This appeal filed by the assessee is directed against the order of the Commissioner (Appeals) dated 30-3-1999 relating to assessment year 1996-97.
The main dispute raised through ground Nos. 1 to 6 is against the addition of Rs. 98,24,911 made by the assessing officer (hereinafter referred to as "the AO") for the provision made on account of warranty.
The entire issues centers around the scope and ambit of the provisions of section 145 of the Income Tax Act, 1961 and the amplitude of the jurisdiction conferred upon the assessing officer to reject the method of accounting followed by the assessee.
At the outset, factual matrix of the case may be spelt out. The assessee-company is engaged in the manufacture of items called Mass Transfer equipments such as tower packings, trays and internals etc.
These items are used for the purpose of filling and activating distillation and absorption towers in the various mega plants such as Fertilizers, Petroleum, Chemical etc. The assessee manufactures the products under technical collaboration of M/s. Norton Chemical Process Products Corporation of U.S.A. According to the assessee the products are highly sophisticated and specialised and are of utmost necessity for cost efficient and optimum use of fertilizers, petrochemical, petroleum refinery and other chemical plants. It is further stated that tower packings are not uniform items mass produced for supply to the customers but are tailor made to the requirements of each mega plant.
For different towers of the same plant, the calculations, specifications and design of the products involve a crucial and technically intensive exercise and any deviation from predicted performance would result in malfunctioning of the plant, thus exposing the assessee to arrange rectification or replacement of the defective equipment. Contracts for the supply of tower packings are secured by the assessee in response to globally floated tenders which are overseen by reputed global consultants. The tender documents as well as the purchase orders provide for retention of upto 10 per cent of the sale value throughout the contractual guarantee period. This retention amount has been paid to the assessee against irrevocable and unconditional bank guarantee in favour of the customer. In cases of two customers, namely, Indian Farmers Fertilizers Co-op. Ltd. and National Fertilizer Ltd., the amount of the performance bank guarantee is 5 per cent of the sale value whereas in the remaining cases performance bank guarantee is for 10 per cent of the said value. The assessee makes the warranty provision in its book equivalent to the amount of bank guarantee furnished to the customer. The period of guarantee usually varies from 12 months to 24 months as per terms of the contract. The assessee has been regularly making provision for the warranty from year to year and such provisions are reversed back on the expiration of period of guarantee and the amount on reversal of the provision is offered for taxation.
For the assessment year 1996-97 under appeal, the assessee has made provision for warranty amounting to Rs. 96,24,911 by deducting the amount from the sale value. The details of the amount of warranty provision for which performance bank guarantee has been given by the assessee during the year to the various customers are placed at page 60 of the paper book filed by the learned counsel for the assessee. At page 59 of the paper book statement showing year-wise warranty provision has been filed which indicates the following particulars : From the aforesaid figures it would be seen that provision has been made in the books of account equivalent to the amount of performance bank guarantee, during the year when the bank guarantee is furnished and such provision is reversed during the year of expiration of the bank guarantee.
For assessment year 1996-97 under appeal, the assessee has thus made provision for an amount of Rs. 98,24,911 whereas an amount of Rs. 15,47,914 has been credited to the trading account on account of expiration of the bank guarantee earlier furnished in the preceding years.
Before the assessing officer the assessee submitted that a regular and consistent method of accounting is being followed for the last many years whereby the amount of 10 per cent of the sale value for which unconditional, irrevocable and unqualified bank guarantee has been furnished to the customer has been excluded from the sale receipts on the ground that the amount does not become due to the assessee and there is no entitlement until after satisfactory performance of the tower packings supplied by the assessee under the contract. The assessee further explained that the bank guarantee is not a mere idle formality and has been enforced on a number of occasions by the customers without making any reference to the assessee. According to the assessee the amount covered by the bank guarantee, even though received by the assessee, remains under the control of the customers.
