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TMI Blog1986 (9) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the port of Yambu in Saudi Arabia. In the assessment year under appeal, it received a gross amount of Rs. 3,48,73,543 for services rendered. The administrative and establishment expenses in carrying out this contract were of the order of Rs. 53,20,048. Operational expenditure by way of wages for the crew and mobilisation expenses, etc., amounted to Rs. 54,17,764. Thus, both the administrative expenditure and the operational expenditure aggregated to Rs. 1,07,38,082. After deducting the said expenditure, this contract resulted in an income of Rs. 2,41,35,461 for the assessment year 1980-81. The assessee claimed as deduction the whole of the gross receipts in foreign exchange amounting to Rs. 3,48,73,543. The IAC (Assessment) took the net income of Rs. 2,43,35,046 for purposes of deduction under section 80-O. There is no dispute before us regarding the eligibility of the assessee for deduction under section 80-O. The dispute is only about the quantum of deduction. The assessee relied on the decision of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. The Commissioner (Appeals) held that the operative part of section 80-O does not refer to either th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of the whole of the income so received in, or brought into, India in computing the total income of the assessee : " The assessee claimed the gross income received in the foreign country as being eligible for deduction ; the IAC (Assessment) allowed only the net income arising to the assessee. The Commissioner (Appeals) allowed the amount that was brought into India. The opening words of section 80-O, viz., 'Where the gross total income of an assessee . . . includes any income by way of royalty, commission, . . . describe the condition which must be fulfilled in order to attract the applicability of the provisions contained in section 80-O. The condition is that the gross total income of the assessee must include income by way of the specified categories. Gross total income is defined in section 80B Column IV of the Act to mean 'total income, computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or section 280-O.' Therefore, income by way of royalty, commission, fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r brought into India. The second point of dispute is about the taxability of the amount of bills raised during the previous year for work done by the assessee, the details of which are as follows : . . Rs. 1. Cochin Shipyard 56,16,752.67 2. Madras Port Trust 14,25,210.00 3. Calcutta Port Trust 65,790.95 4. Tuticorin Port Trust 1,00,000.00 5. Mangalore Port Trust 59,21,248.70 . . 1,31,29,002.22 7. The assessee adopted the mercantile system of accounting. In the earlier years, it had offered as income the bills raised by it on its customers. Subsequently, when such bills were not accepted by the customers, the assessee used to make a claim of bad debts for the unrealised portion. In this year, it is the assessee's contention that there were certain disputes between the assessee and the customers in respect of idle time, quantity of work done, escalation in prices, etc., and, therefore, the assessee did not include these amounts as part of its income as it considered the realisation of these amounts to be extremely doubtful. The IA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dredged was about 9.1 lakh cu.m. As the contract rates were applicable only for 6 lakh cu.m. + or -- 25 per cent, the assessee claimed payment on time basis for the excess work done. There was also dispute pertaining to the rate at which the work in excess of the variation was to be computed. The work was done in two phases : phase 1 and phase 2. The income was reported in two assessment years, 1979-80 and 1980-81. The arbitrator gave his award in March 1981. 10.1(a) The claim of Cochin Shipyard for liquidated damages was rejected by the arbitrator. The board of directors at their meeting held on 23-6-1981, accepted the arbitration award. The commissioner (Appeals) held that until the arbitration award was made and accepted, income did not accrue to the assessee in respect of the disputed amount for which claims were made unilaterally by the assessee. 10.2 Similarly, in the case of work done for Madras Port Trust, the estimated quantity of dredging was 5 lakh cu.m. with + or -- 25 per cent variation. There was delay on the part of the Madras Port Trust in arranging the reclamation of sites free of physical obstructions. On account of this delay, the assessee claimed a total am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Commissioner (Appeals) on the issues covered in paragraphs 10.1 to 10.4 above. The reason is that unilateral claims do not give rise to accrual or receipt of income. In all cases of contracts, if there is dispute over the amount of claim, unless the dispute is settled by way of arbitration or negotiation or settlement, it cannot be said that income really accrued to the assessee. In CIT v. A. Gajapathy Naidu [1964] 53 ITR 114, the Supreme Court explained the meaning of the words 'accrue' and 'arise' as follows : ". . . both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate." [quotation from the decision in Rogers Pyatt