ANUP ENGINEERING LTD vs. COMMISSIONER OF INCOME TAX

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No 300 of 1984 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and Hon'ble MR.JUSTICE A.R.DAVE ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? : NO 1 & 2 Yes 3 to 5 No -------------------------------------------------------------- ANUP ENGINEERING LTD Versus COMMISSIONER OF INCOME TAX -------------------------------------------------------------- Appearance: MR JP SHAH for Petitioner MR AKIL QURESHI for MR MANISH R BHATT for Respondent No. 1 -------------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE Date of decision: 06/07/2000 ORAL JUDGEMENT (per A.R. Dave, J.) The Income Tax Appellate Tribunal, Ahmedabad Bench 'A', has referred to this Court, under the provisions of section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the following question of law arising out of its order No. I.T.A. No. 731/Ahd/1982 for consideration of this Court. "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in disallowing the claim of Rs. 3,00,000/-?" 2. The facts and circumstances in which the Reference has arisen, in a nutshell, are as under:- 2.1 The applicant, assessee-company, is in business of manufacturing vessels used by chemical industries. It entered into a contract with Godrej Soaps Pvt. Ltd. (hereinafter referred to as 'Godrej'), for supply and erection of a spray drying plant for synthetic detergent plant for a consideration of Rs. 40 lacs. During the relevant A.Y. 1977-78, the plant was erected and the assessee was paid a sum of Rs. 34.49 lacs against bills issued by the assessee company to Godrej. 2.2 The assessee company had shown in its books of account that a sum of Rs. 40 lacs was to be received from Godrej, but during the calendar year 1976, which was previous year for the relevant Assessment Year, it had debited a sum of Rs. 3 lacs from its sales account by crediting the same to Warranty Account as some dispute had arisen with regard to quality of the vessel supplied by the assessee to Godrej and the assessee apprehended that due to the clause of warranty incorporated in the contract, the assessee might not receive the said amount. 2.3 In the course of the assessment, the Assessing Officer disallowed the debited sum of Rs. 3 lacs on the ground that the claim was still in dispute and till the claim was settled, the same could not have been allowed as a deduction. Thus, the claim made by the assessee with regard to Rs. 3 lacs was not allowed. 2.4 Being aggrieved by the said decision of the Assessing Officer, the assessee had filed an appeal before the C.I.T. (Appeals). It was contended by the assessee that the assessee had undertaken the liability to supply spare parts along with the plant, which had not been supplied and as there was a dispute with regard to quality of the vessel supplied to Godrej, the above referred amount was debited from the sales account by crediting the same to Warranty Account. The appeal was allowed by the CIT (Appeals) and the claim of the assessee was accepted. 2.5 Being aggrieved by the order passed in appeal, the revenue had filed an appeal before the Tribunal. The Tribunal allowed the appeal and restored the assessment made by the Assessing Officer so far as the said amount of Rs. 3 lacs was concerned. 3. This Court has now to examine whether, on the facts and in the circumstances of the case, the Tribunal was right in law in disallowing the claim of Rs. 3 lacs, which was made by the assessee. 4. Before answering the question, let us see what is included in 'income' of an assessee. In order to examine the scope of 'total income', one has to look at the provisions of section 5 of the Act. Relevant portion of the said section reads as under:- "5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year................" 5. Thus, income is taxable when it accrues, arises or is received or when, by fiction of law, it is deemed to accrue, arise or is deemed to be received. Upon perusal of section 5(1)(b), it is clear that all income from whatever source derived, which accrues, arises or is deemed to accrue or arise to the assessee becomes income for the relevant previous year and it becomes subject to charge of income tax under the provisions of sec. 4 of the Act. It is not necessary that a person should have actually received the income. The words "accrue" and "arise" have not been defined in the Act but, the Hon'ble Supreme Court, in CIT, Gujarat v. Ashokbhai Chimanbhai, 56 ITR 42 has observed that the words "accrue" and "arise" are used to contra-distinguish the word "receive". Income is said to have been received when it reaches the assessee. When the right to receive the income becomes vested in the assessee, income is said to have been accrued or arisen. Thus, income becomes taxable on the footing of accrual only when right to receive the income becomes vested in the assessee. 