1987 (4) TMI 122 - AT - Income Tax

Tribunal decision: Income exclusion & inclusion under mercantile accounting system

The Tribunal partially allowed the appeal, determining that the sum of Rs. 1,48,954.59 could not entirely be considered the assessee's income. It excluded ... Previous Year Issues Involved:1. Accrual of Income2. Mercantile System of Accounting3. Price Variation Clause4. Extension of Delivery Schedule5. Bank Guarantees and EncashmentIssue-wise Detailed Analysis:1. Accrual of Income:The primary issue is whether the sum of Rs. 1,48,954.59, realized by the assessee, constitutes its income. The Income-tax Officer argued that since the bills were honored and payments received, the income accrued to the assessee under the mercantile system of accounting. The Commissioner of Income-tax (Appeals) upheld this view, noting that the assessee had realized the entire sale proceeds and there was no evidence of refusal for an extension of the delivery schedule by UPSEB. The Tribunal, however, differentiated between various invoices, recognizing that the income accrual depends on specific circumstances, such as the invocation of the price reduction clause and the lodgment of claims with the bank.2. Mercantile System of Accounting:The assessee follows the mercantile system of accounting, where income is recognized when it accrues, regardless of actual receipt. The Tribunal noted that the mere receipt of payment does not necessarily mean that income has accrued. It emphasized that the critical factor is whether the income genuinely belongs to the assessee, considering the terms of the contract and the correspondence with the customer.3. Price Variation Clause:Clause 4.5 of the contract allows for price updates based on raw material costs. The assessee billed at higher rates, considering the price of aluminum at the time of delivery. The Tribunal acknowledged that the assessee was entitled to invoice at updated rates unless the extension of the delivery schedule was explicitly refused. The Tribunal found that the refusal of the extension was communicated only after the relevant assessment year, allowing the assessee to bill at revised rates during the disputed period.4. Extension of Delivery Schedule:The contract required deliveries by June 1979, but the supplies were made much later. The Tribunal observed that the matter of extending the delivery schedule was under correspondence and not conclusively refused until December 1981. This delay in communication allowed the assessee to bill at higher rates. The Tribunal categorized the invoices into those where the price reduction clause was invoked and claims lodged within the relevant year, those where claims were lodged later, and those with no material evidence of claims.5. Bank Guarantees and Encashment:The Tribunal considered the encashment of bank guarantees as a significant factor. It recognized that claims lodged with the bank before the end of the previous year could be excluded from the assessee's income. For instance, the claim for Rs. 33,879.99 lodged before the end of the previous year was excluded from the income, while the claim for Rs. 58,937.92, which materialized in 1986, was not excluded. The Tribunal emphasized that the actual encashment of bank guarantees and the timing of claims are crucial in determining income accrual.Conclusion:The Tribunal concluded that the sum of Rs. 1,48,954.59 could not be entirely treated as the assessee's income. It allowed the exclusion of Rs. 33,879.99 from the income for the relevant year, recognizing the lodgment of claims and the invocation of the price reduction clause. However, it upheld the inclusion of Rs. 58,937.92, as the claim materialized later. The appeal was partly allowed, reflecting a nuanced understanding of income accrual under the mercantile system of accounting, considering contractual terms and specific circumstances.