- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax v. Bhartiya Steel Industries
Structured Summary of the Court's Opinion
Factual and Procedural Background
M/s. Bhartiya Steel Industries, Calcutta (the assessee), an association of persons, supplied railway sleepers to the Railways under a contract dated 22 January 1966. The contract permitted escalation in the price of sleepers on an increase in the cost of pig iron. The assessee claimed escalation for sleepers supplied during the accounting years ending on Ram Navami in 1966 and 1967; the Railways accepted the escalation and directed the assessee to submit supplementary bills.
For the accounting period ending 6 April 1968 (assessment year 1968-69), the assessee submitted supplementary bills claiming Rs. 2,02,309 for sleepers supplied between 28 June 1967 and 18 August 1967. The Railway Board, however, on 9 December 1966 asserted a counter-claim of Rs. 2,26,106 for late supply, later reduced to Rs. 73,731.09 after protest. The Board warned it would refuse supplementary bill payments unless the counter-claim was accepted; it later stated payments would be released after arbitration on a dispute regarding quantities. The assessee approached this Court under article 226 on 16 April 1968. On 2 November 1968 the Railway Board agreed to pay the escalation less Rs. 73,731.09 provided the assessee withdrew the writ petition; the counter-claim was referred to arbitration. An arbitration award dated 8 May 1970 directed payment to the assessee of Rs. 71,637.
Payments received by the assessee against supplementary bills were Rs. 56,120 (16 Jan 1969), Rs. 72,486 (26 Mar 1969), and Rs. 71,637 (16 Dec 1970).
The assessee, assessed to income-tax for 1968-69, omitted the supplementary-bill amounts from its return for that year, stating it would show these amounts on receipt basis in subsequent years. The Income-tax Officer added Rs. 2,02,309 to income on the ground that the assessee kept mercantile accounts and the supplementary bills had been submitted during the relevant accounting year. The Appellate Assistant Commissioner allowed the assessee's appeal and deleted the addition. The Revenue appealed to the Income-tax Appellate Tribunal (the Tribunal), which upheld the assessee. On the Tribunal's application under section 256(1) of the Income-tax Act, 1961, two questions of law were referred to this Court for opinion.
At the hearing before this Court, no one appeared for the assessee.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case and in view of the fact that the method of accounting adopted by the assessee was the mercantile method and the fact that the supplementary bills were made at the rate accepted by the Railway authorities, the Tribunal was correct in law in holding that the sum of Rs. 2,02,309 representing the amount of supplementary bills was not liable to be included in the assessee's total income for the assessment year 1968-69?
- Without prejudice to question No. 1, whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the issue relating to the supplementary bills preferred by the assessee on account of the escalation in price and that relating to the claim of the Railway authorities on account of the alleged late supply of sleepers were inseparable and had to be considered together?
Arguments of the Parties
Revenue's Arguments
- The assessee followed the mercantile system of accounting; therefore, when the assessee submitted its supplementary bills, the claimed amount accrued in the relevant accounting year and was taxable in that year.
- The assessee never relinquished its claim under those bills; the Railway Board's counter-claim for late supply should be considered separately and could not be connected to or postpone accrual of the supplementary-bill amounts.
- To support these contentions, the Revenue cited authorities (E.M. Muthappa Chettiar v. ITO; Vishnu Agencies Pvt. Ltd. v. CIT; James Finlay & Co. v. Commissioner of Income-Tax) that, as summarized in the opinion, stand for accrual principles under mercantile accounting and that a mere dispute or counter-claim does not necessarily prevent accrual when bills are accepted or due.
Assessee's Arguments
- The assessee contended that before submission of the supplementary bills the Railway Board had already made a counter-claim for late supply; both the assessee's claim and the Board's counter-claim arose under the same agreement and therefore should be considered together rather than separately.
