1990 (8) TMI 216 - AT - Income Tax

Summary

Issues Involved:
1. Whether the provision of Rs. 6,86,172 towards the guarantee fund is a contingent liability or a known liability.
2. Whether the assessee was justified in reducing the aggregate contract price by Rs. 6,86,172 and showing it as a liability.
3. Whether the sum of Rs. 5,36,672 is exigible to tax in the assessment year 1983-84.
4. Whether the assessee is entitled to a revenue deduction under section 37(1) of the IT Act, 1961.

Detailed Analysis:

Issue 1: Contingent Liability vs. Known Liability
The Income Tax Officer (ITO) found that the contracts with Dutta and Konark did not contain provisions enabling the buyer to withhold 5% of the contract value towards the guarantee fund. The entire contract price was received by the assessee. The CIT(A) held that the liability was enforceable at law and hence was a known liability. However, the Tribunal concluded that the liability was contingent, as it depended on future events such as defects in the machinery, which may or may not arise. Therefore, the provision of Rs. 6,86,172 was not a known liability but a contingent one.

Issue 2: Justification of Reducing Aggregate Contract Price
The CIT(A) approached the issue from the angles of real income and legally enforceable claim. He concluded that the appellant had only a contingent right to demand payment of 5% of the contract value, and no debt had accrued. The Tribunal agreed, noting that the assessee received the entire contract price and the bank guarantee was conditional on future events. Therefore, the sum of Rs. 6,86,172 could not be deducted from the aggregate contract price and shown as a liability.

Issue 3: Taxability of Rs. 5,36,672 in Assessment Year 1983-84
The Tribunal noted that the assessee received the full contract price during the relevant accounting year, making the income embedded in the receipt taxable under section 5(1)(a) of the IT Act, 1961. The concept of real income was deemed inapplicable as the entire income had accrued and was received. The Tribunal rejected the argument that the right to receive the guarantee money was postponed to a later date, holding that the sum of Rs. 5,36,672 was exigible to tax in the assessment year 1983-84.

Issue 4: Revenue Deduction under Section 37(1)
The Tribunal held that the provision for the sum of Rs. 5,36,672 related to a contingent liability and was not revenue deductible. Therefore, the assessee was not entitled to a deduction under section 37(1) or section 28 of the IT Act, 1961. The Tribunal rejected the argument that the sum was blocked with the bank and should be treated as a deductible liability.

Conclusion:
The Tribunal set aside the order of the CIT(A) and restored the order of the assessing officer, holding that the provision of Rs. 5,36,672 was a contingent liability and not revenue deductible. The departmental appeal was allowed, making the sum of Rs. 5,36,672 taxable in the assessment year 1983-84.