The assessing officer however, rejected the contensions of the assessee and held that the entire provision of Rs. 98,24,911 by which the assessee has reduced its sales for the year under consideration are purely contingent in nature and does not represent ascertained and accrued liability which is deductible. The assessing officer relied upon the following judicial pronouncements in support of his view : Regarding the liabilities of the assessee in respect of quality of material fabrication and workmenship performance of tower packings supplied to the customers, the assessing officer observed that no such liabilities are fastened on the assessee in the purchase orders placed on record. According to the assessing officer there is no clause in the purchase orders under which it is held that the assessee was liable to bear the expenses in case the goods supplied do not perform as per the specifications given. The assessing officer further held that the bank guarantees furnished by the assessee are not related to the sales made by the assessee and the provision on account of bank guarantee as well as the reversal thereof in the books of account has been made at the sweet-will of the assessee. The assessing officer accordingly made an addition of Rs. 98,24,911 in the trading account. It is significant to note that even while making the addition on account of provision for the amount of bank guarantee, the assessing officer did not make any adjustment with regard to the amount of Rs. 15,47,914 credited to the sales account on account of reversal of the provision.
The assessee carried the matter in appeal before the Commissioner (Appeals). The Commissioner (Appeals) endorsed the conclusion of the assessing officer and held that the amount of provision represented by the performance bank guarantee has accrued to the assessee and is liable to be added back in the total income. The learned Commissioner (Appeals) placed reliance upon the decision of the Honble Supreme Court in the case of CIT v. British Paints (India) Ltd. (1991) 188 ITR 44 and held that since the method of accounting followed by the assessee is not the correct method, the assessing officer is entitled to reject the same by invoking the provisions of section 145 of the Act. The learned Commissioner (Appeals) accordingly upheld the addition.
Shri S.N. Soparkar, the learned counsel for the assessee assailing the orders of the tax authorities below, strongly argued that a method of accounting, regularly followed by the assessee right since assessment year 1984-85 and accepted and acknowledged by the tax authorities after detailed scrutiny of the accounts in the earlier years, has been unjustifiably rejected by the assessing officer for the assessment year under appeal without bringing on record any fresh material. The learned counsel argued that since the department has accepted the method of accounting of the assessee for the past many years, there is no justification for making a departure for the assessment year under reference when the facts and circumstances of the assessees case are identical with the earlier years and no new facts have been brought on record by the Income Tax Department in support of its view that the method of accounting followed by the assessee is not correct. The learned counsel submitted that it is true that the strict rule of doctrine of res judicata does not apply to proceedings under the Income Tax Act. At the same time, it is equally true that unless there is a change of circumstances, the authorities will not depart from previous decisions at their sweet-will in the absence of material circumstances or reasons for such departure. The learned counsel cited the following decisions in support of his contentions : The learned counsel meticulously took us through the paper book filed by him and argued that there are categorical stipulations in the bid documents and the purchase orders of the various customers which require strict process performance guarantees from the assessee. Such guarantees, the learned counsel added, would extend to free replacement of entirety of faulty products as well as unilateral encashment of bank guarantee. Referring to extracts from the purchase order from Indian Farmers Fertilizers Coop. Ltd., dated 12-4-1995 placed at pages 69 to 72, the learned counsel invited our attention to clause 18 appearing in the Attachment-II of the purchase order which provide for warranties and guarantees. Clauses 18.1 to 18.8 lay down that in case of any defects in the design, materials or workmenship within 48 months from the date of despatch of last consignment or 12 months from the date of commissioning of the plant, whichever is earlier, the supplier would take immediate steps for rectification/replacement of the defective equipments at site on his own cost. Clauses 18.9 to 18.12 provide for the performance bank guarantee in respect of the products supplied by the assessee under the purchase order. Clause 9 of the Attachment-II of the purchase order dealing with the performance bank guarantee reads as under : "9.1 Within 30 days after receipt of purchase order by supplier, the supplier shall furnish to the owners/consultant a performance bank guarantee issued or counter confirmed by one of the banks at Attachment-II for an amount equivalent to 5 per cent of the value of purchase order as specified in the special conditions of purchase.