- The assessee further submitted that it disclosed income only on actual receipt basis in the returns for the relevant subsequent assessment years and that hypothetical income could not be assessed; only real income was assessable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| E.M. Muthappa Chettiar v. Income Tax Officer, Special Circle, Coimbatore, [1961] 41 ITR 1 | Where accounts are kept on mercantile basis, amounts credited or due in accounts may be taxable on that basis even though payment has not been made and although the payer claims a counter-claim; an assertion of a counter-claim does not necessarily alter accrual under mercantile accounting. | The Court relied on this precedent to support the Revenue's position that mercantile accounting leads to accrual of the supplementary-bill amounts in the relevant accounting year despite the Railways' counter-claim. |
| Vishnu Agencies Private Ltd. v. CIT, [1963] 48 ITR 444 (Bom) | An amount which has become due and whose bill is accepted accrues to the assessee in the relevant accounting year; mere assertion of a claim for damages by the payer does not necessarily make the amount non-accrued or non-enforceable. | The Court cited this authority to emphasize that acceptance of the bill by the payer supports accrual in the relevant year and that withholding payment on the ground of a dispute does not automatically prevent accrual under mercantile accounting. |
| James Finlay & Co. v. Commissioner Of Income-Tax, [1982] 137 ITR 698 | Where there is no material to show that an assessee has waived a claim or agreed to keep amounts in suspense, amounts (here interest) are includible in total income for the relevant assessment year on accrual basis even if there is difficulty in realisation. | The Court used the principle from this case to reinforce that absence of an agreement to waive or suspend the claim means the claimed amounts accrued and are assessable on accrual. |
Court's Reasoning and Analysis
The Court's analysis proceeded from the factual findings and the accounting method followed by the assessee. The key reasoning steps stated in the opinion are:
- The Court observed that the assessee's bills for escalation were never formally disputed by the Railways; the Railways instead made a counter-claim under the same agreement for damages on account of late supply of sleepers.
- The counter-claim of the Railways was characterized as an allegation of damages for late supply; it did not amount to the Railways disputing the existence of the assessee's bill claims themselves.
- The assessee did not abandon or give up its claim under the supplementary bills; in fact, the assessee ultimately succeeded in reducing the Railway Board's counter-claim from Rs. 73,731.09 to Rs. 71,637 as a result of arbitration.
- It was undisputed that the assessee kept its books on the mercantile system of accounting. Applying mercantile principles, the Court concluded that when the supplementary bills were raised (and, implicitly, when they were accepted or became due), the amounts accrued to the assessee in the relevant accounting year.
- Relying on the cited authorities and the application of mercantile accounting rules to the facts, the Court held that the supplementary-bill amounts accrued in the accounting year ending 6 April 1968 and were therefore chargeable in that year.
The Court expressly answered the two referred questions of law in the negative (see Holding below) and gave no order as to costs. The opinion records that Justice Monjula Bose agreed with the judgment.
Holding and Implications
Holding: Both questions referred under section 256(1) were answered in the negative and in favour of the Revenue.
Implications:
- The Court held that, on the facts before it and given that the assessee maintained mercantile accounts, the supplementary bills for escalation in price accrued in the relevant accounting year (assessment year 1968-69) and were thus chargeable in that year.
- The direct effect on the parties is that the Revenue's position on accrual under the mercantile system was accepted by the Court and the Tribunal's contrary conclusion was disapproved by this Court's opinion on the referred questions. The opinion records that there will be no order as to costs.
- This opinion applies the existing accrual principles cited in prior decisions; the text does not state that the Court has created any new legal precedent beyond applying those principles to the facts at hand.
The Judgment of the Court was delivered by
Dipak Kumar Sen, J.:— M/s. Bhartiya Steel Industries, Calcutta, the assessee, is an association of persons. Under a contract dated January 22, 1966, the assessee was regularly supplying railway sleepers to the Railways including the Eastern and the Central Railways. Under the terms of the contract, the assessee was entitled to increase the price of the sleepers on the increase in the cost of pig iron, the main raw material required for the manufacture of sleepers. The assessee claimed escalation in price in respect of the sleepers supplied during the assessment years 1966-67. and 1967-68, the accounting years ending on the Ram Navami day of the financial years 1966 and 1967. The claim of the assessee was accepted by the Railways and the escalation in price for the sleepers supplied was fixed for the said two assessment years. The Railway Board asked the assessee to submit supplementary bills in respect of the escalation in price as fixed.
