Commissioner of Income Tax vs Alampally Brothers Ltd.

C.N. Ramachandran Nair, J.—Heard the senior standing counsel appearing for the Revenue and senior counsel Shri Sarangan appearing for the Respondent-Assessee.

The short question raised in the appeal filed by the Revenue is whether the Tribunal was justified in confirming the order of the CIT(A) upholding Respondent-Assessees claim of loss of Rs. 55,61,146 on account of de-escalation of price of LPG cylinders supplied by Respondent to oil companies. Admittedly the Respondent was engaged in supply of LPG cylinders to Government companies like HPCL, IOC and BPC. What is clear from the orders is that the regular bills raised for supplies were credited on the dates of supplies. The declared profit in the accounts for the asst. yr. 2000-01 was Rs. 35,76,983. However, the Assessee worked out a loss of Rs. 55,61,146 on account of de-escalation of prices later fixed by the company. After setting off the loss on account of de-escalation of price the Assessee claimed a net loss of Rs. 7,72,120 which is done after finalisation qf account. In the course of assessment, the AO noticed that the Assessee has taken credit of sale price in accordance with the invoices and going by the system of accounting maintained, the entire income is assessable. In other words loss if any on account of de-escalation of prices could be accounted only in the subsequent year that is for the asst. yr. 2001-02. The claim of loss therefore was rejected and assessment completed based on the income credited in the accounts.

The CIT(A) following the decision of the Supreme Court in Godhra Electricity Co. Ltd., Ahmedabad Vs. Commissioner of Income Tax, Gujarat-II, Ahmedabad, allowed the appeal holding that only real income is assessable. This is confirmed by the Tribunal against which Revenue has filed this appeal.

After hearing both sides, we find that the Assessee is entitled to claim loss only in the year in which the purchasers have credited their accounts. The letter of IOC extracted in the Tribunals order itself shows that even though revised rates were applicable from 1st July, 1999 the purchaser company has not sent any debit notes or sought to recover any amount as on the date of such letter which itself was written on 31st Oct., 2000 that is seven months after close of the accounts. In fact what is clear from the letter is the provisional billing which is for subsequent sales at revised rate started only from 1st Nov., 2000. Therefore, what is required to be found out is as to when the oil companies have started effecting recovery of the excess payments made to the Respondent-Assessee on account of price variation effected retrospectively. We are of the view that the case oi the Revenue that income has to be determined in accordance with the system of accounting followed by the Assessee in terms of Section 145(1) is absolutely tenable. However, there can be no dispute on the Assessees contention that only the real income is assessable under the IT Act. The Department also does not raise the proposition that unreal or notional income should be assessed. It is also the common case of both sides that bills raised and accounted in the several years got varied on account of price variation provided in the supply contract. However, income has to be computed in accordance with the system of accounting followed. In fact the purchasers are also Assessees under the Act and obviously going by the transaction, the purchasers cost would have been debited to the P and L a/c of the oil companies and they would have claimed the credits on account of price variation only in subsequent years because without raising bills or debit notes they cannot account the price difference. We also notice that the first appellate authority and the Tribunal which are essentially fact-finding authorities have not considered the way the price difference is accounted by the Assessee and by the purchasers. The Assessees contention that only real income is assessable has to be necessarily upheld. However, the income has to be computed in accordance with the system of accounting in terms of Section 145 of the Act. Since the recovery of excess price paid to the Assessee would have been done by the oil companies later in the course of time it is for the Assessee to produce documents before the AO to show when the oil companies have recovered the amounts by issuing debit notes or other documents and if done in the previous year only Assessee is entitled to the deduction in this year. It is also open to the AO to call for the records of the concerned oil companies to verify as to when they accounted recovery of excess price paid to the Respondent-Assessee. We therefore allow the appeal by vacating the orders of the Tribunal and the first appellate authority and remand the matter to the AO for fresh decision after verifying the accounts of the Assessee and purchasers on accounting of price variation. We make it clear that the Assessee should not miss the claim for subsequent years on account of the claim allowed by the Tribunal though erroneously this year. In other words AO should revise even the subsequent assessments if the claim is found allowable in next year or later years.