2002 (6) TMI 183 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 64,58,606 to the assessee's income.
2. Accrual of income under the contract terms.
3. Consistency in accounting practices.
4. Treatment of sales for sales tax versus income tax purposes.
5. Legal right to receive income.

Detailed Analysis:

1. Addition of Rs. 64,58,606 to the Assessee's Income:
The Revenue initially raised 7 grounds of appeal against an addition of Rs. 71,69,457, later corrected to Rs. 64,58,606 by the Assessing Officer. The dispute centered on whether this amount should be included in the assessee's sales for the assessment year 1998-99. The assessee had not accounted for this amount, citing that it represented 10% of the ex-works price for supplies made to a corporation, which was payable only upon fulfillment of specific conditions as per the contract.

2. Accrual of Income Under the Contract Terms:
The key contractual clause (Clause 5.1.3) stipulated that the final payment of 10% would be made within 30 days of receipt of goods at the site and submission of a claim supported by an acceptance certificate from the purchaser's representative. The Assessing Officer argued that the goods had already been dispatched, fulfilling all the ingredients of sales, and thus the amount should be included in the sales. However, the assessee contended that the income did not accrue until the conditions were met, relying on several judicial precedents which state that income accrues only when the right to receive it becomes vested.

3. Consistency in Accounting Practices:
The assessee had consistently followed the practice of accounting for the 10% ex-works price on a cash basis as and when received, a method accepted by the Assessing Officers in previous years (e.g., assessment years 1991-92 and 1997-98). The CIT(A) and the Assessing Officer did not accept this practice for the year under consideration, leading to the dispute.

4. Treatment of Sales for Sales Tax Versus Income Tax Purposes:
The Assessing Officer noted that the assessee had included the 10% ex-works price in its sales for sales tax purposes but not for income tax purposes. The assessee argued that the treatment for sales tax and income tax could differ, as income for tax purposes must accrue or arise as per Section 5 of the Income-tax Act, which was not the case here due to the conditional nature of the payment.

5. Legal Right to Receive Income:
The assessee's argument was supported by various judicial decisions, including those from the Supreme Court, which clarified that income accrues only when the right to receive it becomes vested. The Tribunal agreed with the assessee, stating that the amount did not accrue during the year under consideration as the stipulated conditions in the contract were not fulfilled. The Tribunal also noted that the assessee had duly accounted for the amount in the year it was actually received (assessment year 2001-02).

Conclusion:
The Tribunal concluded that the income under dispute did not accrue to the assessee during the year under consideration, even under the mercantile system of accounting. The addition made by the Assessing Officer and confirmed by the CIT(A) was not justified and was directed to be deleted. The appeal was allowed partly in favor of the assessee.