AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (5) TMI 1353
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....ccounts and information. During the course of assessment proceedings, from the notes on account appended to the financial statements of the assessee, the A.O. noticed that the assessee stated during the year under consideration, an amount of Rs. 82,35,112/- was transferred to contingent sales account from the total sales, reducing the debtors to that effect in the balance sheet. The A.O. further observed that the assessee has raised invoices towards sale of power including the alleged contingent sale towards supply of power, however, at the end of the financial year deducted the amount pertains to contingent sale from the total sales. Since, assessee is following mercantile system of accounting, it needs to recognize the revenue on accrual basis whereas, the assessee has postponed the revenue though the revenue accrues for the relevant financial year. Hence, issued a show cause notice and asked to explain why the amount of Rs. 82,35,112/- should not be treated as sales and brought to tax. 3. In response to the show cause notice, the assessee has filed written submissions vide letter dated 19.12.2011 and stated that it has established a 6 MW bio mass power plant in March, 2001. The....
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....order or till APERC finalises the tariff. The assessee further submitted that since the matter is pending for determination of selling price, the assessee has raised invoice to M/s. APTRANSCO with a base price fixed as per the power purchase agreement with 5% escalation to justify its claim for payment, if APERC/Tribunal/High Court/Supreme Court gives a favourable order, then the APTRANSCO cannot claims that there is no demand from assessee. However, the company has recognized the revenue in the books of accounts as per the orders of the State Government of Andhra Pradesh as per which the State Government has directed the APTRANSCO to pay a price of Rs. 3.79 per unit. Since, the company has already raised a sale bill with a price of Rs. 4.23 and Rs. 4.44 per unit, the excess billed amount has been kept under contingent sales. The assessee further submitted that the assessee company a Public Limited Company required to follow the accounting standard notified by the Government or issued by the Institute of Chartered Accountants of India (ICAI) as per the provisions of section 211 (3c) of the Companies Act, 1956. Accordingly, the assessee is following Mercantile system of accounting a....
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....revenue in the books of accounts as per the price fixed by the State Government. The State Government has fixed the selling price of power by an interim order pending disposal of the appeal by the Appellate Tribunal for Electricity. It is further submitted that the assessee is a company required to follow the provisions of section 211(3c) of the Companies Act, 1956 and also accounting standards notified by the Government/issued by the Institute of Chartered Accountants of India. As per the Accounting Standards-9 issued by the ICAI, recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the services, it would not be unreasonable to expect ultimate collection. When the uncertainty relating collectability arises subsequent to the time of sale or the rendering of the services, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. Since the collection of escalated sale price from the APTRANSCO was uncertain, it is recognized the revenue as per the order of the State Government, however, made a separate disclosure in the books of accounts by way o....
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....lated price and the matter has been admitted by the Appellate Tribunal for Electricity. The assessee has every right to get the amount billed to the APTRANSCO, therefore, the CIT was not correct in holding that the assessee does have any right to recognize the income in the absence of clear orders from the ATE. The D.R. further submitted that the CIT(A) failed to appreciate the finding made by the A.O. that the assessee company has not followed consistent/uniform method of accounting to recognize its revenue. The assessee has recognized the revenue in respect of power supplied to APTRANSCO exceeding 2.4 MW with billed amount, however, in respect of power supplied up to 2.4 MW, the assessee has recognized the revenue as per the sale price fixed by the State Government. The D.R. further submitted that the method of accounting followed by the assessee is contrary to the accounting standards-9, which is dealing with revenue recognition and the accounting standard-9 specified that when the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the services, it is more appropriate to make a separate provision to reflect the uncertainty, rather th....
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....e of recognition of revenue. As per the mercantile system of accounting, it has to recognize revenue on accrual basis. However, when the recognition of revenue is uncertain, the same may be deferred until the said revenue actually accrues. The assessee by following the consistent method of accounting and also following the accounting standard 9 issued by the ICAI, recognized the revenue as per the interim order issued by the A.P. State Government. The disputed amount as per the claim of the assessee and the order of the State Government has been adjusted from the revenue originally recorded by transferring the disputed amount to the contingent sales. Therefore, the order passed by the CIT(A) should be upheld. 10. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The factual matrix of the case which leads to the impugned addition are that the assessee entered into a Power Purchase Agreement (PPA) with APTRANSCO for supply of power. As per the said agreement, the assessee has agreed to sell the power at a unit price of Rs. 2.25 per unit with a 5% escalation per annum up to 31.3.2004, with a base year of 19....