9.2 The proceeds of performance bank guarantee shall be appropriated by the owners/consultant as compensation for any loss resulting from the suppliers failure to complete its obligations under the purchase order without prejudice to any of the rights or remedies the owners/consultant may be entitled to as per terms and conditions of purchase order." The learned counsel submitted that the performance bank guarantee provided by the assessee is irrevocable, unqualified and unconditional and the said guarantee is liable to be encashed by the customer without recourse to the assessee and even without bringing out any default on the part of the assessee in the matter of quality of materials supplied and performance thereof. The learned counsel referred to pages 55 to 58 of the paper book containing the bank guarantee document. This bank guarantee is in respect of 5 per cent of the value of the purchase order of National Fertilizers Ltd. Clause 1 of the guarantee is relevant : In pursuance of the said purchase order and in consideration of the promise, the bank hereby guarantees to the owner due observance and fulfilment by the supplier of the terms of the said purchase order relating to the said goods and of the performance warranty which is a part of the said purchase order and agrees and undertakes that if the Supplier fails to observe and fulfil the terms of the said purchase order and or of the performance warranty, then the bank shall immediately pay to the owner, on demand such sum or sums of money to the extent of Rs. 12,94.678 being 5 per cent of the value of the said purchase order on account of losses and damages suffered by the owner as may be claimed by the owner by reason of such non-observance and non-fulfilment by the Supplier as aforesaid and shall also indemnify the owner against all losses and damages which may be suffered by the owner as aforesaid and against all costs, charges, expenses which may be incurred by the owner in connection herewith. The bank shall pay the said amount without demur or protest or without recourse to the supplier. Any such demand placed on the bank shall be conclusive with respect to the amount due and payable by the bank under this guarantee.
The learned counsel pointed out that documentation with regard to terms and conditions for the supply of products by the assessee to various other parties including purchase orders as well as bank guarantees are couched in substantially similar language. In this connection, the learned counsel referred to the extracts from the purchase order regarding performance bank guarantee, warranty and guarantee in respect of various parties appearing at pages 65 to 86 of the paper book filed by him. It is stated that most of the customers of the assessee are government undertakings such as M/s. Rashtriya Chemicals Fertilizers, National Fertilizers Ltd. (NFL). Indian Farmers and Fertilizers Corporation (IFFCO), Indian Oil Corporation Ltd. (IOCL), Indian Petrochemicals Corporation Ltd. (IPCL) etc. Besides, corporate giants like Jagjit Industries, Reliance Industries are also clients of the assessee. The learned counsel argued that terms and conditions including the bank guarantee in respect of 10 per cent of the sale value represent genuine commercial transactions and it is wrong for the assessing officer to allege that mere idle formalities have been incorporated into the agreements by way of manipulation by the assessee so as to suit its ulterior motive of excluding 10 per cent of the income from taxation. The learned counsel, referring to the profiles of the customers, being big government undertakings as well as corporate giants in the private sector, strongly refuted what the learned counsel called "false insinuation" of the assessing officer and argued that on a number of occasions, bank guarantees have been encashed by the customers without recourse to the assessee and without any default whatsoever on the part of the assessee in the matter of quality and performance of the material supplied. In this connection, the learned counsel referred to encashment of bank guarantees by the Associated Cement Co. Ltd. at page 40 and Indian Acrylics Ltd. at page 42 and Gas Authority of India Ltd. at page 54 of the paper book. The learned counsel further referred to pages 36 and 41 of the paper book and submitted that there have been instances when the customers have insisted upon renewal of the bank guarantee contrary to the express provisions in the purchase order. The learned counsel emphasized that the products supplied by the assessee are highly sophisticated involving exacting specifications tailor made to the specific requirements of the customers and on a number of occasions the assessee has been called upon to replace defective material. The learned counsel in this connection referred to pages 37, 38, 39, 43 and 44 of the paper book whereby the customers have called upon the assessee to provide replacement of defective material or take corrective action to ensure performance as per the specifications in the purchase order. On the basis of these facts, the learned counsel vehemently submitted that the exclusion of 10 per cent of the sale value represented by the amount of the bank guarantee is in conformity with the actualities and realities of the situation and has been rightly deducted by the assessee for arriving at the correct profits.
The learned counsel submitted that the assessee has consistently followed a reasonable and rational method of accounting and it is wrong for the assessing officer to allege that the assessee has been suppressing its sales for reducing the tax liability. The learned counsel pointed out that for assessment years 1992-93 and 1993-94, the assessee has offered more income on the basis of expiry of the bank guarantee and there was absolutely no mala fide intention to take resort to any devices to suppress income.
The learned counsel further argued that the 10 per cent of the sale value covered by the bank guarantee has not accrued to the assessee and is therefore not liable to be included in the total income. In support of his contention, reliance has been placed on the following decisions : (2) CIT v. Chanchani Bros. (Contractors) (P) Ltd. (1986) 161 ITR 418 (Pat); (4) Corrosion Control Services (Bombay) (P) Ltd. v. CIT (1999) 70 ITD 109 (Mum); (5) Dy. CIT v. Paramount Construction Income Tax Appeal No. 3624 (Ahd) of 1994 (Ahmedabad Tribunal).
