TaxTMI 
TaxTMI 
2011 (4) TMI 384
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....ding its actual quantification in a subsequent year? (iii) Whether the Tribunal misdirected itself in law in holding that the additional liability due to the sub-contractor was in suspense or was agreed to/accepted by the appellant or became a liability only in July, 1997, when it was actually quantified and its purported findings in this behalf are based on any material and/or have been arrived at by ignoring the relevant materials and/or by taking into consideration irrelevant and/or extraneous materials and/or are otherwise arbitrary, unreasonable and perverse? (iv) Whether under the provisions of section 194C of the Income-tax Act, 1961 tax has to be deducted at source from all payments made to contractors even if they be on capital account? (v) Whether under the mercantile system of accounting the expenditure incurred for earning the income should be considered for deduction in the year of accrual of the income so as to arrive at the true profits and postponement of deduction of such expenditure would result in distortion of profits? (vi) Whether the Tribunal misdirected itself in law in holding that the appellant was not entitled to d....
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....abour payment; (b) Supply of consumables like gas and electrodes; and (c) Repairing of machines. 4.6 The value of the said facilities was to be adjusted against the revised rates. 4.7 It was agreed that the said facilities would be provided on recoverable basis. 4.8 Accordingly, the appellant from time to time made payments towards the aforesaid facilities on actual basis of the work completed. 4.9 Out of such payments, the appellant deducted tax at source in accordance with the provisions of section 194C of the Income-tax Act, 1961 (hereinafter to be referred to as 'the Act'). 4.10 PECO had provided security of about Rs. 15 lakhs in respect of the initial advance paid by the appellant. No further security was stipulated in respect of the payments for the aforesaid facilities. 4.11 The appellant, following the mercantile system of accounting, raised bill on Rourkela Steel Plant for the work done during each year. The value of which was duly credited to the profit and loss account of that year. Since the appellant in principle had agreed to enhance PECO's rates and had incurred the liability to pay PECO additional amount over and abov....
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....CO any amount over and above the rates stipulated in the original purchase orders. 4.16 Aggrieved by the refusal of claim of the deduction of the additional liability in the assessment years 1991-92 to 1995-96, the appellant preferred appeals before the Commissioner of Income-tax (Appeals) against refusal of deduction for each of the aforesaid assessment years. The Commissioner of Income-tax dismissed the appeals. The appellant then preferred appeal before the Tribunal. Learned Tribunal dismissed all the appeals of the appellant by the impugned common order dated 26-7-2001. 5. In the impugned order, learned Tribunal has held that the additional payment made by the appellant was only an advance payment and the same has become liability only on final settlement vide letter dated 28-7-1997. The appellant is required to deduct tax at source on payment to sub-contractors either on capital or revenue account and that the accounting entries in the books of account also give an impression that the additional payments made to PECO were in fact advance payment. 6. Mr. Biren Poddar, learned Senior Counsel, assailing the impugned order of the learned Tribunal, submitted that during su....
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....n 194C of the Act, the assessee is liable to deduct tax at source for carrying out any work in pursuance of a contract. If the payments were made over and above the contract or were in the nature of loan, then there is no obligation on the assessee to deduct tax at source. But in the instant case, the appellant had deducted tax at source, considering the additional payments made in pursuance of the contract with PECO. The observation of the learned Tribunal that tax is to be deducted even if payment is made to sub-contractor on capital account is misconceived and untenable. 9. Stressing his point, learned counsel submitted that in the impugned order dated 26-7-2001 learned Tribunal has not considered that income from Rourkela Steel Plant was duly included in the Profit & Loss Account of the respective years according to the work done and in order to arrive at true income, expenditure incurred for earning such income had to be deducted even on an estimated basis. The expression 'profits and gains' has to be understood in its commercial sense and in the light of the mercantile system accounting. In order to determine the net income of an accounting year, the revenue and other inco....
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.... ITR 261 (AP) XII. Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307 (SC) XIII. CIT v. Glenmark Pharmaceuticals Ltd. [2010] 324 ITR 199/191 Taxman 455 (Bom.) XIV. Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) XV. Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102/126 Taxman 544 (Bom.) XVI. CIT v. Industrial Finance Corpn. of India Ltd. [2009] 185 Taxman 296 (Delhi) XVII. Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) XVIII. Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) XIX. CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) XX. CIT v. India Discount Co. Ltd. [1970] 75 ITR 191 (SC) XXI. Nagri Mills Co. Ltd. v. CIT [1981] 131 ITR 257/7 Taxman 286 (Guj.) 12. The respondent-revenue, on the other hand, supported the impugned order. Mr. Deepak Roshan, learned counsel, appearing on behalf of the respondent, submitted that the plea of the assessee company that the rates of the PECO were enhanced is not supported by any document. The appellant used to pay substantial amount as advance ....
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.... Tribunal has discussed every aspect and has rightly rejected the claim of the assessee for the aforementioned assessment years. There is, thus, no merit in these appeals and the grounds taken by the appellant are liable to be rejected. 14. Having heard the rival contentions of learned counsel for the parties, I find that the main issue for decision is as to what is the nature of the payment made by the appellant to the PECO. Whether the payment made by the assessee partakes the character of revenue expenditure or the same is by way of advance? 15. The real character of the revenue differs according to the mode of the accounting system. There are two recognized mode of accounting system; (1) Cash Basis of Accounting; and (2) Accrual Basis or Mercantile System of Accounting. Under cash basis accounting, revenues are recognized and earned only when cash is received irrespective of when and how the services were performed or goods delivered. To put it in different terms, in the cash basis of accounting what is to be considered are all those incomes which have been received in cash or other assets and expenses/losses that have been paid out in cash or other assets during the acco....
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....ability may be quantified and discharged on a future date. 18. In Bharat Earth Movers' case (supra), the Apex Court has held as follows :- "If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." 19. The Supreme Court has given similar verdict in Metal Box Co. of India Ltd.'s case (supra) and held thus :- "Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if the profits cannot be properly estimated without taking them into account." 20. The same view has been taken in Rotork Controls I....
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....le system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). This matching is required to be done on accrual basis. This matching concept, revenue and income earned during an accounting period, irrespective of actual cash inflow, is required to be compared with expenses incurred during the same period, irrespective of actual outflow of cash. The same view has been taken in Rotork Controls India (P.) Ltd.'s case (supra). 29. Further an entry made by an assessee in his books of account is not determinative of whether the assessee has earned any profit or suffered any loss, it is necessary to consider the nature of the transaction and as to whether, in fact, the same has resulted in profit or loss to the assessee. Reference may be made to the decision of the Apex Court in Sutlej Cotton Mills Ltd.'s case (supra), Shoorji Vallabhdas & Co.'s case (supra) and India Discount Co. Ltd.'s case (supra) as also to the decision in Nagri Mills Co. Ltd.'s case (supra). 30. Though learned counsel for the respondent-revenue tried to support the findings of the learned Tribunal, his....