Judgment:
Both these appeals by the department are directed against two separate orders of the learned Commissioner (Appeals), dated 24-4-1995 and 25-4-1995, for assessment years 1992-93 and 1993-94, respectively.
Since common issues are involved in both the appeals, they are being disposed of together by this combined order for the sake of convenience.
The first common ground in both the appeals is against the deletion of additions of Rs. 50,73,698 and Rs. 8,47,118 made on account of ad hoc payments received from Sardar Sarovar Nigam for extra efforts of excavation work. The second common ground is against holding that apportionment of ad hoc payment was incorrect. The third common ground is against holding that the disputed amount recoverable in excess of the amount fixed cannot be treated as income. For the sake of convenience we shall refer to the facts pertaining to assessment year 1992-93.
The assessee is a contracting firm specializing in earth work. For the year under consideration, assessee had been working on the construction of Narmada Canal for Sardar Sarovar Narmada Nigam Ltd. (hereinafter referred to as Nigam). Assessee had to excavate the canal in soil and rocky channel from kms. 97 to kms 108 and thereafter canal lining, had to be constructed by the assessee-firm. The scrutiny of Narmada main canal work account as appearing in the assessee's books showed of Rs. 20,43,64,239 for RA bill Nos. 57 to 80. The sum of Rs. 15,36,65,056 was debited as various expenses. The other debit was of Rs. 3,70,54,104 pertaining to RA bill No. 79 being a payment for rock excavation and was transferred to ad hoc payment account which was reflected on the liability side of the balance sheet. The balance of Rs. 1,36,45,079 in the above account was transferred to the credit of P&L a/c.
Assessing officer enquired above RA bill No. 79 and the reasons for transferring the concerned amount to ad hoc payment account. The first explanation of the assessee was that as per the tender drawing and details given by Nigam, total earth to be excavated was 36.49 lac cubic metres consisting of 34.69 lac cubic metres of earth and 1.80 lac cubic metres of soft rock. However, as the excavation progressed since its commencement in November, 1989, assessee found that it was encountering rock at a much higher level. It was estimated that the rock excavation could go up from 1.80 lac cubic metres to 14.08 lac cubic metres.
Accordingly, assessee made representations to the Nigarn for extra rates of excavation. After much persuasion and correspondence, Nigam made an ad hoc/provision payment of Rs. 3,70,54,104. Assessing Officer gathered some information directly from the Nigam. Nigam's reply was that it was a provisional compensation to the contractors on account of higher rock pro. Further clarifications was sought from the Nigam by the assessing officer. Nigam did furnish the necessary clarifications.
Assessee also furnished further clarifications quite elaborately and submitted that advance of Rs. 370 lacs was provisional only and was liable to be recovered in full or in part as and when final decision was taken.
On the basis of information supplied by the Nigam to the assessing officer, it was ascertained that for the accounting period from 1-4-1991 to 31-3-1992, assessee had already excavated extra rock of 4 lac cu.m. and 7.98 lac cu.m. of rock was to be excavated after 31-3-1992. On the basis of this information and considering the fact that assessee had received ad hoc payment of Rs. 370 lacs, assessing officer computed the average rate per cu.m. at Rs. 29.93. After adding 33 per cent for price escalation as per tender clause, he concluded that actually Rs. 1,75,15,396 should have been credited to the P&L a/c against which assessee had credited Rs. 1,24,41,698. Thus, the difference of Rs. 50,73,698 was sought to be added to the total income by the assessing officer. Assessee tried to resist this addition very strongly, the main contention being that it was only an ad hoc payment which the Nigam had the authority to demand it back. In support of its contention, assessee relied on the decision of the Karnataka High Court in the case of CIT v. Mysore Tobacco Co. Ltd. (1979) 119 ITR 87 (Kar) Reliance was also placed on the following decisions Assessing officer was, however, not convinced by the explanation given and struck to his computation, and made the addition.
Commissioner (Appeals) considered the submissions of the assessee. It was stated before her that the rates for provisional payment were revised from time to time and in fact there had been some recovery also in December, 1993/January, 1994. The Commissioner (Appeals), therefore, observed that the assessing officer's observation that Niga~ffi was paying a uniform rate for all sorts of rock, hard or soft, was not in order. So also his method of working out the average rate was also found to be not in order. Further, according to the Commissioner (Appeals), assessing officer did not take into account the element of higher expenses required to be incurred in future while determining the average rate on the basis of ad hoc payment. Legally also, she held, there was no firm commitment from the Nigam and at best it could be treated as deposit in the hands of the assessee. Accordingly, she directed the assessing officer to delete the addition of Rs. 50,73,698 with a rider that for any reason, the amount of ad hoc payment or part thereof ceased to be held as deposit, in any year, the same will become taxable as income accrued in that year.
