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TMI Blog2002 (6) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... statements for the year ended 31-3-1998." "(c) Sales - The Company has not accounted for an amount of Rs. 64,58,606.53 representing 10% Ex-works price of supplies of Snowbird ACSR Conductor made to M/s. Power Grid Corporation of India Limited during the Financial year 1997-98 against contract No. C-20507-L. 170-1/ PEC/AL No. 347 dt. 26-3-95, Amend. I dt. 20-2-96, Amend. II dt. 19-4-1996, Amend. III dt. 21-6-1996. As per clause No. 5.1.3 of the subject contract with the said Corporation this amount becomes payable within 30 days of receipt of goods at site and on submission of claim supported by the acceptance certificate issued by the Corporation's representative. Unless these conditions are fulfilled the Company will not be entitled for the receipt of this 10% final payment." In response to Assessing Officer's query to provide justification as well as to furnish evidence in support of the contention made in the above note, the assessee filed its reply on 8-12-2001 reiterating the submissions already available in the above note. The assessee also enclosed copies of relevant pages of its contract with PGCIL justifying its action not taking the amount of Rs. 64,58,605 into sales. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, will have to be so treated as Sales. Consequently, the amount of Rs. 64,58,606 has to be included in Sales and brought to tax accordingly." 3.1 Against the above addition the assessee went on appeal before the CIT(A) and agreed that the general practice of the appellant-company is to treat the particular item as 'sale' only after receiving the acknowledgement from the purchaser as 'accepted'. Until then it is not treated as sales. The learned CIT(A) did not accept the contention of the assessee and sustained the addition under the following observation made in para 2.2 of his order: "The arguments of the Authorised Representative have been examined. It is seen that the appellant-company has not been disclosing the sales that took place in the month of March as its turnover, because the goods sent from the appellant-company to the purchaser are generally tested and later on only, they are accepted. This process takes almost 30 days. As the Assessing Officer hag pointed out, most of the sales which took place in the month of March, will not be forming part and parcel of the appellant's turnover during the previous year. Since the goods have left the appellant's premises, they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pulated in the contract are satisfied and without having regard to the grounds raised before him and the arguments advanced with regard to "accrual" or "arisal" of income, the time of the assessee getting the right to the income etc., and relying on an issue regarding the so-called 'non-accounting for the March sales' which was not canvassed either before the Assessing Officer or before him, the CIT(A) upheld the addition. 4.1 It was argued by the learned AR that the assessee has been accounting for the 10% ex-works price of the goods supplied retained by the contractee on cash basis as and when received. The assessee has been following the same method of accounting consistently in the earlier years also i.e., in assessment years 1991-92 and 1997-98 which has also been accepted by the respective Assessing Officers. It was pointed out that in the contracts relating to the assessment years 1992-93 to 1996-97 the issue relating to postponement of payment of 10% ex-works price was not there. It was further pointed out that for the year ending 31-3-1997 the assessee had no accounted for an amount of Rs. 1,53,18,976 representing 10% ex-works price of supplies to the PGCIL, as can be see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01-02. The Final payment in respect of the amounts due for the said assessment years was Rs. 1,89,21,859 after adjustment of amounts towards damages, samples, price variation etc. which was accounted for in assessment year 2001-02. In support of these facts the AR drew our attention to pages 17, 18 and 20 of the paper book containing reconciliation of the amounts due for the years ending 31-3-1997 and 31-3-1998, reconciliation statement signed by both parties and cheque dated 30-3-2001 issued by the contractee in favour of assessee for Rs. 1,89,21,859. 4.5 It was further pointed out that for the assessment year 1997-98 though the amount of Rs. 1,53,18,976 was available before the Assessing Officer no attempt was made to add the same even while processing the return under section 143(l)(a) in view of the appreciation of the correct legal position. Similar situation arose in assessment year 1991-92 in which the assessee had entered into contracts for supply of goods to Karnataka Electricity Board and National Thermal Power Corporation. In these contracts also there was stipulation regarding payment of 100 per cent ex-works price on receipt of material at site and issuance of taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was submitted that the assessee raised the bill only to the extent of 9096 of value of goods sold. The balance of 1096 was to be raised on receipt of the certificate of approval from the contractee. Under the circumstances the question of including the said value in the closing stock does not arise because the amounts in respect of the said sales are being accounted for on cash basis as and when received as stated earlier. In support of the proposition that the bills not accounted for by the assessee for the year under consideration need not be included in the closing stock it relied on the judgment of the Honourable A.P. High Court in its own case in assessment year 1989-90 - CIT v. India Fruits (P.) Ltd.[1999] 105 Taxman 212. It was pointed out that in assessee's own case the scrap generated in the manufacturing process for aluminium condensers was being accounted for by the assessee only as and when the scrap was sold. The Assessing Officer while completing the assessment were calculating the scrap value and were adding the same in the respective years as the value of closing stock of scrap. The assessee contested the said addition for all the years. For the assessment year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sation for the loss which was received during accounting year 1950-51 relevant to assessment year 1951-52. It was held that the said profit is to be included in assessment year 1951-52 and could not be related back to earlier year during which the assessee actually supplied the bread. It was also held that if the assessee followed mercantile system of accounting it is to be seen as to when the right to receive, accrued, The income is assessable in the year in which the right to receive accrued. 2. CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC) Page 10-D It was held that the words 'accrue' and 'arise' are used to contradistinguish the word 'receive'. Income is said to be received when it reaches the assessee; when right to receive the income becomes vested in the assessee, it is said to accrue or arise. Income becomes taxable on accrual only after the right of the assessee to the income accrues or arises, and in the case of an agreement which makes profits receivable at or on the happening of a contingency, the income would accrue only after the event of the contingency takes place. 3. Seth Pushalal Mansinghka (P.) Ltd v. CIT [1967] 66 ITR 159 (SC) Page 21-D The words 'accru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentation cables. As per contracts with customers 10% of payment was to made to the assessee on receipt and acceptance of goods subject to performance and workmanship bank guarantee for that 10%. Though this amount was received by the assessee it referred to this 10% of the price as 'retention money' as it took the view that it could not be appropriated until the period of guarantee was over. The Assessing Officer held that the assessee had furnished a bank guarantee against which the retention money was released to it and the receipts representing the retention money were only postponed to a later date. The Assessing Officer was of the view that since the goods had been supplied in the relevant previous year and the right to receive the payment also accrued to the assessee within the same period, 100% of the price of the goods had to be assessed towards the cost of the goods supplied. The Third Member upheld the claim of the assessee holding that as long as the performance guarantee remained and was enforceable, the retention money of 10% had to be excluded in computing the total income until the period of the guarantee was over. 8. Janatha Contract Co. v. CIT [1976] 105 ITR 627 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st have acquired a right to receive the payment." 7.1 If the nature of payment referred to in clause 5.1.3 of the contract is examined keeping in view the above judicial pronouncements it can be said without hesitation that the payment did not accrue to the assessee during the year under consideration and therefore, there was no justification for its inclusion. The above clause stipulates fulfilment of certain conditions before payment of the retained amount by the purchaser. Because of these conditions the assessee does not get the legal enforceable right to claim the receipt of 10% of ex-works price immediately after the despatch of goods. In case of contracts and agreements the income arises or accrues only after the happening of certain contingencies and fulfilment of conditions stipulated in them. The Assessing Officer has also not established that the conditions stipulated in the contract were fulfilled. No doubt the assessee follows mercantile system of accounting but for addition the income or receipt must accrue during the year under consideration. In assessee's case the amount withheld by the contractee was in accordance with the terms of contract. It did not accrue to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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