Tribunal clarifies income accrual rules: Bills not fully income, acceptance key.

Commissioner Of Income-Tax Versus Chanchani Brothers (Contractors) Pvt. Limited

Commissioner Of Income-Tax Versus Chanchani Brothers (Contractors) Pvt. Limited - [1986] 161 ITR 418, 53 CTR 84 Issues Involved:
1. Whether the Tribunal erred in law in holding that only a part and not the entirety of the outstanding bills was the income fallen due for the previous year.
2. Whether the Tribunal was correct in law in allowing the expenditure relating to extra work for which claims were made by the assessee, but receipts for which were not accounted for either as work-in-progress or bills receivable.
3. Whether the Tribunal was justified in holding that the Appellate Assistant Commissioner was justified in allowing the relief, as the bills to that extent had not yet been accepted and hence it could not be said that the right of the assessee had accrued in respect of that amount.

Summary:

Issue 1: Income Fallen Due for Previous Year
The Tribunal held that only a part and not the entirety of the outstanding bills was the income fallen due for the previous year. The Income-tax Officer included Rs. 1,64,428 in the receipts of the assessee, which was withheld by the Irrigation Department pending verification. The Appellate Assistant Commissioner allowed a relief of Rs. 84,243 out of Rs. 1,64,428, as only Rs. 80,585 was admitted by the Irrigation Department in subsequent years. The Tribunal upheld this relief, stating that the assessee's system of accounting only showed bills accepted in principle by the Government. The Tribunal concluded that merely because there was a claim by the assessee, it could not result in the conclusion that the amount was due to the assessee.

Issue 2: Expenditure Relating to Extra Work
The Tribunal considered the addition of Rs. 23,06,079 relating to extra work done by the assessee beyond the provisions of the contract agreement. The Income-tax Officer estimated the claim for the assessment year 1970-71 at Rs. 92,24,315 and treated 25% of this amount as the income of the assessee. The Appellate Assistant Commissioner deleted this addition, following the order for the earlier years. The Tribunal upheld this deletion, stating that the claims were disputed and not admitted by the Government. The Tribunal emphasized that the right to receive the amount did not accrue to the assessee until the claims were accepted by the Government.

Issue 3: Relief by Appellate Assistant Commissioner
The Tribunal was justified in holding that the Appellate Assistant Commissioner was justified in allowing the relief, as the bills to that extent had not yet been accepted. The Tribunal reiterated that the claims were disputed and the income would accrue only when the bills were finally admitted and accepted by the Government. The Tribunal also held that the expenses incurred by the assessee were allowable in the year they were incurred under the mercantile system of accounting.

Conclusion
The Tribunal did not err in law in holding that only a part and not the entirety of the outstanding bills was income falling due for the previous year. The Tribunal was correct in law in allowing the expenditure relating to extra work for which claims were made by the assessee. The Tribunal was justified in holding that the Appellate Assistant Commissioner was justified in allowing the relief, as the bills had not yet been accepted. All three questions were answered in favor of the assessee and against the Revenue.