pending disputes.

During the assessment proceedings, the Assessing Officer (A.O.) contended that the amount should be treated as sales and taxed accordingly, as the assessee had an absolute right to receive the billed amount from APTRANSCO by virtue of Government orders. However, the assessee maintained that the revenue did not crystallize due to the ongoing dispute and thus recognized revenue as per the orders of the State Government.

2. CIT(A) Decision:

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], reiterating that the revenue should be recognized when it crystallizes, following the mercantile system of accounting. The CIT(A) agreed with the assessee, referencing the Supreme Court's decision in UCO Bank Vs. CIT, which emphasized that tax must be on real income, not notional income. The CIT(A) concluded that mere raising of invoices towards disputed sale price does not create an undisputable right to the assessee unless the receipt of the price is certain and undisputed.

3. ITAT Decision:

The Income Tax Appellate Tribunal (ITAT) reviewed the case, considering both parties' arguments and the materials on record. The Tribunal noted that the issue was covered by its earlier decision in the assessee’s own case for the assessment year 2009-10, where it was held that the differential sale price claimed by the assessee, pending before the Appellate Tribunal for Electricity, did not accrue as revenue for the relevant financial year.

The Tribunal reaffirmed that the recognition of revenue should be based on real income and not hypothetical income. It emphasized that the assessee had followed a consistent method of recognizing revenue as per the price fixed by the State Government, and the differential amount was rightly treated as contingent sales due to the pending dispute.

4. Legal Precedents:

The Tribunal referenced several legal precedents, including:
- Godhara Electricity Company Ltd. Vs. CIT: The Supreme Court held that income should be considered based on the probability of realization, and if the amount is under dispute, no real income accrues to the assessee.
- DCIT Vs. Sri Balaji Bio Mass Power Pvt. Ltd.: The ITAT, Hyderabad, held that income cannot be deemed to accrue based on invoices raised when the differential income is under litigation and there is no certainty of entitlement.

Conclusion:

The ITAT concluded that the CIT(A) had rightly deleted the additions made by the A.O., as the disputed sale price did not accrue as revenue for the relevant financial years. The appeals filed by the revenue for the assessment years 2005-06, 2006-07, 2010-11, and 2011-12 were dismissed, upholding the CIT(A)'s order. The Tribunal emphasized that the assessee's recognition of revenue was consistent with the mercantile system of accounting and the real income principle.

Final Pronouncement:

The order was pronounced in the open court on 28th April 2017, dismissing the revenue's appeals for the assessment years in question.