2019 (6) TMI 445 - HC - Income Tax

Accrual of income - real income theory - Incomes arising on account of contractual work performed before termination of contract and pendency of litigation - demobilization and winding up of site operation costs - HELD THAT - Tribunal noted that the parent Company was in severe financial crisis; the assessee could not receive any payment for a long time; eventually after delay of nearly four years the Assessee could recover only 8.58% of the total claim. Interalia on such factors the Tribunal applied the theory of real income and deleted the addition. In the meantime the Assessee had also in the later year claimed same amount by way of bad debts. The Tribunal while giving relief to the Assessee ensured that such claim of bad debts would stand deleted. We are broadly in agreement with the view of the Tribunal. With respect to the larger amount of 59.51 Crores the claim was for damages for pre mature termination of the contract. The bills were raised after the termination of the contract and the contracted party did not even accepted the bills. With respect to the remaining amount of 26.47 Crores the Tribunal has applied relevant facts and held that in view of the real income theory no income tax can be levied on the Assessee at the relevant time. Any further examination of the issue would be wholly academic in nature since in any case the Assessee could have claimed the said amount by way of bad debts. Infact such a claim was allowed but in view of the further development pursuant to the impugned decision taken by the Tribunal such claim was ordered to be adjusted - Decided against revenue.

Summary

Issues:
1. Whether incomes arising on account of contractual work performed before termination of contract and pendency of litigation have accrued to the assessee?
2. Whether incomes on account of demobilization and winding up of site operation costs have accrued to the assessee?
3. Whether the Assessee properly accounted for the amounts in question in its income tax return?
4. Whether the Tribunal's application of the real income theory was appropriate in this case?
5. Whether the claim of bad debts by the Assessee was justified?

Analysis:
1. The case involved the Revenue challenging the order of the Income Tax Appellate Tribunal regarding the inclusion of certain amounts in the Assessee's income tax return. The Assessing Officer questioned the non-inclusion of two amounts, one related to contractual work and the other to demobilization costs. The Commissioner of Income Tax (Appeal) granted partial relief to the Assessee, which led to further appeals by both the Assessee and the Revenue.

2. The Tribunal considered the peculiar facts of the case, where the Assessee was awarded a construction contract for a project with legal disputes. Regarding the amount related to demobilization costs, the Tribunal upheld the Commissioner's decision that the income had not accrued to the Assessee as the bill was raised after contract termination and not accepted by the contracting party.

3. For the amount related to contractual work, the Tribunal noted the financial crisis of the parent company and the Assessee's delayed and partial payment recovery. Applying the real income theory, the Tribunal concluded that no income tax could be levied on the Assessee at that time. The Tribunal also addressed the Assessee's subsequent claim of bad debts, ensuring that the relief granted did not overlap with the bad debts claim.

4. The Tribunal's decision to dismiss the Income Tax Appeal was based on the fact that the bills for the larger amount were raised after contract termination and not accepted by the contracting party. The Tribunal's application of the real income theory for the smaller amount was deemed appropriate, considering the Assessee's financial challenges and delayed payment recovery.

5. The Tribunal's decision to dismiss the Income Tax Appeal was comprehensive, considering the specific circumstances of the case and applying legal principles such as the real income theory. The judgment addressed the issues related to the accrual of income, proper accounting treatment, and the justification for the Assessee's claim of bad debts, providing a detailed and reasoned analysis for each aspect of the case.