Assessee was a closely held company incorporated in USA In India, assessee-company entered into contract with DPC .First phase of contract was completed - Second phase of contract did not run its full course . Same was terminated by assessee-contractor on account of non-payment of bills by contractee DPC. Assessee raised a claim which had not been accepted by contractee DPC. Since ultimate collection was not certain while raising bills, assessee did not credit same to its profit and loss account . Thus, said amounts were not shown by assessee as its income - Whether since, suits/ disputes between assessee-contractor and contractee were pending, contractual income could not be said to be accrued when invoice raised by assessee had been rejected by contractee in view of its bankruptcy - Held, yes - Whether, however, on actual receipt of invoice amount, same would be taxed in year of receipt - Held, yes Bechtel International Inc [2016] 71 taxmann.com 62 (Mumbai - Trib.) OCTOBER 30, 2015

Facts

Assessee , a closely held company in USA , entered into contract with Indian Companies. Contract could be executed partly only because contratee companies failed to pay the bils raised. The USA Company raised bill for work done and also for demobilization in winding up site operations. The bills were not offered for Income and assesse made a disclosure in this regard in his computation. AO made addition. CIT A deleted addition of bill for demobilization only saying that this bill was never accepted by contractee.

Comprehansive Analysis of Income Computation and Disclosure Standads

The Court held that Additional Finance Charges collected by the assessee on borrowers default in payment of EMIs was to be taxed on receipt basis and not accrual basis. It held that the test of real income is the chance or probability of realization and when there was uncertainty in the recovery of EMIs the recovery of the additional finance charge which was an additional burden was equally uncertain and to be taxed on receipt basis. CIT v Shriram Investments Ltd [Tax Case (Appeal) Nos 1222 & 1225 to 1228 of 2007] – TS-538-HC-2015 (MAD)

Amount received for right to use network for 20 years shall be taxable over 20 years Reliance communication Infrastructure Ltd. 79 DTR 198 (BOM.)

Compensation received from landlord for delay in actual delivery of leased premises. Pre-operative rent was credited to pre-operating expenses to be capitalized and post operative rent was credited to rent expenses. Held that no portion of compensation amount is taxable as revenue receipt. American Express (India) 79 DTR, 127 (Delhi Trib.)

Difference between purchase price and redemption price of debentures offered for taxation over a period of six years. Apex court upheld order of ITAT and reversed order of High court relying upon judgement of Bombay High Court in Taparia Tools Ltd. 260 ITR 102 (BOM)-Rakesh Shantilal Mardia (2012) 210 Taxmann 565(SC)

Guarantee commission to recognized when guarantee is issued and not over period of guarantee Shinhan Bank (2012)54 SOT 140 (Mum Trib)

Income from Deferred guarantee does not accrue or arise in the year in which agreement is entered but spread over the period to which commissions relates BNP Paribas (2012) 79 DTR 310 (Mum Trib.)

For genuine difficulties for changing method of accounting from merchantile to cash for interest income-change is genuine Coromandal Investment (P) Ltd. (Guj) 225CTR 313

Accrued interest receivable by assessee only after end of previous year cannot be assessed to tax in current year even though assessee following mercantile system. FAL Industries 17 DTR 308 (MAD) (2009)

Once an order of refund of sales tax is passed, the same has to be treated as income notwithstanding pendency of appeal against refund order. Beirsdorf (India) LTD 28 DTR 188(Bom)

Law relating to deductibility of expenses in Contractual and Statutory liability disputes dealt at length by the Special Bench of ITAT

Special Bench presided by ITAT President Mr. DD Sud in the case of National Agriculture Co-operative ITA  1999 & 2000/Del/2008 pronounced on 16-10-2015 has touched and dealt at length the issues of deductibility of expenses in case of Contractual and Statutory liability disputes with the aide of Judicial pronouncements and adumbrated vital principals of law on the subject as under:

Where the assessee has been assessed at higher amount under sales tax law and demand has been raised against the assessee, notwithstanding that the assessee has not made any entry for liability in his books of accounts and has gone into appeal before higher authorities, the deduction in respect of sales tax demand shall be allowed- Kedar Nath Jute Mfg. Co. Ltd. 82 ITR 363(SC)

Entries made by assessee in account s are not determinative of profit or lose earned by assessee .Assessee by making entries not as per accounting principal may conceal profit or loss and entries made by him cannot be regarded as conclusive one way or another -Sutlej Cotton Mills 116 ITR 1(SC)

Held by Allahabad HC in Sumati Television P Ltd (23.09.2014) 53 TMC 281, advance received for warranty services to be rendered in second year could not held as income on receipt basis.

Bill for professional fee for uploading tax return of financial year ending 31st March raised on 31st October is not prior period item [para 23]--M/s. LGW Limited ITA No.267/Kol/2013 Date of Pronouncement : 07.10.2015.

Matters which are not covered by notified standards u/s 145(2) and are also not covered by provisions of income tax law can be interpreted as per non notified standards or guidance notes of ICAI although not mandatory in nature- Held by AP High Court in Pact Securities on 05-02-2015 ITA 252/2003. The Court allowed deduction of lease equalization charges as per Guidance Note issued by ICAI applicable before 01-04-2001

Given the manner and functioning of the lawyers and law firms, it is correct that the categorization of a receipt can take place only at the time of appropriation i.e. in case of fees only when the matter is over or as when the Assessee decides on the quantum of fees. This will not be the entire advance received as at the time it is received it does not bear any particular characterization for the purposes of treating it as income. Hence mere receipt of advance can not be treated as income in the year of receipt of amount although cash system of accounting is being followed by the advocate.

[Om Parkesh Khaitan ITAT Delhi 21-07-2015 ITA 416/2015]

Accrued interest which was receivable by the assessee only after the end of the previous year cannot be assessed to tax in the current year even though the assessee is following mercantile system of accounting.

CIT vs. FAL Industries Ltd. (2009) 17 DTR 308 (Mad)

Treatment of Deferred Guarantee Commisison

Income from deferred guarantee commission did not accrue or arise in the year in which guarantee agreements were entered and such income should be spread over the period to which the guarantee commission related and should be assessed proportionately. (A.Y. 2002 – 03 & 2003 – 2004) BNP Paribas Sa v. Dy. DIT (International Taxation) (2012) 79 DTR 310/150 TTJ 395 (Mum.) (Trib.)