The learned counsel referred to the decision of Gujarat High Court in the case of CIT v. Ashaland (1982) 133 ITR 55 and argued that the receipt must assume the character of income before it becomes exigible to income-tax. According to the learned counsel the amount received from the customer against the irrevocable and unconditional bank guarantee does not represent accrued income of the assessee and cannot be brought to tax merely on the ground of receipt thereof. Further referring to the decision of the Honble Supreme Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. (1986) 161 ITR 524 the learned counsel argued that even though in that case money was made available to the assessee under a strict bank guarantee with likelihood of revocation and return of the money, the Supreme Court held that a receipt will not constitute income until the uncertainty is removed and the assessee acquired right and entitlement to claim the money as his own.
Shri Rakesh Gupta, the leaned Senior Departmental Representative supporting the order of the learned Commissioner (Appeals) strongly urged that the income covered by the bank guarantee has already been received by the assessee and is liable to be included on accrual basis since the assessee has adopted mercantile system of accounting. The learned Departmental Representative was at pains to say that the warranty provision made in the books of account represented a contingent liability and no deduction in respect thereof would be allowable under the Income Tax Act. Referring to the provisions of section 19 of the Sales of Goods Act, the learned Departmental Representative submitted that on the facts of the assessees case sale transaction has been concluded after supply of goods and receipt of sale proceeds thereof. It is further submitted that the title over the goods supplied by the assessee rightfully vested with the customer and with the transfer of title to the customer, right to receive value under the sales contract has undoubtedly accrued to the assessee. The learned Departmental Representative further added that the incorporation of the warranty provisions and provision of the bank guarantee per se would not detract the factum of accrual of income. The learned Departmental Representative submitted that after the goods have been supplied by the assessee, the customer has no right to reject the goods and the assessee is under the terms of the purchase order liable only for damages or repairs. Regarding the bank guarantee, the learned Departmental Representative argued that even if the bank guarantee is irrevocable, unconditional and unqualified, yet it will be merely a security to the customer for recovery of the amount from the assessee in case of default under the contract. The learned Departmental Representative specifically referred to the entries recorded in the books of account by the assessee whereby the amount of Rs. 98,24,911 has been deducted after crediting the manufacturing-cum-trading account with the entire sale value and the amount has been taken to the warranty provision account. According to the learned Departmental Representative on the basis of the very entries recorded in the books the amount is shown as a provision and not as a accrued liability. The learned Departmental Representative placed reliance on the following decisions in support of his contentions : With regard to the decision of the Mumbai Bench in Associated Cables (P) Ltd. v. Dy. CIT (1994) 48 ITD 141(TM) relied upon by the learned counsel, Shri Rakesh Gupta, the learned Senior Departmental Representative referred to the observations of the Third Member and argued that the majority view taken by the Tribunal is that the liability on account of a warranty provision is a contingent liability and discounted value of the provision in conformity with the decision of the Honble Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 should be allowed as a deduction.
Towards the conclusion of his arguments, the learned Departmental Representative fairly conceded that a scientific evaluation of the liability of the assessee may be made on the basis of facts of the case including the past history and deduction in respect thereof may be allowed as against 10 per cent of the sale value claimed by the assessee as a deduction. The learned Departmental Representative thus took the view that the deduction of 10 per cent of the sale value claimed by the assessee on the basis of a bank guarantee is excessive and a reasonable estimate on the basis of rational and scientific evaluation may be allowed to be deducted.
In rejoinder, the learned counsel for the assessee argued that once the revenue has accepted in principle that discounted value of the liability on account of guarantees and warranties provided by the assessee is deductible, the claim made by the assessee on the basis of perception and judgment of both the parties to the transaction, namely, assessee supplier and the purchaser should be adopted. The learned counsel pointed out that bid documents and purchase orders provide for furnishing of performance bank, guarantee by the assessee equal to 5 per cent in the case of IFFCO and NFL and 10 per cent in the remaining cases, and the basis adopted by the assessee for accounting for the receipts and the method of accounting followed consistently and regularly should not be disturbed by taking recourse to the provisions of section 145 of the Act.
