G. SANTHANAM, A.M. ORDER This is appeal by assessee. assessee is private limited company. It had entered into agreement with Uttar Pradesh State Electricity Board (UPSEB) for supply of 1,500 Kms. of ACSR (Weasel) conductors and 500 Kms. of ACSR (Rabbit) conductors at Rs. 1,775 and Rs. 2,970 per Km. respectively, exclusive of taxes and duties. rates were variable in accordance with rates of raw materials viz. aluminium and steel. For purposes of calculating price variation as per cl. 4.1 of agreement dt. 9th Sept., 1978, basic rate of aluminium was taken at Rs. 14,253.46 per MT as was prevailing at time of issue of order, whereas basic rate remained at Rs. 13,390.15 per MT till 30th June, 1979. supplies should have been made before 30th June, 1979. As per cl. 4.2 of said agreement, billing rate agreed to by UPSEB was based on price of aluminium prevailing one month prior to date on which conductors were offered for inspection. assessee was requesting for extension of time for supply of materials, but contractee had not granted such extension and, as per its letter dt. 4th July, 1980, had directed assessee to charge bill at rate of Rs. 1,717.57 per Km. (Rs. 1,880.06 per Km. inclusive of taxes and duties) based on aluminium rate of Rs. 13,390.15 per MT prevailing in May 1979. But, assessee submitted 10 sales bills dated between 17th April, 1980 to 28th July, 1980 in respect of supply of total quantity of 461.860 Km. Weasel conductors for total amount of Rs. 10,17,279.10 at rate of Rs. 1,921.37 per Km. inclusive of taxes and duties, as against total sum of Rs. 8,68,324.51 computed at agreed rate of Rs. 1,880.06 per Km. (inclusive of taxes and duties). These bills were negotiated through bank and honoured by customer. 2. Before ITO, assessee claimed that sum of Rs. 1,48,955, being difference between agreed rate and rate charged by assessee, did not accrue to assessee even though received by it and, therefore, it did not form part of its income. ITO rejected contention of assessee for reason that bills as raised by assessee were duly honoured by customer and payments were also collected by assessee on these supplies. As assessee adopted mercantile system of accounting, income accrued to it and as matter of fact received by it and, therefore, it formed part of its total income. ITO further observed that assessee was free to claim deduction in relevant years if excess amount of bills had to be refunded to customer. Accordingly, he added sum of Rs. 1,48,955 to income of assessee. 3 . Before CIT (A), it was contended that assessee had to furnish bank guarantee of 10 per cent margin and had to send bill for 100 per cent value to customer. As bills were negotiated through bank, customer was obliged to honour bills and thus sale proceeds were realised. excess sale proceeds realised did not belong to assessee as deliveries were made long after stipulated date. Therefore, assessee was holding amount in trust for customers. Extension of time was not granted to assesses for making delayed despatches and, therefore, amount represented by excess bill did not form part of its income. It was further argued that relationship with customer had got strained and assessee had refused to make further supplies to customer who had in turn threatened to take appropriate legal action against assessee for non-supply of balance of material. In circumstances, it was submitted that sum of Rs. 1,48,955 representing difference in rates charged by assessee did not form part of its income. CIT (A) went through correspondence between assessee and UPSEB and found that assessee had realised entire sale proceeds for its invoices dt. 17th April, 1980 to 28th Aug., 1980. He also noticed that during period from 1st April, 1980 to 31st March, 1981 relevant to asst. yr. 1981-82, there was no letter from UPSEB rejecting assessee's request for extension of delivery schedule and in this connection, he referred to letter dt. 4th July, 1980 (extracted in his order) and came to conclusion that matter of extension of time was under its consideration and also there was suggestion that invoices should be raised only at old rate. He further held that there was absolutely no evidence regarding any refusal of extension of time limit by UPSEB. In this view of matter, he upheld addition made by ITO. 4. Sri Sharma, learned representative of assessee, submitted that as per terms of order of Superintending Engineer, UPSEB, delivery of materials should have been completed by June 1979. As supplies in question were made during year ending on 31st March, 1981, long after scheduled date of delivery, assessee was not eligible for any price increase which occurred after June 1979. He referred us to letter No. 3726/ ESPC-II/AE- IV/II/VBK-63/78, (Deccan), dt. 4th July, 1980 (page 23 of paper book) of Superintending Engineer, UPSEB, who is purchasing officer, In support of his contention. Notwithstanding that letter, assessee was billing at higher rate taking into consideration rate of aluminium prevailing at time of delivery and this was also objected to immediately by customer as can be seen from its letter No. 3808/ESDA/Deccan/ VBK-63/78, dt. 31st July, 1980 (page 26 of paper book) of Executive Engineer, UPSEB, Agra, and No. 131/ESDB/0-1/Deccan Cond. VBK-63/78, dt. 15th Jan., 1981 (pp. 24 and 25 of paper book) of Executive Engineer, Bareilly. In these letters, customer asked assessee to pay back excess amount immediately ; otherwise bank guarantee would be encashed. These letters were received b y assesses during year ending on 31st March, 1981 and no delivery extension was granted by UPSEB during that year, or even as on date. In circumstances, assessee was not entitled to retain excess amount of bill charged by assesses. At best, assessee had lodged only claim to which it is not entitled and, therefore, amount of Rs. 1,48,955 could not be treated as income of assessee. What is material in mercantile system of accounting so far as income is concerned is to ascertain whether income really accrued. Unless extension of time was granted by UPSEB during relevant accounting year, assessee was bound to charge at agreed rate only and it was entitled to claim only lesser amount and not more and, therefore, no income accrued to assessee. observation of CIT (A) that even after lapse of three years assessee was not asked to refund any amount in respect of excess billing is not based on facts. In this connection, he referred to pages 24, 25 and 26 of paper book (referred to above) wherein customer had demanded refund of excess amount by recovering same from bank guarantees furnished. By 7th Jan., 1986, customer recovered amount of Rs. 55,465.94 by encashing bank guarantees (page 29 of paper book). Other bank guarantees also can be encashed by customer at any time at its will and pleasure and all these claims were lodged with bankers during year ending on 31st March, 1981. In circumstances, he submitted that no income accrued to assessee and amount represented by excess billing did not really belong to assessee. He also relied on decision of Bombay High Court in CIT vs. R.D. Sharma & Co. (1982) 30 CTR (Bom) 2 23 : (1982) 137 ITR 333 (Bom) and Allahabad High Court in L.H. Sugar Factories & Oil Mills (P) Ltd. vs. CIT (1982) 137 ITR 277 (All). 5 . Sri C.V. Padmanabhan, learned Senior Departmental Representative (as he then was), submitted that assessee was following mercantile system of accounting. income is chargeable on basis that it accrues or arises or is received. In this case, all bills raised by assessee at higher rate were fully honoured by UPSEB when negotiated through bank and thus entire sale proceeds were realised. Mercantile system of accounting does not rule out income emanating from actual receipt of such income pertaining to relevant previous year. This is what has happened in this case. May be, customer had lodged its claim against assessee to encash bank guarantees to recover amount of excess billing, but it was only lodgment of claims which were never enforced during previous year. In fact, encashment took place after more than three years. ITO was fair enough to state that as and when excess billed amount is refunded to customer, it will be allowed as deduction. Therefore, assessee's claim is premature and in this connection, he relied on order of CIT (A). 6. We have heard rival submissions and perused materials on record. Before we proceed to deal with rival submissions, we would prefer to set out details of consignments giving rise to controversy : Uttar Pradesh State 1. Customer : Electricity Board. 4353/ESPC-II/IV/VBK- 63/78 (Deccan), dt. 9th Sept., 2. P.O. No. : 1978 for supply of 1500 Kms. ACSR 'Weasel' and 500 Kms. ACSR ' Rabbit '. . Quantity supplied ACSR ' ACSR 3. during 1st April, 1980 to WEASEL ' ' RABBIT 31st March, 1981 461.860 . . NIL Kms. .. As per letter No. 3726/ESPC- II/AE IV/II/VBK-63/78 (Deccan), dt. 4th July, 1980, rate applicable is Rs. 4. Billing 1,717.57 per Km. plus Excise Duty @ 1,717.57 per Km. plus Excise Duty @ 5.25 per cent plus CST @ 4 per cent (i.e. Rs. 1,880.06 per Km) Value of Billing as per latter No. : 461,860 Kms. x 1880.06= 5. 3726/ESPC- 8,68,324.51 II/AE-IV/II VBK- 63/78 (Deccan), dt. 4th July 80 Value 6. actually billed : Quantity Sl. Value Rs. Invoice No Date (Weasel) in . No P. Kms. B/F . . . . 8,68,324.51 17th 1/PC/CR/80- 1. April, 24.196 53.183.96 . 81 1980 20th 2/PC/CR/80- 2. April, 103.738 2,28,021.03 . 