IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN THURSDAY, THE 21ST OCTOBER 2010 / 29TH ASWINA 1932 ITA.No. 1313 of 2009() ------------------------------- ITA.1209/COCH/2005 of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT/REVENUE ----------------------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY SRI.P.K.R.MENON, SR.COUNSEL, GOI (TAXES) ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT/ASSESSEE: ------------------------------------------------------------- ALAMPALLY BROTHERS LTD., MARKET ROAD, ALUVA. BY SRI.SARANGAN, SENIOR ADVOCATE, ADV. SRI.K.VINOD CHANDRAN. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 21/10/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: rs 'CR' C.N.RAMACHANDRAN NAIR & K. SURENDRA MOHAN, JJ. ------------------------------------------------------------ I.T.A. NO:1313 OF 2009 ----------------------------------------------------------- Dated this the 21st October, 2010. JUDGMENT Ramachandran Nair, J. Heard the senior standing counsel appearing for the revenue and senior counsel Shri. Sarangan appearing for the respondent- assessee. 2. The short question raised in the appeal filed by the revenue is whether the Tribunal was justified in confirming the order of the CIT (Appeal) upholding respondent-assessee's 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 assessment year 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 ITA 1313/2009 2 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 of account. In the course of assessment, the Assessing Officer noticed that the assessee has taken credit of sale price in accordance with the invoices and going by the system of account 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 assessment year 2001-02. The claim of loss therefore was rejected and assessment completed based on the income credited in the accounts. 3. In CIT (Appeal) following the decision of the Supreme Court reported in Godhra Electricity Co.Ltd. v. Commissioner of Income Tax (225 ITR 746) allowed the appeal holding that only real income is assessable. This is confirmed by the Tribunal against which revenue has filed this appeal. 4. 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 Tribunal's order itself shows that even though revised rates were applicable from 1/7/1999 the purchaser company has not sent any ITA 1313/2009 3 debit notes or sought to recover any amount as on the date of such letter which itself was written on 31/10/2000 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 1/11/2000. Therefore, what is required to be found out is as to when the oil companies have started effecting recovery of the excess payments made by the respondent-assessee on account for price variation effected retrospectively. We are of the view that the case of 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 assessee's contention that only the real income is assessable under the Income Tax 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 get 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 purchaser's cost would have been ITA 1313/2009 4 debited to the profit and loss account 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 assessee's 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 Assessing Officer 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 Assessing Officer 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-asssessee. We therefore allow the appeal by vacating the orders of the Tribunal and the first appellate authority and remand the matter to the ITA 1313/2009 5 Assessing Officer 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 Assessing Officer should revise even the subsequent assessments if the claim is found allowable next year or later years. C.N.RAMACHANDRAN NAIR Judge K. SURENDRA MOHAN Judge jj ITA 1313/2009 6