We have carefully considered the facts and circumstances of the case as well as rival submissions made by the learned representatives of both the sides. Various judicial authorities of High Courts as well as Honble Supreme Court cited before us by the learned representatives of both sides have been carefully gone through. The basic question which falls for consideration is whether the system of accounting followed by the assessee can be rejected by the assessing officer by taking recourse to the provisions of section 145. In our opinion, the issue needs to be considered on the basis of accepted principles of commercial accounting shorn of legal facets like connotation of legal terms viz. contingent liability or accrual of income etc. We are concerned in the instant case with profits and gains of business being one of the six heads of income as enumerated under section 14 of the Income Tax Act. Now the word "profits" is to be understood in its natural and proper sense in a sense in which no commercial man would misunderstand. The profits must be ascertained on the ordinary principles of commercial trading and commercial accounting. Section 145 of the Income Tax Act deals with the method of accounting. Till the amendment was made by the Finance Act, 1995, the section provided that the income chargeable under the head "Profits & Gains of business or profession" or "income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee. The method of accounting which the assessee desired to adopt was of his choice and the section did not mention even the names of the methods which could be adopted. This freedom of choice in adopting one or the other method of accounting has invariably been considered by the courts as an undisputed prerogative of the assessee. Thus it is open to the assessee to opt for such method of accounting as he deems reasonable and appropriate except in a few cases where the law itself imposed restrictions on the assessees choice like section 43B. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the Departmental Authorities on the view that he should have adopted a different method of accounting. Section 145 envisages that any method of accounting adopted by the assessee must satisfy the following conditions : (1) The method must be such that income can be properly deduced therefrom. In other words it must be a method recognised by the accounting principles and sanctioned by the commercial practice.
(2) The system of accounting must be regularly followed by the assessee.
(3) The accounts maintained under the said system must be complete and correct.
In so far as the first criterion is concerned, the basic requirement, implicit in the provision of section 145 as well as the general commercial world is that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory provision to this effect. However, what constitutes true and fair view of the financial results of an enterprise The pronouncement of the Institute of Chartered Accountants of India seek to describe the accounting principles and the methods of applying these principles in the preparation and presentation of financial statements so that they gave a true and fair view. The Institute has issued accounting standards and made it mandatory for the members of the Institute to comply with these standards while conducting auditing work. Such accounting standards have been formulated in conformity with the laws, customs, usages and business environment of the country. The Honble Supreme Court has endorsed and approved the authoritative nature of the accounting standards formulated by the Institute being a body of professional experts in the field of accountancy. Reference in this connection may be made to the decisions of the Supreme Court in the cases reported in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 and Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC). For our present purposes, Accounting Standard 9 dealing with the basis for recognition of revenue is relevant. Para 10 of the Standard reads as under : "Revenue from sales or service transactions should be recognised when the requirement as to performance set out in paras 11 and 12 are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. Para 11 reads as under : In a transaction involving the sale of goods performance should be regarded as being achieved when the following conditions have been fulfilled.
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to the degree usually associated with ownership and (ii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods." Now applying the aforesaid Accounting Standard to the facts of the present case, it is clear that the amount covered under the bank guarantee is subject to significant risks and uncertainties since the assessee has given a irrevocable, unconditional and unqualified bank guarantee to the customer which can be enforced without reference to the assessee. From the facts indicated hereinbefore we find that on a number of occasions the customers have in fact encashed the bank guarantees in a unilateral fashion with the result that the guarantee amount has been lost to the assessee. Furthermore instances have been cited before us by the learned counsel referring to pages 36 and 41 of the paper book whereby bank guarantees have been got renewed by the parties. The learned counsel has also referred to pages 37, 38, 39, 43 and 44 of the paper book bringing out numerous instances when the assessee has been called upon to replace or rectify the defective material supplied to the customers. In the light of these facts, we feel that the assessee is fully justified in excluding the amount of bank guarantee for the purpose of recognising the revenue. The accounting policy followed by the assessee is thus in conformity with the Accounting Standard 9 formulated by the Institute of Chartered Accountants of India.
Even if the assessee is to account for the entire sale value including the 10 per cent of the sale value covered by the bank guarantee, the liabilities arising from the warranties and guarantees as well as the uncertainties involving the possible encashment of bank guarantee by the customer have to be taken care of for the purpose of presenting a true and fair view of financial results of the enterprise. Looked at from this angle, Accounting Standard 4 issued by the Institute of Chartered Accountants of India would be relevant. Para 10 of the Accounting Standard 4 deals with the contingencies and reads as under : "The amount of a contingent loss should be provided for by a charge in the statement of profit & loss if, (a) it is probable that future events will confirm that after taking into account any related probable recovery an asset has been impaired or a liability has been incurred as at the balance sheet date and (b) a reasonable estimate of the amount of the resulting loss can be made.
