Section 5 of ITA, 1961 – Income – Accrual of income – Mercantile system of accounting – Bill raised for premature termination of contract and contracting company not accepting bill – Income did not accrue – Another bill of which small part received after four years – Theory of real income – Sum not taxable – Any claim of assessee by way of bad debts was to be adjusted

35.  CIT(IT) vs. Bechtel International Inc.; 414
ITR 558 (Bom.)

Date of order: 4^th June,
2019

A.Y.: 2002-03

Section 5 of ITA, 1961 – Income –
Accrual of income – Mercantile system of accounting – Bill raised for premature
termination of contract and contracting company not accepting bill – Income did
not accrue – Another bill of which small part received after four years –
Theory of real income – Sum not taxable – Any claim of assessee by way of bad
debts was to be adjusted

The assessee was in the
construction business. It did not include in its return two sums of Rs. 26.47
crores and Rs. 59.51 crores, respectively, for which it had raised bills but
had not accounted for in its income. The AO rejected the assessee’s contention
that those amounts had not accrued to it and that even on the basis of the
mercantile system of accounting followed by it, the amounts need not be offered
to tax. But the AO was of the opinion that since the assessee had raised the
bills, whether the payments were made or not was irrelevant since the assessee
followed the mercantile system of accounting.

The
Commissioner (Appeals) held that the sum of Rs. 59.51 crores, for which the
assessee had raised the bill after the termination of the contract, could not
have been brought to tax since the bill pertained to the mobilisation and site
operation cost; but in respect of the sum of Rs. 26.47 crores, he did not grant
any relief on the ground that the bill pertained to the construction work that
had already been carried out before the termination of the contract. The
Tribunal found that in respect of the sum of Rs. 59.51 crores, the assessee was
awarded the contract of the project of the parent company of the contracting
company, that the parent company was in severe financial crises, that the
assessee raised the bill after the termination of contract, that the bill was
not even accepted by the contracting company and that the income never accrued
to the assessee. In respect of the amount of Rs. 26.47 crores, the Tribunal
found that due to the financial crises of the parent company of the contracting
company, the assessee could not receive any payment for a long time and could
recover only 8.58% of the total claim and, inter alia applying the
theory of real income, deleted the addition. The assessee had also in a later
year claimed the same amount by way of bad debts. The Tribunal while giving
relief to the assessee ensured that any such amount claimed by way of bad debts
was to be adjusted.

On appeal by the Revenue, the
Bombay High Court upheld the decision of the Tribunal and held as under:

“(i)   The Tribunal did not err in holding that no real income accrued to
the assessee as only 8.58% of the total claim was received, applying the real
income theory, bill amount of Rs. 26.47 crores due to the financial crises of
the parent company of the contracting company, and in respect of the sum of Rs.
59.51 crores on the ground that the bill was raised after the termination of
the contract and the bill was not even accepted by the contracting party.