COMMISSIONER OF INCOME TAX Vs. WESTERN INDIA ENGINEERING COMPANY

JUDGEMENT

(1.) THIS reference relates to the assessment of the respondent's income for the assessment year 1962 -63, the accounting year being S. Y. 2015. The only question which is involved in this reference is whether contract would amount to 'gross receipt' even though bills including the kasar amounts are prepared by the assessee and sent to its customers.

(2.) IN order to understand the real controversy between the parties, it would be necessary to state the relevant facts and the system of accounting adopted by the respondent -assessee since last many years. These facts are as under :

(3.) IT is an admitted position that the assessee credits the total amount of the bills for non -tender work which contain a higher rate of charges to the respective works accounts kept by it in its account books. It may be recalled here that the rates which are mentioned in the bills prepared by the assessee for non -tender work are not stipulated in the contract and, therefore, there is always a possibility with regard to such bills that the customers would not accept these rates at the time of final settlement of the bills. What the assessee, therefore, does is that, though it credits the whole amount of such bills to the works account, it transfers only a part of the total amount of these bills to the profit and loss account and retains the balance of the amount in the works account by way of a provision, which is known between the parties as kasar. To explain the position by way of an illustration, if the assessee has done some extra non -tender work and has preferred a bill for Rs. 10,000, this whole amount of Rs. 10,000 would be credited to the works account but, since the past experience of the assessee is that the bill would not be invariably settled by the customers at the figure of Rs. 10,000, what it does is that it makes a reasonable estimate of the possible recovery towards this bill and credits that estimate to the profit and loss account. Suppose, in the given case, its estimate is that he would be able to recover Rs. 9,000 from his customers then an amount of Rs. 9,000 would be carried to the profit and loss account keeping the remaining amount of Rs. 1,000 in the works account as kasar.