Para 7.3 of the Accounting Standard clearly provides that uncertainties creating a contingency may relate to the warranties for products sold.These costs are usually incurred frequently and experience provide a means by which the amount of liability or loss can be estimated with the reasonable precision and the same can be provided for in the financial statements prepared by the enterprise. Now in the instant case the claim of the assessee that warranty provision is revenue deductible is clearly in conformity with the Accounting Standard 4 and therefore deserves to be accepted." Having regard to the aforesaid discussion we feel that the method of accounting followed by the assessee is in conformity with the prevailing Accounting Standards issued by the Institute of Chartered Accountants of India and depict a fair and true view of profits of the business enterprise. Since the method had been consistently and regularly followed right since assessment year 1984-85 and gives a fair and true view of the profits of the enterprise, the assessing officer is not entitled to invoke the provisions of section 145 and reject the method of accounting followed by the assessee. We see substantial merit in the contention of the learned counsel that the method of accounting accepted by the assessing officer for the past many years cannot be rejected merely on the basis of a change of opinion without bringing any material on record in support of a departure. There is no quarrel with the proposition that the doctrine of res judicata is not applicable to income-tax proceedings. However, this principle is subject to limitations for there should be finality and certainty in all litigations including litigations arising out of the Income Tax Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary of perverse and if it had been arrived at after due inquiry. Certainty and finality are the most essential attributes of mature and developed tax jurisprudence. We do not approve of the approach of the revenue to turn a somersault during the year under consideration in utter disregard of the aforementioned principles of jurisprudence and taking a view that the method of accounting regularly followed and accepted in past years does not give a true picture of the profits of the business.
Regarding the reliance placed by the revenue on the decision of the Supreme Court in British Paints (i) Ltd.s case (supra) we feel that the said decision does not support the case of the revenue. Undoubtedly the fact that the method of accounting has been accepted in the past would not debar the assessing officer to take a contrary view if the accounts are found to be incorrect. In the instant case, nothing has been brought on record by the assessing officer in-support of his conclusion that the method of accounting followed by the assessee is in conflict with the statutory provisions of the Income Tax Act or that the accounts are incorrect or that true profits cannot be deduced therefrom. What the assessing officer has done is to change his opinion about the method of accounting adopted by the assessee without bringing any material on record justifying the departure in his approach British Paints (i) Ltd.s case (supra) would obviously not be applicable in the facts of the case.
With regard to the various judicial authorities cited by the assessing officer in the assessment order concerning the liability being contingent, we have carefully have gone through these decisions and find that these decisions do not justify rejection of the method of accounting by the assessing officer under section 145. In Navsari Cotton & Silk Mills Ltd.s case (supra) relied upon by the assessing officer, the issue concerned deduction of gratuity under section 40A(7) which has been held as contingent liability. The Honble Gujarat High Court has referred to the decision of the Supreme Court in the case of Shri Sajjan Mills Ltd. (supra). It is relevant to mention here that the Supreme Court in the said decision took note of the accounting principle that the provision made in the profit & loss account for estimated present value of the contingent liability properly ascertained and discounted on an accrued basis could be deducted either under section 28 or 37 of the Act. In Metal Box Co. of India Ltd.s case (supra) a similar view has been taken by the Honble Supreme Court.
However, in view of the specific provisions introduced under section 40A(7) concerning deduction of gratuity, the aforesaid principle regarding deduction of discounted present value of the contingent liability was held as inapplicable. These decisions therefore rather support the case of the assessee.
The learned Departmental Representative has relied on the decision of the Delhi Bench of the Tribunal in the case of Punj & Sons (supra). In this case, the assessee undertook certain contracts which were completed in August/September, 1992. Although the assessee received substantial amount during the assessment year 1983-84, yet the income from the contract was not disclosed on the ground that completed contract method of accounting was being followed. The Tribunal rejected the contention of the assessee on the ground that there was no conclusive evidence to establish that the assessee had been following a consistent method of accounting where under income has been accounted for after complete execution of the contract. The decision does not render any assistance to the departmental case. In the facts of the case in hand, there is no dispute that a consistent method of accounting has been followed by the assessee for the last 15 years or so and the said method has been accepted by the revenue authorities in the earlier years.
