9911796707
TMI Blog2000 (7) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... evant assessment year 1977-78, the plant was erected and the assessee was paid a sum of Rs. 34.49 lakhs against bills issued by the assessee-company to Godrej. The assessee-company had shown in its books of account that a sum of Rs. 40 lakhs was to be received from Godrej, but during the calendar year 1976, which was the previous year for the relevant assessment year, it had debited a sum of Rs. 3 lakhs from its sales account by crediting the same to the warranty account as some dispute had arisen with regard to the quality of the vessel supplied by the assessee to Godrej and the assessee apprehended that due to the clause of warranty incorporated in the contract, the assessee might not receive the said amount. In the course of the assessment, the Assessing Officer disallowed the debited sum of Rs. 3 lakhs on the ground that the claim was still in dispute and till the claim was settled, the same could not have been allowed as a deduction. Thus, the claim made by the assessee with regard to Rs. 3 lakhs was not allowed. Being aggrieved by the said decision of the Assessing Officer, the assessee had filed an appeal before the Commissioner of Income-tax (Appeals). It was contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . When the right to receive the income becomes vested in the assessee, income is said to have accrued or arisen. Thus, income becomes taxable on the footing of accrual only when the right to receive the income becomes vested in the assessee. A similar principle was propounded by the Supreme Court in E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27. It has been held in the said case that if the assessee acquires a right to receive the income, the income is said to have accrued to him, though, it may be received later on. The basic conception is that he must have acquired a right to receive the income. In other words, there must be a debt owed to him by somebody. Unless and until a debt is created in favour of the assessee by somebody, it cannot be said that the assessee has acquired a right to receive the income or the income has accrued to him. Looking to the legal position referred to hereinabove, one has to see whether a right had been created in favour of the assessee to receive a sum of Rs. 3 lakhs, which was claimed by way of deduction by the assessee in the relevant previous year. It is not in dispute that the assessee had shown in his books of account that he had to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied by the assessee to Godrej. The relevant terms forming part of the contract, which was executed between the assessee and Godrej in February, 1975, and which is forming part of the paper book, is reproduced hereinbelow: 1. Prices: (a) Plant and machinery: Charges for the supply of plant and machinery as per annexure I enclosed herewith--Rs. 38,00,000. The abovementioned price includes cost of packing, forwarding, freight including insurance and is for free delivery at our factory at Vikhroli. (b) Erection and start-up: Charges for the erection and starting-up of the plant and machinery to be supplied by you as above--Rs. 2,00,000." "8. Workmanship guarantee: Since the entire plant will be supplied, erected and commissioned by you, the workmanship guarantee period will be 12 months from the date of commissioning, or 24 months after the supply of plant item of equipment, whichever is later. It shall be your entire responsibility to replace, repair such defective equipment or part(s) thereof to our complete satisfaction, free of cost to us." "14. Payment terms: For supply of plant and machinery--10 per cent. along with order. 90 per cent. against progressive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no right to receive the said amount, till the plant was handed over to Godrej in perfect condition and up to the satisfaction of Godrej. As stated hereinabove, it is not in dispute that the plant was not up to the mark and was not to the satisfaction of Godrej and, therefore, the assessee had no immediate right to receive Rs. 4 lakhs, which could have been retained, and which was in fact retained, by Godrej. During the relevant previous year only a sum of Rs. 34.49 lakhs was paid to the assessee by Godrej and the remaining amount was not paid. Of course, the amount which could have been retained was only Rs. 4 lakhs, but the other amount was not paid as some spare parts were not supplied by the assessee to Godrej. Be that as it may, we are not concerned with the remaining amount, but we are concerned only with a sum of Rs. 3 lakhs in respect of which deduction was claimed by the assessee from the entire amount of consideration which was to be received by the assessee from Godrej and which was reflected in the books of account as receivable from Godrej at an initial point of time. Looking to the terms of payment referred to in clause 14 hereinabove, it is clear that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be said that the assessee has acquired a right to receive the income or that the income has accrued to him. A debt must have come into existence and the assessee must have acquired a right to receive the payment. In the instant case, the assessee did not get any right to receive a sum of Rs. 4 lakhs which could have been retained by Godrej in pursuance of clause No. 14 of the contract. One has to look at the contract and not at the entries made in the books of account. If, upon construction of the contract, one comes to a conclusion that the assessee could not have received Rs. 4 lakhs from Godrej, by no stretch of imagination it can be said that the said amount had accrued by way of income to the assessee in the previous year in question. As the plant was not up to the satisfaction of Godrej, Godrej had a right to retain Rs. 4 lakhs. It is not in dispute that during the previous year in question the dispute as to quality of the plant had arisen and the assessee had also felt that the quality of the plant was not upto the mark and, therefore, believing that Godrej might ultimately retain Rs. 3 lakhs or under the warranty clause the assessee might have to pay Rs. 3 lakhs, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es only reflect the transactions which had taken place and by virtue of entries a person neither earns nor spends. For the purpose of knowing whether an income has accrued, one has to know whether the assessee had a vested right to receive the amount from Godrej. In our opinion, by looking at the terms of the contract, we are not considering something which is not the subject-matter of the reference. Looking to the law discussed hereinabove and the facts and circumstances of the case, it is crystal clear that the Rs. 3 lakhs, which was deducted from the sales account by the assessee was rightly claimed by the assessee by way of deduction as the said amount had never become income of the assessee. As the income had not accrued in respect of the said amount, it was not proper on the part of the Revenue to treat the same as income accrued to the assessee. Even if for the sake of argument, it is assumed that the income had accrued to the assessee, the assessee's liability with regard to repairs of the plant as per the terms of the contract had also arisen in the same previous year. If the liability had also arisen in the same previous year in which the income had accrued, the said am ..... X X X X Extracts X X X X X X X X Extracts X X X X
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