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....ating it as contingent sales in the notes appended to the financial statements. 11. The A.O. made addition to contingent sales for the reason that the assessee has continued to raise bill for higher price, but not recognized the revenue in the books of accounts. The A.O. was of the opinion that the assessee has absolute right to receive the said amount in view of the interim order passed by the State Government and also the fact that the matter is pending before the ATE. Therefore, the assessee required to recognize the said disputed sale amount for the relevant financial period. It is the contention of the assessee that since the matter is pending for adjudication before the Appellate authorities, there is no guarantee that the said amount is receivable by the assessee, unless the ATE passes its final order. Under these circumstances, it has rightly recognized the revenue which is accrued to the assessee as per the sale price fixed by the State Government and the remaining disputed amount was not recognized as revenue which was considered as contingent sale and disclosed in the financial statements. 12. The question before us is whether the said disputed sales revenue is accrued....
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....The disputed amount claimed by the assessee is a contingent in nature. The collectability of such amount is uncertain as long as the issue is pending before the ATE and also determination of sale price to be fixed by the APERC. Therefore it has rightly recognized the revenue and which has been consistently followed for last several years. The A.O. merely based on the copies of sale bills has come to the conclusion that the assessee has absolute right to receive the said disputed amount without understanding the facts of disputes prevailing at the time of recognition of revenue. 13. The facts with regard to the method of accounting followed by the assessee and the recognition of revenue are not in dispute. The assessee has consistently following mercantile system of accounting to recognize the revenue. The assessee is continuously followed this method of revenue recognition by following the accounting standard 9 issued by the ICAI. The assessee being a company bound to follow the provisions of section 211(3c) of the Companies Act, 1956 which requires the assessee to follow accounting standards notified by the Government or issued by the ICAI to prepare its financial statements. Bei....
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....ncome of the assessee. 14. Coming to the case laws relied upon by the assessee. The assessee relied upon judgement of Hon'ble Supreme Court of India, in the case of Godhara Electricity Company Ltd. Vs. CIT (1997) 225 ITR 746, wherein the Hon'ble Supreme Court held that the income accrued to the assessee has to be considered by taking the probability of realization of income and in case if the amount to be realized is under dispute, there was no real income accrues to the assessee. The relevant portion is extracted below:- "Under the Act income charged to tax is the income that is received or is deemed to be received in India in the previous year relevant to the year for which assessment is made or on the income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis, i.e., accrual of the right to receive payment and the accrual of th....
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.... Electricity Board. It is no doubt true that the letter addressed by the Under Secretary to the Government of Gujarat to the assessee-company had no legally binding effect but one has to look at things from practical point of view. The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the ITO while passing the assessment orders in respect of the assessment years under consideration. The AAC was right in deleting the said addition made by the ITO and-the Tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the ITO did not represent the income which had really accrued to the assessee-company during the relevant previou....
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...., unless it succeeds in such litigation. Even if an assessee succeeds ultimately in the litigation, a debt enforceable against the other party does not get created, unless a claim in that behalf was raised before the same being barred by limitation. It is for this reason that an assessee, to keep the issue alive, has to raise the claim against the other party within the period of limitation, which in its view is due to it according to the terms of the contract, so as to get an enforceable right for the recovery of the amount as and when it succeeds in the litigation. In this view of the matter, though invoices raised constitute fundamental record for maintenance of accounts in the normal course, as observed by the Assessing Officer, that logic does not hold good when the subject matter was under dispute and was under litigation before the judicial fora, including the jurisdictional High Court and Hon'ble Supreme Court during the relevant points of time. Assessee's method of accounting only the amount which was not subject matter of litigation and which in fact was received by it from the APTRANSCO in terms of the interim order of the A.P. High Court, was in conformity with ....