The next decision cited by the learned Departmental Representative is Associated Cables (P) Ltd.s case (supra) decision has in fact been cited by the learned counsel also in support of assessees case. The learned Departmental Representative submitted that in this decision, learned Judicial Member came to the conclusion that 10 per cent of the sale proceeds released to the assessee on furnishing of bank guarantee are liable to be included as accrued receipts. On difference of opinion, the case was referred to the Third Member under section 255(4). The Third Member, after going into the facts of the case observed that discounted value of the 10 per cent of the sale proceeds which are subject to risk of loss in case of any defect in the goods should be adopted. On this basis the learned Departmental Representative sought to argue that the decision in fact supports the case of the department. After going through the entire decision of the Tribunal, we feel that the decision in fact supports the assessees case for excluding the 10 per cent of the sale value against which irrevocable and unconditional bank guarantee has been furnished.
Encashment of the bank guarantee is not subject to any default on the part of the assessee in the matter of quality of goods supplied or the performance thereof. The bank guarantee, as per the extracts from the agreement of guarantee reproduced above can be encashed by the customer in a unilateral fashion without any reference to the assessee. Looking to these circumstances, the method followed by the assessee excluding 10 per cent of the sale value covered by the bank guarantee appears to be fair and reasonable. It is relevant to add here that in Associated Cables case not a single instance has been cited by the assessee in which 10 per cent of the sale value covered by the bank guarantee has not been paid to the assessee. The assessee in that case did not furnish any instance of encashment of bank guarantee. Thus even on facts the decision is clearly distinguishable from the facts of the present case.
We may now turn to various judicial authorities cited by the learned counsel which support the case of the assessee. In Janatha Contract Co.
case (supra) cited by the learned counsel, the assessee was a firm of contractors which carried out certain works on contract for the state.
The terms of the contract provided for a deduction of 10 per cent from all payments to be held as retention money to be released on completion of work or the sanction of the final bill. It was held by the Kerala High Court that the money retained by the government had not become due since the stipulation in the contract postponed the time of payment of the contract money until after the expiration of a period during which the contractor is liable for defects or for repairs.
A similar view has been taken by the Patna High Court in Chanchani Brothers (P) Ltd. case (supra) cited by the learned counsel.
In Simplex Concrete Piles (India) (P) Ltd. case (supra) cited by the learned counsel, on similar facts retention money in respect of the jobs completed by the assessee was excluded from the total income and it was held that only after the assessee fulfilled the obligations under the contract, and the retention money was released after the verification of satisfactory execution of the contract, the amount can be included in the total income. The ratio laid down by the High Courts in these decisions apply with equal force to the facts of the present case before us. The only distinction, referred to by the learned Departmental Representative, is that in these cases the retention money has been withheld by the principal till the satisfactory completion of the contract and final approval thereof whereas in the instant case the retention amount has been released by the customers subject to furnishing of irrevocable and unconditional bank guarantee. In our opinion, the distinguishing feature referred to by the learned Departmental Representative is of no consequence inasmuch as in so far as 10 per cent of the sale value is concerned, even though payment has been received by the assessee yet the control and ownership of the amount vest with the customer and the amount can be recovered by the customer at any time by unilateral encashment of bank guarantee without any reference to the assessee and without pointing out any default on the part of the assessee in the matter of quality and performance of the goods supplied under the contract. Thus, mere payment against furnishing of bank guarantee is of no consequence whatsoever except that it may enhance the liquidity of the assessee. The decision of Honble Supreme Court in the case of Hindustan Housing & Land Development Trust case (supra) supports the view taken by us.
The decisions of various Benches of the Tribunal cited by the learned counsel indicated below involve substantially similar set of facts and fully support the view taken by us in the instant case.
(4) Paramount Construction, Income Tax Appeal No. 3624 (Ahd) of 1994, order dated 6-9-1999.
Before parting with this ground, we may observe that the various judicial authorities cited by the learned representatives of both the sides have been considered by us even if some of these authorities may not be specifically discussed above.
For the reasons discussed above, we hold that the system of accounting regularly followed by the assessee in the instant case is not liable to be rejected under section 145 and the addition of Rs. 98,24,911 upheld by the learned Commissioner (Appeals) is therefore directed to be deleted.