81 1980 28th 3/PC/CR/80- 3. April, 124.841 2,74,406.42 . 81 1980 29/PC/CR/80- 21st 4. 32.700 72,202.85 . 81 July, 1980 30/PC/CR/80- 22nd 5. 32.444 71,637.60 . 81 July, 1980 23 31/PC/CR/80- 6. rd July 27. 23 9 60,144.76 . 81 ,1980 32/PC/CR/80- 25th 7. 10.856 23 ,970.46 . 81 July, 1980 33/PC/CR/80- 28th 8. 36.660 80,946.68 . 81 July, 1980 34/PC/CR/80- 28th 9. 35.060 77,413.82 . 81 July, 1980 35/PC/CR/80- 28th 10. 34.126 75,351.52 . 81 July, 1980 . . . . . 10,17,279.10 Difference . . . 1,48,954.59 : assessee is private limited company maintaining its accounts under mercantile system. It had made supplies to UPSEB on basis of contract in form ' B ' r/w Special Conditions for supply of conductors (specification Nos. VBK-63/78 and VBK-64/78), dt. 10th Sept., 1978 r/w letter No. 4353/ESPC-II/ IV/VBK-63/78 (Deccan), dt. 9th Sept., 1978 (pp. 40 to 63 of paper book). As per terms of contract, rates are variable in accordance with rates of raw materials viz. aluminium and steel on both plus and minus sides without any ceiling and are based on prices of raw materials as detailed in cl. 4 of order dt. 9th Sept., 1978. delivery schedules were from October 1978 to June 1979. payment will be at 100 per cent of invoice with contractor furnishing bank guarantee for 10 per cent value of each consignment from scheduled bank of India duly executed on stamp paper worth Rs. 37.75, which will be valid for three months from date of despatch. This bank guarantee should accompany despatch advice. For purposes of calculation of price variation, rate of raw material viz. EC grade aluminium and HTGS wire shall be taken as prevailing one month prior to date of offering conductors for inspection. assessee had to make supplies before June 1979 and thus complete contract, which it did not do. initial rate agreed to was Rs. 1,717.57 per Km. exclusive of taxes and duties; if taxes and duties were taken into account, rate per Km. would work out to Rs. 1,880.06. This rate was based on aluminium rate of Rs. 13,390.15 per MT prevailing in May 1979. But, assessee had submitted 10 sale bills between 17th April, 1980 to 28th Oct., 1 9 8 0 in respect of supply of total quantity of 461.860 Kms. (Weasel conductors) at rate of Rs. 1,921.37 (inclusive of taxes and duties). difference between agreed rate and rate charged worked out to Rs. 1,48,954.59 on entire consignments consisting of 10 sale bills. UPSEB duly honoured bills when negotiated through bank.7.The short point of dispute before us is whether this sum of Rs. 1,48,954.59, which assessee had realised, really belonged to assessee as its income or not. Clause 4.5 of Superintending Engineer's communication dt. 9th Sept., 1978 is as follows : "As far as possible, before despatches of Conductor, price shall be updated. to take care of initial price variation of raw materials. Alternatively, despatches be made at contracted price and price variation claimed subsequently through supplementary bill." This clause is very material in that it enables assessee to revise its rate for purposes of billing. Accordingly, assessee had been raising bill on basis of updated. rates. It is assessee's contention that unless and until extension of time limit for making supplies was granted by customer, it was precluded from making invoice at revised rates. This is true. But, from correspondence placed before us, which was also before CIT (A), it is gathered that only by his letter No. 5140/ESPC-II/AE-IV/IV/VBK-63/78 (Deccan) dt. 26th Dec., 1981, Superintending Engineer had categorically turned down request for rescheduling delivery time for reasons mentioned in said letter. This letter was not received until end of previous year relevant to asst. yr. 1981-82. Till then, matter was under correspondence. Therefore, assessee was perfectly at liberty to invoice its supplies at revised rates in accordance with cl. 4.5 of Suptdg. Engineer's communication, dt. 9th Sept., 1978 extracted above. It is also seen that out of 10 invoices, claim for encashing bank guarantee was lodged by Executive Engineer vide his letter No. 131/ESDB/0-1/Deccan Cond. VBK-63/78, dt. 15th Jan., 1981 (pp. 24 and 25 of paper book) in respect of following three invoices (Sl. Nos. 8, 9 and 10) : Amt. of Penalty Grand excess Invoice No. Date . on price total of payment as per reduction claims excess rates 33/PC/CR/80- 28th 8,586.30 . 3,148.30 . 81 July, 1980 34/PC/CR/80- 28th 8,211.26 . 3,010.90 . 81 July, 1980 35/PC/CR/80- 28th 7,992.54 . 2,930.69 . 81 July, 1980 = . . 