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1970 Supreme(Guj) 163
IN THE HIGH COURT OF GUJARAT
P.N. Bhagwati, T.U. Mehta, JJ.
Commissioner of Income-Tax, Gujarat II - Petitioner
Versus
Western India Engineering Co. - Respondent
Income-tax Reference No. 7 of 1970
Decided On : 11-09-1970
For the Petitioner:J.M. Thakore, Advocate General with M.G. Doshit, Advocate
For the Respondent:J.P. Shah, Advocate
The accrual of income under Section 5 of the Indian Income-tax Act is not merely a matter of cogency of entries in the account books but is a question of substance and the real nature of what happened.
Headnote:
INCOME TAX - Assessment - Addition of kasar (rebate or deduction) amount to taxable income - Whether justified - Mercantile system of accounting - Accrual of income - Real income earned.
Fact of the Case:
The assessee, a building contractor, followed a mercantile system of accounting and credited the entire amount of bills issued to customers to the works account. However, it estimated the amount it could reasonably expect to receive from customers at the time of settlement and transferred only that amount to the profit and loss account, retaining the balance as kasar (rebate or deduction) in the works account.
Finding of the Court:
The Tribunal held that the disputed kasar amount did not represent the real income earned by the assessee during the accounting period, as the bills submitted for non-tender items did not necessarily represent a legally enforceable claim against customers.
Issues: Whether the Tribunal was correct in holding that the addition of the disputed kasar amount to the taxable income was unjustified.
Ratio Decidendi: The court held that the mere posting of an entry in the account books of the assessee following the mercantile system of accounting is not conclusive evidence of the accrual of income. If there are other facts and circumstances showing that the income had not actually accrued, the assessing authorities can conclude that the amount has not accrued to the assessee.
Final Decision: The court answered the referred question in the affirmative, upholding the Tribunal's decision that the addition of the kasar amount to the taxable income was unjustified.
JUDGMENT :
(STATEMENT OF CASE)
This reference application is preferred by the department against the order passed by the Tribunal in I.T.A. No. 12788 of 1966-67 in which a question regarding the assessment of the income of the assessee for the assessment year 1962-63 arose.
2. The reference application is filed late by three days, but the explanation of the department is that the reference application was dispatched by registered post on August 9, 1968, but it could not reach the Tribunal's office at Bombay by August 14, 1968, because of the dislocation of the railway traffic caused by heavy floods at Broach and Surat in August, 1963. It may be mentioned that, if the application had reached the Tribunal's office on August 14, 1968, it would have been within time but since it has reached the Tribunal's office on August 17, 1968, it is late by three days. It is, however, clear that the department has dispatched the application through post quite in time and that it has reached the Tribunal's office late on account of circumstances which were beyond the control of the department. Under the circumstances, the delay in question is sufficiently explained and, therefore, the same is condoned under Section 256(1) of the Act, 1961.
3. Following are the brief facts relating to this case:
The assessee, M/s. Western India Engineering Co., Ahmedabad, is a firm registered under the Indian Income-tax Act and does the business of building contract. It has its branch at Baroda also. However, the assessee maintains separate sets of account for its Ahmedabad and Baroda business. In this case, we are concerned only with the Ahmedabad business of the assessee.
4. While the Income-tax Officer was going through the accounts of the assessee for the purpose of the previous assessment year 1961-62, he found that the assessee had made certain provisions for different works account in his Ahmedabad set of books. These provisions were claimed by the assessee to be kasars (deductions or rebates) payable to the parties concerned in respect of certain items of work. So far as the assessment year 1961-62 was concerned, this kasar amounted to Rs. 1,05,900. A similar provision for kasar was found even for the assessment year 1962-63 and its amount was Rs. 26,000. The Income-tax Officer felt that the amounts so kept back in the works account for possible kasar really represented reserves and did not amount to outgoings of the business and, therefore, they were not admissible deductions in computing the taxable income of the assessee. He, therefore, added the entire amount of kasar during the course of the assessment for the assessment years 1961-62 and 1962-63. This view of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner in appeal but when the matter came before the Tribunal, the Tribunal took the view that the additions made by the Income-tax Officer and the Appellate Assistant Commissioner were unjustified. It is against this order of the Tribunal that the present reference is sought by the department.
5. Following are the brief facts relevant to the disputes between the parties:
The assessee undertakes contract works on the basis of tenders submitted by it to customers and accepted by the latter. The specific items of work to be carried out and the rates to be charged are agreed to in advance by the assessee and the customers before the work commences on individual contracts. Often, however, in the course of execution of a contract, alterations and additions to the work are made at the request of customers to suit their requirements. The rates to be charged for the work undertaken as a result of alterations or additions to the prior contract are settled after the contract work as a whole is completed. On the completion of work on a particular contract, the assessee makes out a bill for both the tendered items of work at the agreed rates as well as for additional work undertaken at the request of the customer at the rates which the assesse