Shellac Co. v. Secretary of State for India 1 ITC 363 (Cal.).] "Under this definition accepted by this court, an income accrues or arises when the assessee acquires a right to receive the same. . . When does the right to receive an amount under a contract accrue or arise to the assessee, i.e., come into existence ? That depends upon the terms of a particular co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and which as a Government company it is not permitted to do. Therefore, taking into account the practical difficulties and the uncertain nature of the claims, it felt that it would be enough to set up proforma invoices for such disputed claims against its customers and, therefore, when the dispute is resolved and the amount is agreed upon, the assessee wanted to offer the same as income in respect of disputed claims. We are of the considered view that this type of accounting is only an accounting procedure and does not partake of the nature of method of accounting which is either cash basis or mercantile basis. The assessee is obviously following the mercantile system of accounting, but in respect of the disputed claims, a different accounting procedure was set up by raising only proforma invoices. This is in accord with the accrual concept in respect of disputed claims. Unless the claim is settled, no income accrues and when income accrues at that point, the same will be taken care of. Therefore, according to us, there is no change in the method of accounting adopted by the assessee which continues to remain mercantile system of accounting. Only accounting procedure for disputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner (Appeals) and decide the same on merits in accordance with law. Adequate opportunity should be given to the assessee to substantiate its claim. 15. Ground No. 5 of the appeal is as follows : 1. Tuticorin Port Trust 2. Calcutta Port Trust 3. Cochin Shipyard 4. Madras Port Trust 5. Mangalore Port trust for rendering certain services, as are evidenced by the correspondence between the assessee and the customers and services were in fact rendered in pursuance of those agreements and he should have, therefore, held that the income represented by the sum of Rs. 1,31,29,002 actually accrued in the year of account notwithstanding the disputes referred to by the assessee." On a perusal of the order of the IAC (Assessment), it would be clear that he was only questioning the assessee's claim that no income accrued during the previous year in respect of the disputed bills. In no part of his order has he referred to the contracts or the correspondence between the assessee and the customers on which the specific ground as above is taken by the department before us. However, the Commissioner (Appeals) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Commissioner (Appeals) on this point. The cost incurred for the supply of national flags could never be viewed as entertainment expenditure. Even the preparation of artificial greenery and erection of arches are only in connection with the inaugural function. 'Entertain' would mean to amuse, occupy agreeably or to receive hospitably. In matters of entertainment, there is an element of personal gain on the part of the giver and the given. Normally, it is associated with the provision of food, beverages, performances of art and show--dance, drama and music--and provision of conveyance and lodging. The expenditure was not on this count. Therefore, the expenditure of the kind incurred by the assessee is not covered by section 37(2A) read with Explanation (ii). For these reasons, we uphold the order of the Commissioner (Appeals) on this issue. 18. Another related dispute is with regard to a sum of Rs. 4,387 being expenditure in connection with the Board meeting. The Commissioner (Appeals) took the view that the amount was spent in the course of conducting an official meeting of the board of directors and this cannot be viewed as an entertainment expenditure. 19. Having reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n all these cases was disputed by the customers and was referred to arbitration or was resolved by settlement or otherwise by mutual agreement in the case of Tuticorin Port Trust, Madras Port Trust and Visakhapatnam Port Trust. In the case of A.C.C., it was found that the assessee's claim for idle time due to delay in commencing dredging operations was not in terms of the agreement and ultimately the claim was withdrawn. For these reasons, the Commissioner (Appeals), following his earlier order in the case of the same assessee, deleted the additions made by the IAC (Assessment). We have already held in paragraph 11 of this order that unilateral claims do not give rise to accrual or receipt of income and that there was no change in the method of accounting by the assessee but only the accounting procedure was streamlined in response to the call of business expediency and sound business practices in relation to the disputed claims. These reasonings will apply to the facts in relation to this assessment year also. Therefore, we uphold the order of the Commissioner (Appeals) on this point. 22. In ground No. 4, the revenue contends as follows : 1. Tuticorin Port Trust ..... X X X X Extracts X X X X X X X X Extracts X X X X
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