The learned departmental Representative referred to the various facts mentioned by the assessing officer in his order. Our specific attention was drawn to the clarification given by the Nigam to the assessing officer to the effect that in principle it had decided to compensate the assessee for the rock excavation which undisputedly was found to be at a higher level. The main plank of the argument of the departmental Representative was that it was only the rate which was provisional but the right to receive was there. According to him, the Commissioner (Appeals) was unduly influenced by the Nigam stating in its clarification that the payment was provisional and it could be recovered also following the final decision. The learned departmental Representative relied on the decisions of the Supreme Court in the case of CIT v. K.R.MTT Thiagaraja Chetty & Co. (1953) 24 ITR 525 (SC) and in the case of Morvi Industries Ltd. v. CIT (1971) 82 ITR 835 (SC).
The main argument of the learned counsel was, of course, that the ad hoc payment was provisional and it was liable to be recovered by the Nigam. It was further pointed out that while making the impugned additions, assessing officer had not allowed the expenses incurred by the assessee on extra work. This was confirmed by the fact that in assessment years 1994-95 and 1995-96, the successor assessing officer had changed the formula for determining the income and having been satisfied with the overall GP shown by the assessee, no addition was made. It was also pointed out from the P&L a/c for the year ending on 31-3-1996, that all ad hoc payments were shown in the said P&L a/c minus the undisputed expenses. Several decisions have been relied upon by the assessee which we shall deal with at appropriate places, if necessary.
We have duly considered the rival contentions and the material on record. We first deal with the case law relied upon by the learned departmental Representative. In the case of Thiagaraja Chetty (supra), though managing agency commission had accrued to the assessee, it was kept back and held in suspense account by the managed company as there was a dispute going on with regard to a debit which the assessee owed to the managed company. The Supreme Court held that the mere fact that the company was withholding payment on account of a pending dispute cannot be held to mean that the amount did not accrue to the assessee.
Thus, in the case before the Supreme Court, the two amounts were separate and distinct. One amount was owed by the assessee to the company and the other amount, i.e., commission was owed by the company to the assessee. The dispute with regard to one amount did not stop the accrual of the commission income and hence was held to be taxable. The facts in the case before us are quite distinguishable. We are concerned only with one amount, i.e., the ad hoc payment received by the assessee. We have to decide whether the receipt accrued to the assessee during the year under consideration as income or not.
The case of Morvi Industiies (supra) also related to the accrual of managing agency commission. As per the terms of agreement, commission was due to the assessee on the last day of the accounting year but was payable immediately after the annual accounts of the managed company had been passed in the general meeting. Since the managed company was suffering losses, assessee relinquished part of its commission after it had become due but before it had become payable. The claim of the assessee was that the commission relinquished by it was not taxable.
The Supreme Court held that the commission had accrued to the assessee, and the fact that payment was deferred till after the accounts had been passed in the meeting of the managed company did not affect the accrual of the income. The Supreme Court rejected the assessee's argument that as the amount in question was never received by the assessee but was relinquished, there arose no tax liability. In the present case, amount has been received by the assessee unlike in the case of Morvi Industries Ltd. (supra). The question is whether it is received as income or not. Therefore, facts being quite different, the said decision cannot help the revenue.
Now, let us consider the facts of the present case. The enhanced rate was .granted to the assessee because the rock content was found to be at a much higher level. On this basis it was estimated that total rock to be excavated may go upto 14.08 lac cu.m. as against 1.80 lac cu.m.
as was the assumption in the original tender drawing. It is also a fact that as the excavation progresses, the strata of rock may undergo a change. Not only that, even the quality of rock may undergo a change, i.e., whether it is hard or soft. All these changes which are very likely, may ultimately change the rate of excavation and weighted average quite drastically. Therefore, what was presently paid to the assessee was absolutely provisional. Payment was made during the year under consideration because presently the assessee was encountering rock which was entailing heavy expenditure. Hence, pending final decision, Nigam had decided to make a provisional payment.
