1986 (6) TMI 14 - HC - Income Tax

Revenue wins in Bhartiya Steel case as High Court upholds accrual of escalation income under mercantile accounting system

The High Court held in favor of the Revenue in the case involving M/s. Bhartiya Steel Industries. The court ruled that the escalation amount accrued in ... Accrual, Income Issues:Assessment of income tax based on supplementary bills for escalation in price, Application of mercantile accounting system, Separation of claims by the assessee and the Railway Board, Accrual of income, Interpretation of legal precedents.Analysis:The case involved M/s. Bhartiya Steel Industries, an assessee supplying railway sleepers under a contract allowing price escalation based on pig iron cost increase. Dispute arose when Railway Board reduced the claim due to late supply, leading to arbitration award in favor of the assessee. The assessee received payments against the supplementary bills in subsequent years. The Income-tax Officer assessed the entire escalation amount in the year of submission, but the Appellate Assistant Commissioner deleted the addition.The Revenue appealed to the Tribunal, arguing the amount accrued when the bills were submitted under the mercantile system. The assessee contended the claims were interconnected, and income was disclosed upon actual receipt. The Tribunal upheld the assessee's stance, considering both claims inseparable under the same agreement.The Tribunal referred questions to the High Court regarding tax liability on the escalation amount and the interconnected nature of the claims. The Revenue argued for accrual based on legal precedents like E. M. Muthappa Chettiar and Vishnu Agencies cases. The High Court noted the undisputed nature of the bills and the reduction of the counter-claim, concluding the escalation bills accrued in the relevant accounting year under the mercantile system.The High Court answered both questions against the assessee, emphasizing the accrual of income based on the mercantile accounting system and the interconnected nature of the claims. Judge S. Monjula Bose concurred with the judgment.In conclusion, the High Court ruled in favor of the Revenue, holding that the escalation amount accrued in the relevant accounting year under the mercantile system. The court emphasized the interconnectedness of the claims and the application of legal precedents supporting accrual of income.