2. During the assessment year 1968-69, the relevant accounting period ending on April 6, 1968, the assessee had submitted its supplementary bills for its additional claim on account of escalation in price aggregating Rs. 2,02,309 in respect of the sleepers supplied between June 28, 1967, and August 18, 1967. In the meantime, on December 9, 1966, the Railway Board informed the assessee that on account of late supply of sleepers, the assessee's claim would be reduced by Rs. 2,26,106. The assessee lodged a protest on which the Railway Board reduced its counter-claim from Rs. 2,26,106 to Rs. 73,731.09, but the assessee was informed that if it did not accept the counter-claim of the Railways, the assessee would be required to take back the sleepers supplied and that the Railway Board would refuse to pass the supplementary bills of the assessee. Subsequently, on February 15, 1968, the Railway Board informed the assessee that the payments withheld by the Railways would be released after a dispute in respect of the quantity of sleepers supplied by the assessee was settled in arbitration. Being aggrieved, the assessee moved this court on April 16, 1968, under article 226 of the Constitution against the Railway Board. On November 2, 1968, the Railway Board agreed to pay the claim of the assessee on account of escalation of prices less Rs. 73,731.09 on condition that the assessee withdrew the writ petition. The Board's claim of Rs. 73,731.09 against the assessee was referred to the Arbitration Committee. An award was passed in the arbitration in favour of the assessee on May 8, 1970, whereby the Railways were directed to pay to the assessee Rs. 71,637.
3. Against its supplementary bills, the assessee received payments from the Railways of Rs. 56,120 on January 16, 1969, Rs. 72,486 on March 26, 1969, and the balance Rs. 71,637 on December 16, 1970.
4. The assessee was assessed to income-tax in the assessment year 1968-69. In its return for the said year, the assessee did not include any income in respect of its claim on account of escalation in price as contained in its supplementary bills on the ground that the said amounts had been shown on receipt basis in the subsequent assessment years. The Income-tax Officer held that as the assessee followed the mercantile system of accounting and had submitted its bills in respect of escalation of price during the relevant accounting year, the entire amount of Rs. 2,02,309 was exigible to income-tax in the said assessment year.
5. Being aggrisved, the assessee preferred an appeal before the Appellate Assistant Commissioner who allowed the appeal and deleted the addition of the said amount of Rs. 2,02,309.
6. Being aggrieved, the Revenue went up in appeal before the Income-tax Appellate Tribunal. It was contended on behalf of the Revenue before the Tribunal that as the assessee followed the mercantile system of accounting, the said amount of Rs. 2,02,309 accrued to the assessee when the supplementary bills in respect of the tax were submitted during the accounting year. The counter-claim of the Railway Board on account of late supply, it was submitted, had to be considered separately and could not be connected with the supplementary bills of the assessee for the escalation in price.
7. It was contended on behalf of the assessee that even before the submission of its supplementary bills, the Railway Board had made a claim against the assessee on account of late supply of sleepers. The claims of the assessee and the Railway Board both arose under the same agreement and it was not reasonable to consider the claim of the assessee as distinct and separate from the claim of the Board. It was submitted that when the amounts were actually received by the assessee against its supplementary bills, the same were disclosed in the returns filed in the relevant assessment years. It was also submitted that no hypothetical income could accrue to the assessee and only the real income of the assessee was assessable.
8. The Tribunal accepted the case of the assessee and upheld the decision of the Appellate Assistant Commissioner. The Tribunal held that both the bills for escalation and the claim of the Railway Board on account of late supply of sleepers pertained to the same agreement and both the issues should be considered together. The Tribunal noted that unless the assessee accepted its liability arising out of late supply of sleepers, the Railway Board refused to pay anything to the assessee. The Tribunal held that the assessee had adopted the proper course and had disclosed its income on this account on actual receipt basis though the assessee was following the mercantile system of accounting.
