Since, suits/ disputes between assessee-contractor and contractee were pending, contractual income could not be said to be accrued when invoice raised by assessee had been rejected by contractee in view of its bankruptcy
Facts
Assessee , a closely held company in USA , entered into contract with Indian Companies. Contract could be executed partly only because contratee companies failed to pay the bils raised. The USA Company raised bill for work done and also for demobilization in winding up site operations. The bills were not offered for Income and assesse made a disclosure in this regard in his computation. AO made addition. CIT A deleted addition of bill for demobilization only saying that this bill was never accepted by contractee.
Held by ITAT Mumbai in Bechtel International Inc [2016] 71 taxmann.com 62 (Mumbai – Trib.)OCTOBER 30, 2015 that:
Supreme Court in the case of Excel industries Ltd had laid down three tests to determine when income can be said to have accrued :
| (a) | Whether the income is real or hypothetical; | |
| (b) | Whether there is a corresponding liability of the other party to pay the amount to the assessee; | |
| (c) | the probability or improbability of realisation of the income by the assessee has to be considered from a realistic and practical point of view. |
Thus, probability or improbability of realization of the income has to be considered from practical point of view.
Also drew support from Eicher Ltd. [2010] 320 ITR 410/[2009] 185 Taxman 243
Further ITAT Mumbai held that As per Accounting Standard (‘AS’) – 9 i.e. Revenue recognition, if there is uncertainty with regard to the collection of amount then recognition of said amount should be deferred in the books of account. The assessee being company has to follow these accounting standards while maintaining its books of accounts Further, the CBDT has recently issued a Notification dated 31st March 2015 notifying the Income Computation and Disclosure Standards (‘ICDS’) to be followed by all income-tax assessee following the mercantile system of accounting for the purposes of computation of income chargeable to tax under the heads “Profit and gains of business or profession” or “Income from other sources”. As per ICDS – III (revenue recognition in the case of construction contracts) and IV (revenue recognition in other case) also ultimate recovery of amount is important criteria for the amount to be held as accrued during the year. Thus, revenue itself has now recognized ultimate recovery as important principal for accrual of income.
However ITAT directed to tax the amount in the year of receipt.
Other References:
- Motor Credit Co. P. Ltd. [1981] 127 ITR 572/6 Taxman 63 (Mad)
- SLP by the Department against the decision of Madras High Court in the case
- of Motor Credit Co. P. Ltd. (supra) [1983] (144 ITR(St) 50)
- CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619/4 Taxman 439 (Punj. & Har.)
- CIT v. Vasisth Chay Vyapar [2011] 330 ITR 440/[2011] 196 Taxman 169/[2010] 8 taxmann.com 145 (Delhi)
- D.R.D Tata v. ITO [1986] 17 ITD 0642 (Bom.)
- Malbros Investment Ltd. v. DCIT[1986] 17 ITD 0642 (Bom.)
- ITO v. Dyestuffs & Chemicals (P.) Ltd. [1983] 6 ITD 513 (Bom.)
- FGP Ltd. v. CIT (applying Supreme Court judgment in case ofGodhara Electricity v. CIT [1997] 225 ITR 746/91 Taxman 351[2010] 326 ITR 444/[2009] 177 Taxman 147 (Bom.)
- CIT v. Orissa State Financial Corpn. [1993] 201 ITR 595/[1992] 64 Taxman 473 (Orissa)
- UCO Bank v. CIT[2014] 43 taxmann.com 294/225 Taxman 136/360 ITR 567 (Cal.)
- Maruti Securities Ltd. v. ACITIT Appeal No. 468/Hvd/2009