6. A similar principle was propounded by the Hon'ble Supreme Court in E.D. Sassoon & Company Ltd. & Ors. v. Commissioner of Income-tax, Bombay City, 26 ITR 27. It has been held in the said case that if the assessee acquires a right to receive the income, the income is said to have accrued to him, though, it may be received later on. The basic conception is that he must have acquired a right to receive the income. In other words, there must be a debt owed to him by somebody. Unless and until a debt is created in favour of the assessee by somebody, it cannot be said that the assessee has acquired a right to receive the income or the income has accrued to him. 7. Looking to the legal position referred to hereinabove, one has to see whether a right had been created in favour of the assessee to receive a sum of Rs. 3 lacs, which was claimed by way of deduction by the assessee in the relevant previous year. It is not in dispute that the assessee had shown in his books of account that he had to receive a sum of Rs. 40 lacs from Godrej in pursuance of the contract with regard to supply of spray drying plant for synthetic detergent plant. Relevant entries reflecting the above transaction were made by the assessee in its books of account. Subsequently, on account of certain dispute, which had arisen during the same previous year between the assessee and Godrej due to unsatisfactory quality of the plant, the assessee was of the view that the assessee would not receive the entire amount of Rs. 40 lacs and as per the terms and conditions on which the plant was to be supplied to Godrej, the assessee might receive something less on account of the warranty which had been given to Godrej, especially in view of the fact that even Godrej had a right to retain certain amount with it and the amount to be retained was to be paid only when the plant was handed over to it in a perfect condition and when Godrej was satisfied with regard to performance of the plant in all respects. 8. It appears that, on account of the book entries made by the assessee, the revenue has finally decided to assess the assessee for the entire amount which was shown as receivable by the assessee at an initial point of time. As stated hereinabove, and as observed by the Hon'ble Supreme Court in different cases, income accrues only when the assessee gets a right to receive the same and if the right to receive is not established, no income would accrue or arise to the assessee. 9. To ascertain whether Rs. 40 lacs was income of the assessee, one has also to look at the contract in pursuance of which the amount was to be received by the assessee from Godrej. One has to look at the nature of the transaction and the terms and conditions on which the plant was supplied by the assessee to Godrej. Only when the right of the assessee to receive Rs. 40 lacs is established, the income would accrue or arise and not otherwise. It is pertinent to note that the accounting entries are not made in abstract. Entries reflect the transactions which have taken place. So, one has to look at the nature of the transaction and the terms and conditions of the contract under which the revenue believed that the entire income had accrued to the assessee during the previous year in question. 10. In the circumstances, it would be worthwhile to look at the terms and conditions on which the plant was to be supplied by the assessee to Godrej. Relevant terms forming part of the contract, which was executed between the assessee and Godrej in Feb. 1975 and which is forming part of the paper book, is reproduced hereinbelow. "1. PRICES: a) Plant and Machinery: Charges for the supply of Plant and Machinery as per Annexure I enclosed herewith Rs. 38,00,000 The above mentioned price includes cost of packing, forwarding, freight, including insurance and is for free delivery at our factory at Vikhroli. b) Erection and Start-up: Charges for the erection and starting-up of the plant and machinery to be supplied by you as above 2,00,000" "8. Workmanship Guarantee: Since the entire plant will be supplied, erected and commissioned by you, the workmanship guarantee period will be 12 months from the date of commissioning, or 24 months after the supply of plant item of equipment, whichever is later. It shall be your entire responsibility to replace, repair such defective equipment or part(s) thereof to our complete satisfaction, free of cost to us." "14. Payment Terms: For supply of plant and machinery