2015 (12) TMI 183 - AT - Income Tax

Accrual of income - termination of contract - method of accounting - Held that - There is no dispute to the fact that there was termination of contract and full uncertainty was there with respect to recoverability of the amount invoiced. In fact, the assessee has rightly followed the accounting principle by not recording the said impugned amount in the books of account. As per Accounting Standard ( AS ) - 9 i.e. Revenue recognition, if there is uncertainty with regard to the collection of amount then recognition of said amount should be deferred in the books of account. The fact that the Assessee never recorded the impugned amount in its book of accounts shows that the Assessee never considered the said amount as accrued income. The raising of invoice is initial process of recovery after which the assessee realized that there is uncertainty with respect to receipt of impugned amount and terminated the contract. If assessee had given up its claim then it would not have received even ₹ 7,30 crores, which is merely 8.58 percent of total claim after a long legal fight. The fact that (i) the Assessee recovered only 8.58% of the total claim, and that too after a period of 4 years and that (ii) the addition confirmed by CIT(A) in this year had been allowed as a deduction by the AO in AY 2006-07 clearly shows that the said amount could not be said to have accrued in favour of assessee in the relevant assessment year under consideration. However, the AO is directed to bring to tax net the amount received in future in the year of actual receipt.- Decided partly in favour of assessee

Issues Involved:
1. Accrual of income from contractual work performed till the date of termination.
2. Accrual of income from demobilization and winding up of site operations post-termination.
3. Application of Accounting Standard-9 and Revenue recognition principles.
4. Impact of the Deed of Release issued by the Government of India on tax claims.

Detailed Analysis:

1. Accrual of Income from Contractual Work Performed Till the Date of Termination:

The primary issue was whether the sum of Rs. 26.47 crores for contractual work performed till the termination date accrued as income during the assessment year 2002-03. The Assessing Officer (AO) added this amount to the assessee's income, arguing that the right to receive the income accrued when the work was performed, following the mercantile system of accounting. However, the assessee contended that due to the uncertainty of ultimate collection, the income did not accrue during the year. The CIT(A) upheld the AO's addition, but the Tribunal disagreed, stating that no real income can be said to have accrued during the pendency of disputes and considering the precarious financial condition of Dabhol Power Company (DPC). The Tribunal emphasized that the probability of realization must be considered from a realistic and practical point of view, as laid down by the Supreme Court in CIT Vs. Excel Industries Ltd. 358 ITR 295.

2. Accrual of Income from Demobilization and Winding Up of Site Operations Post-Termination:

The second issue involved the sum of Rs. 59.51 crores claimed for demobilization and winding up of site operations post-termination. The AO added this amount to the assessee's income, but the CIT(A) deleted the addition, noting that the invoices were never accepted by DPC, and thus, no right to receive the amount accrued to the assessee. The Tribunal upheld the CIT(A)'s decision, agreeing that since the invoices were not accepted, the amount did not accrue to the assessee. The Tribunal reiterated that income cannot be said to have accrued merely on the ground that the assessee followed the mercantile system; real income must be considered in light of commercial and business realities.

3. Application of Accounting Standard-9 and Revenue Recognition Principles:

The Tribunal noted that the assessee correctly followed Accounting Standard-9 (Revenue Recognition), which requires deferring the recognition of revenue if there is uncertainty regarding its collection. The Tribunal found that the assessee prudently did not record the impugned amounts in its profit and loss account due to the uncertainty of collection, in line with AS-9. The Tribunal also referred to the Income Computation and Disclosure Standards (ICDS) issued by the CBDT, which emphasize the importance of ultimate recovery for revenue recognition.

4. Impact of the Deed of Release Issued by the Government of India on Tax Claims:

The assessee argued that the Deed of Release dated 12 July 2005, issued by the Government of India, limited the tax claims related to DPC to USD 3 million, including amounts already paid. The Tribunal acknowledged this argument, noting that the demand raised by the AO was contrary to the Deed of Release. The Tribunal held that the Deed of Release should be considered while assessing the tax liability.

Conclusion:

The Tribunal concluded that the income from the contractual work and demobilization did not accrue to the assessee during the assessment year 2002-03 due to the uncertainty of collection and non-acceptance of invoices by DPC. The Tribunal emphasized the importance of considering real income and commercial realities, as well as adherence to accounting standards and the Deed of Release. The appeal of the revenue was dismissed, and the appeal of the assessee was allowed in part, with the AO directed to tax the amount in the year of actual receipt. The cross objection was dismissed as infructuous.

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