1970 (9) TMI 21 - HC - Income Tax

Assessment of the income of the assessee - Method of accounting - Amount credited to the works account - Mere taking of an entry in the account books would not always supply a conclusive evidence on the question, whether the discreted amount had accrued to the assessee or not

Summary

Issues Involved:
1. Whether the amount known as kasar regarding non-tender items of building contract would amount to "gross receipt" for the assessment year 1962-63.

Issue-Wise Detailed Analysis:

1. Nature of Kasar Amounts as Gross Receipts:

The primary issue in this reference was whether the kasar amounts related to non-tender items of a building contract should be considered as gross receipts, even though the bills including these amounts are prepared by the assessee and sent to its customers.

Facts and Accounting System:

The assessee, a firm engaged in private building contracts, often undertakes additional work not covered by the initial contract, referred to as non-tender work. For such work, rates are not pre-set, and the assessee submits bills with higher rates, anticipating deductions during final settlements. The entire bill amount is credited to the works account, but only a reasonable estimate of the recoverable amount is transferred to the profit and loss account, with the balance retained as kasar.

Department's Stand:

For the assessment years 1961-62 and 1962-63, the department contended that since the assessee maintained a mercantile system of accounting, the entire billed amount should be considered as accrued income. Therefore, kasar amounts should not be deducted, as the whole bill amount represents the accrued right to receive payment.

Tribunal's Decision:

The Tribunal held that the bills for non-tender items did not represent a legally enforceable claim, and thus, the kasar amounts could not be considered as real income for the accounting period. The Tribunal found the assessee's estimates reasonable and consistent with past practices, concluding that the kasar amounts left in the works account did not constitute real profits.

Court's Analysis:

The court agreed with the Tribunal, noting that the assessee's method of estimating recoverable amounts and transferring them to the profit and loss account was reasonable and bona fide. The court emphasized that the mercantile system of accounting, while providing prima facie evidence of income accrual, is not conclusive if other facts suggest that the income has not actually accrued. The court cited precedents, including the Supreme Court's affirmation in Commissioner of Income-tax v. Shoorji Vallabhdas and Co., that hypothetical income entries do not equate to actual income accrual.

Conclusion:

The court concluded that the amounts credited to the works account did not represent the real income accrued to the assessee during the accounting period. The Tribunal's decision to allow the assessee's appeal was upheld, and the kasar amount of Rs. 26,000 was not to be added back for income assessment.

Final Judgment:

The court answered the reference in the affirmative, agreeing with the Tribunal that the addition of Rs. 26,000 for the assessment year 1962-63 was unjustified. The matter was sent back to the Tribunal for further proceedings according to law, and the Commissioner was ordered to bear the costs of the respondent-assessee.