Nigam had made it very clear to the assessing officer himself that the amount paid provisionally was liable to be recovered in full or part following the final 'decision. The fact that the rates may vary drastically is further borne out from the correspondence that ensued between the assessee and the Nigam. In normal contract payments, contractees generally retain a part of the final payment, say 10 per cent to ensure that there are no defects. These retained amounts are known as retention amount. In the present case also, while making provisional payment, Nigam had retained 10 per cent of the payment (p.
47 of the paper book). However, here the retention was not as a security but it was under the apprehension that the rate may decrease due to variations in the quantities of canal excavations in rocky strata and overburden in the final slice. On the other hand, assessee was anticipating increase in rate due to exposure of rock at higher levels. The point we are trying to drive home is that nothing was certain about what the future excavations would reveal. And who can be so sure about the ways of nature. It was not a bald statement on the part of the Nigarn that ad hoc payment was liable to be recovered in full or part. But it was possible because of the unfathomable ways of nature. Hence, though 4.4. lac cu.m. of excess rock excavated during the year may have been taken as a base to compute the ad hoc payment, it could not be said to be the income of the assessee for the year. It was merely a receipt, atleast for the year under appeal, without any of the attributes to be described as income. The assessee had no legal claim over it. In this connection, it would be pertinent to quote the observations of the Supreme Court in the case of Morvi Industries Ltd. (supra). At p. 840 the court observed as follows : "The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount. The further fact that the amount of income is not subsequently received by the assessee would also not detract from or efface the accrual of the income, although the non-receipt may, in appropriate cases, be a valid ground for claiming deductions. The accrual of an income is not to be equated with the receipt of the income. That the two, accrual and receipt of income, have different connotations is also clear from the language of section 4 of the Act. Clause (a) of sub-section (1) of section 4 of the Act deals with the receipt of income while the accrual of income is dealt within clause (b) of that sub-section." At this juncture, it would also be useful to refer to the decision of the Supreme Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. (1986) 161 TTR 524 (SC). In that case, assessee was awarded additional compensation of Rs. 7,36,691 by the arbitrator in July, 1955, for acquisition of its land by State Government. State Government had preferred an appeal to the High Court. Pending the appeal, State Government deposited the additional compensation in the court on 25-4-1956. Assessee was permitted to withdraw the amount on 9-5-1956, only on furnishing a security bond for refunding the amount in the event of the appeal being allowed. The question was whether the additional amount could be taxed in assessment year 1956-57 on the ground that it became payable pursuant to the arbitrator's award The Supreme Court (at p. 527) observed that there was no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety, the right to payment of enhanced compensation would have fallen altogether. Again at p. 528 of the report, the court referred with approval to the decision of the Andhra Pradesh High Court in the case of Khan Bahadur Ahmed Alladin & Sons v. CIT (1969) 74 ITR 651 (AP), wherein it was observed that the enhanced compensation accrued to an assessee only when the court accepted the claim and not when the land was taken over by the Government.
In the present case also, as observed earlier, there was no absolute right vested with the assessee to receive higher rate for excavation.
As mentioned by the Nigam itself, it could so happen on final decision that assessee may become liable to refund the amount received by it as provisional payment. In fact, Commissioner (Appeals) has observed that such recovery had been made by the Nigam in December, 1993/January, 1994. Therefore, if on final determination assessee was called upon to refund the entire amount, the amount taxed in this year could fall through. We reiterate that the payment received by the assessee was purely ad hoc and the quantity of rock excavated was used merely as a base to quantify the ad hoc payment. It was not the final rate for the quantity excavated during the year. Again, it would be advantageous to reproduce the observations of the Supreme Court in the case of Hindustan Housing & Land Development Trust (supra) given on p. 530 : "It is sufficient to point out that there is a clear distinction between cases such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles." In the present case also, merely the provisional payment to be received by the assessee is quantified, but the right to receive payment is not absolute. It is not the reverse, i.e., where right to payment is admitted and quantification is left to be determined. The Nigam has not admitted of assessee's right to receive the payment. Hence, following the above principles, we uphold the order of the Commissioner (Appeals) deleting the addition of Rs. 50,73,698 in assessment year 1992-93 and of Rs. 8,47,118 in assessment year 1993-94. The remaining two grounds are consequential to the first ground and hence stand rejected.