9. On an application of the Revenue under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following questions as questions of law arising out of the order of the Tribunal for the opinion of this court:
“1. Whether, on the facts and in the circumstances of the case and in view of the fact that the method of accounting adopted by the assessee was the mercantile method and the fact that the supplementary bills were made at the rate accepted by the Railway authorities, the Tribunal was correct in law in holding that the sum of Rs. 2,02,309 representing the amount of supplementary bills was not liable to be included in the assessee's total income for the assessment year 1968-69?
(2) Without prejudice to question No. 1, Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the issue relating to the supplementary bills preferred by the assessee on account of the escalation in price and that relating to the claim of the Railway authorities on account of the alleged late supply of sleepers were inseparable and had to be considered together?”
10. At the hearing, the learned advocate for the Revenue contended that the assessee followed the mercantile system of accounting. As such, when the assessee preferred its claim under its supplementary bills on account of escalation of price, the amount claimed accrued during the relevant accounting year. The assessee, it was submitted, never gave up its claim under the said bills. In support of his contentions, the learned advocate for the Revenue cited the following decisions.
(a) E.M Muthappa Chettiar v. Income Tax Officer, Special Circle, Coimbatore , [1961] 41 ITR 1. In this case, one of the questions before the Supreme Court was whether the assessee was liable to pay excess profits tax in respect of its business income arising out of a managing agency. Under an agreement with another limited company, the assessee became entitled to remuneration for acting as managing agents of the former. The managed company had debited its account for such remuneration but did not disburse the same in cash and raised a dispute that the managing agents had not fulfilled certain obligations undertaken by them on account of which the managed company claimed to have suffered loss of income and made a counter-claim for damages. The Supreme Court held that the stand taken by the managed company would make no difference to the tax liability of the assessee as the accounts of the assessee were kept on mercantile basis.
(b) Vishnu Agencies Private Ltd. v. CIT, [1963] 48 ITR 444 (Bom). In this case, the assessee which maintained its accounts on the mercantile system acted as transport contractor to the Government for a limited period. For the work done, a sum had become due to the assessee during the relevant previous year and it had debited in its accounts the expenses incurred by it in connection with such work. The assessee, however, did not credit its account with the amount due from the Government on the ground that the Government had raised a dispute over the payment of its bills. The Government claimed deductions from the amount of the bills on account of damages for breach of contract on the part of the assessee. It was found by the Tribunal that the Government had not disputed the amount of the bills but had accepted the liability in full and only sought to withhold payment on the ground of breach of contract. It was held that the said amount had accrued to the assessee during the relevant accounting year. On a reference, it was held by the Bombay High Court that the said amount had accrued at the relevant time when the bills were accepted. It was held further that mere assertion of a claim on the part of the Government for damages for breach of contract was not sufficient to make the claim an enforceable one.
(c) James Finlay & Co. v. Commissioner Of Income-Tax., [1982] 137 ITR 698. In this case, a Division Bench of this court held that though there was difficulty on the part of the assessee to realise interest in the year of account, there was no material to show that there was an agreement with the debtors to waive the interest or to keep it in a suspense account. It was held that the assessee had not given up its claim for interest and the amounts of interest were includible in the total income of the assessee in the relevant assessment year and the amounts were assessable on accrual basis.
11. No one appeared on behalf of the assessee.
12. In the facts and circumstances, it appears to us that the bills of the assessee were not disputed by the Railways at any stage. The Railways, however, made a counter-claim under the said agreement on account of late supply of sleepers. This counter-claim was apparently on the basis of damages alleged to have been suffered by the Railways on account of late supply of sleepers by the assessee. The assessee did not give up its claim on the bills and ultimately succeeded in reducing the counter-claim of the Railways from Rs. 73,731.09 to Rs. 71,637.
13. It is not in dispute that the assessee kept its accounts on mercantile basis. Therefore, in the above facts, it has to be held that the supplementary bills of the assessee for escalation in price of the supplies accrued to the assessee in the relevant accounting year.
14. For the reasons as above, both the questions are answered in the negative and in favour of the Revenue. There will be no order as to costs.
Monjula Bose, J.:— I agree.
Alert