2014 (10) TMI 663 - HC - Income Tax

Accrual of income - Acquisition of right to receive balance consideration - Whether the assessee has acquired the right to receive the balance of 10% of the consideration for the electrical conductor supplied to its customer Held that - The Tribunal has rightly dealt with the matter extensively and relying upon Seth Pushalal Mansinghka (P.) Ltd., v. Commissioner of Income-tax 1967 (5) TMI 1 - SUPREME Court - an assessee can be said to have received the income, only when corresponding right has accrued to him - an income accrues to an assessee not only when it is due to him, but also it is accompanied by a corresponding obligation on the part of the other party, to pay it - though an assessee may claim a particular amount as of right, it cannot be treated as his income, unless the corresponding obligation is either accepted by, or fastened upon, the other party; in accordance with law - assessee was no doubt entitled to receive 10% of the consideration for the goods supplied by it - the corresponding obligation of the recipient of the goods would have arisen only when a certificate, to the effect that the quality conform to the specifications - That event did not take place, by the time the order of assessment was passed the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Whether the respondent has acquired the right to receive the balance of 10% of the consideration for the conductor supplied.
2. Whether the amount representing 10% of the consideration is liable to be taxed at the current stage.
3. Application of legal principles regarding income accrual and corresponding obligations.

Issue 1:
The main issue in this case was whether the respondent had acquired the right to receive the balance of 10% of the consideration for the conductor supplied. The appellant argued that the 10% amount was part of the consideration, thus making it taxable. On the other hand, the respondent contended that the amount became payable only upon final certification of the goods, and until then, no right had accrued to receive it. The Tribunal extensively analyzed precedents, including the case of Seth Pushalal Mansinghka (P.) Ltd., and Commissioner of Income Tax vs. Excel Industries, to determine when income accrues to an assessee. The Tribunal concluded that the respondent was entitled to receive the 10% amount only upon certification of quality, which had not occurred during the assessment year. Therefore, the Tribunal found in favor of the respondent on this issue.

Issue 2:
The second issue revolved around whether the amount representing 10% of the consideration was liable to be taxed at the current stage. The Assessing Officer had added this amount to the respondent's income, arguing that even though it would be paid later, the respondent had acquired the right to receive it. However, the Tribunal disagreed, emphasizing that income accrues to an assessee only when the corresponding obligation of the other party to pay is established. Since the certification confirming quality had not been obtained during the relevant assessment year, the Tribunal held that the amount was not taxable at that stage. Consequently, the Tribunal set aside the Assessing Officer's order on this matter.

Issue 3:
The third issue involved the application of legal principles regarding income accrual and corresponding obligations. The Tribunal applied the principles elucidated in various precedents to determine when income can be considered to have accrued to an assessee. It was highlighted that an assessee can claim an amount as of right only when the corresponding obligation of the other party to pay is established. In this case, the Tribunal found that the respondent's entitlement to the 10% amount was contingent upon the certification of quality, which had not occurred during the assessment year. Therefore, the Tribunal concluded that the amount was not taxable until the requisite conditions were met. The Tribunal's decision was based on a thorough analysis of legal principles and precedents, leading to the dismissal of the appeal.

In conclusion, the High Court of Andhra Pradesh upheld the Tribunal's decision, dismissing the appeal by the Revenue. The judgment emphasized the importance of establishing the corresponding obligation of the other party to pay before considering an amount as taxable income. The detailed analysis of legal principles and precedents formed the basis for the Court's decision in favor of the respondent.