Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income accrued to the assessee only when its principal accepts the bill and therefore, the assessee was not liable to be assessed on the sum of Rs. 5,70,416 received from its principal especially when the relevant expenses were debited already to the P&L a/c of the assessee for the year under consideration ?

Counsel Appeared

C.V. Rajan, for the Applicant : P.P.S. Janarthana Raja, for the Respondent

ORDER

MRS. A. SUBBULAKSHMY, J. :

The question referred to us at the instance of the Revenue in T.C. No. 1445 of 1986, relates to the asst. yr. 1979-80, is as follows :

“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of advance received by the assessee-company should not be brought to tax as it is not income but only an advance to be adjusted towards remuneration as and when work is done ?”

2. The question referred to us at the instance of the Revenue in T.C. No. 1903 of 1986, relates to the asst. yr. 1978-79, is as follows : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income accrued to the assessee only when its principal accepts the bill and therefore, the assessee was not liable to be assessed on the sum of Rs. 5,70,416 received from its principal especially when the relevant expenses were debited already to the P&L a/c of the assessee for the year under consideration ?”

3. Since the parties in both the cases are one and the same and the point involved is also one and the same, both the cases are dealt with in common.

4. The assessee is a private limited company. It follows the mercantile system of accounting. It performs services for its principals and gets income or remuneration by way of commission. The assessee takes advance from the principals and then submit bills for payments. Only after the bills are passed, the amounts so passed are taken as income and treated to the P&L a/c till then the amounts received as advance are shown only as advance. The assessee has been following this practice for a number of years and the Department used to accept it. However, in the year under reference, the ITO stated that what the assessee received as advance was really its income.

5. The ITO held that the company received the so-called advance only after completing the work and after submitting the bills to the principals and therefore, for the work done the income had already accrued. The assessee took up the matter in appeal. The CIT(A) held that it becomes income only when the bills were passed by the principals. Therefore, he deleted the addition of Rs. 5,70,416 made by the ITO in this regard.

Aggrieved by the order of the CIT(A) the Department preferred the appeal before the Tribunal and the Tribunal confirmed the order of the CIT(A). The Tribunal considered the point, when does the income accrue for the work done by the assessee and found that the advance receipt is certainly not income and the advance is received by the assessee after the execution of work and presentation of bills is very material and remuneration for the work done cannot accrue on the mere presentation of bills. The ITO in the assessment order has quoted a letter, dt. 17th Dec., 1980, from Scindia Steam Navigation Company Ltd. to the effect that the assessee is entitled to commission only when the bills are passed for payment by Scindia.

Counsel for the assessee submits that unless the principals accept the bills, income cannot accrue. Commission or remuneration for the work done accrues due only when the bills are passed by the principals and till then they can deny the assessee the remuneration for the work done on the ground that the work is not satisfactory or that required work has not been done or that the quantum of measurement is incorrect and it cannot till the bills are passed to appropriated as income of the assessee. He further submits that till the bills are passed the assessee only gets a right to get an unascertained amount as remuneration and the exactremuneration is not known.

The learned counsel for the Revenue submitted that for the work done by the assessee he had received advance amount and since the work was completed the assessee submits the bills to the principal and before scrutinising the bills the principal paid the advance amount on the basis of the bills which was sent by the assessee and the assessee receives the balance amount after the bills are passed and the advance received by the assessee amounts to remuneration and what all the amount received by the assessee is accrued to his income and the assessee received the income only for the work done by him and 90 per cent advance received by the assessee is nothing but income and so the amount received as advance accrues as income to the assessee for that assessment year.

We asked the counsel to produce the agreement entered into between the assessee and the principal but the agreement has not been produced before the Court. A perusal of the records shows that the assessee-company receives the amount as remuneration for the work done by it and the income received by the assessee accrues as income for that year. The assessee received 90 per cent of the bill amount and certainly it amounts to income. We find that the view taken by the CIT(A) and the Tribunal that the income accrues only after the passing of the bill is not proper.

The law laid down in CIT vs. Seshasayee Bros. (P) Ltd. (1999) 151 CTR (Mad) 598 : (1999) 239 ITR 471 (Mad) relied on by the learned counsel for the assessee is not applicable to the facts of the case, since the above decision relates to assessment on additional remuneration which was based on the profit unless the amount of profit was known.

It was not possible to hold that the additional remuneration accrued at the end of the relevant accounting year. The income accrued during the year is taxable for the assessment year. The learned counsel for the assessee submitted that the assessee is following the mercantile system of accounting and the same practice was followed for the earlier assessment years and was accepted by the Department all along and hence the Department cannot deviate its stand for the assessment years under question.

The learned counsel for the Revenue submitted that the AO is not bound to follow the order which was followed in the previous year and relies upon the decision of the Supreme Court in CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC) : TC 2R.113, wherein the Supreme Court has held that : “It is not only the right but the duty of the AO to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say as contended on behalf of the assessee, that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in the earlier years.

12. Following the decision of the Supreme Court, we find that the arguments advanced by the counsel for the assessee in this respect does not hold good and the AO is entitled to consider afresh and the question of estoppel does not arise. The Tribunal is not correct in holding that amount received is not income and it should not be brought to tax. We answer the questions referred to us in favour of the Revenue and against the assessee.

[Citation : 246 ITR 161]