24,790.10 + 9,089.89 33,879.99 above claim was lodged by Executive Engineer with Manager, State Bank of Hyderabad, Habsiguda Branch, Hyderabad, against bank guarantees provided by assessee. As this happened before end of previous year, in our opinion, assessee is entitled to exclude this sum of Rs. 33,879.99 from income of previous year. 8. In respect of invoices at Sl. Nos. 1, 2 and 3, there was only letter from Executive Engineer dt. 31st July, 1980 complaining about excess billing and requesting assessee to either send copy of (letter granting) extension of delivery time or otherwise send bank draft for Rs. 58,937.92. Thus, there was only claim in respect of these invoices. There is another letter from Executive Engineer dt. 25th Jan., 1985 stating that he had no alternative except to encash bank guarantees amounting to Rs. 55,465.94 and as amount of claim in respect of these three invoices was Rs. 58,937.92, action for recovery of balance would be taken. Again, on 31st Dec., 1985, Executive Engineer required assessee to send bank draft for amount of Rs. 55,465.94 and bank finally debited assessee on 7th Jan., 1986 for sum of Rs. 55,465.94. Thus, so far as this amount of Rs. 58,937.92 is concerned, sum of Rs. 55,465.94 was recovered by customer through encashment of bank guarantees as late as 7th Jan., 1986. Therefore, assessee is not entitled to exclude this sum of Rs. 58,937.92 from its income for previous year relevant to asst. yr. 1981-82 for two reasons : (i) no claim was lodged with bank before end of previous year, and (ii) claim actually materialised only in 1986. 9. In respect of invoices at Sl. Nos. 4, 5, 6 and 7, though assesses had raised similar plea of excess billing, there is absolutely no correspondence before us to indicate whether customer had protested against charging of excess rates and also whether customer lodged any claim against assessee for encashment of bank guarantees in respect of excess amount. Therefore, we are not persuaded by argument of assessee's representative that cases of these invoices at Sl. Nos. 4, 5, 6 and 7 are similar to invoices at Sl. Nos. 8, 9 and 10 and, therefore, excess amount charged in bills should be excluded from income of assessee for previous year. 1 0 . Revenue vehemently contends that in respect of all ten invoices, assessee had in fact realised full amount and, therefore, there was no scope for treating any part of realised income as not forming part of assessee's income. We are unable to subscribe to this view, because customer has clearly explained in its communication No. 131/ESDB/O-1/Deccan Cond. VBK-63/78, dt. 15th Jan., 1981, reason for honouring invoices in following words : "These bills (33 to 35/PC/CR/80-81 dt. 28th July, 1980) have been negotiated through Bank and due to avoid heavy demurrage/wharfage and other complications 100 per cent payment was released and documents were retired from Bank in lieu of your 10 per cent Bank Guarantees sent to this office for obtaining 100 per cent payments." Therefore, merely because bills were honoured fully when negotiated through bank, it will not necessarily lead to conclusion that income has accrued. All depends upon facts and circumstances of each case. Thus, we have analysed case of 10 invoices as detailed in para 6 into three distinct categories viz., (a) Invoices in respect of which price reduction clause was invoked and claim lodged with banker for encashment of bank guarantees within previous year ; (b) Invoices in respect of which price reduction clause was not invoked and lodgment of claims and encashment of guarantees took place only long after expiry of previous year ; and (c) Invoices in respect of which there is no material to classify them either under (a) or (b) above. 11. assessee relies on decision of Allahabad High Court in L.H. Sugar Factories & Oil Mills (P) Ltd.'s case (supra) and Bombay High Court in R.D. Sharma & Co.'s case (supra). case decided by Allahabad High Court was one concerning statutory liability under Uttar Pradesh Industrial Disputes Act, 1947. That was about gratuity payable which was ascertained on actuarial basis. Court held that increase in liability towards payment of gratuity accrued to assessee in relevant year. Thus, this case has no bearing on issue on hand. other case decided by Bombay High Court was in relation to works contractor who failed to carry out work within time stipulated and had to pay penalty which was to be adjusted against future payments to contractor. question in that case was whether penalty payable for delay in completion of work was incidental to business. Court held that there was breach of condition in relation to completion of contracted work within stipulated time and such failure, if it occurred, was clearly incidental to business of assessee. Undoubtedly, in case before us also, assessee did not keep to delivery schedule. There were mutual accusations between assessee and customer in regard to reasons for delay in deliveries. Clause 3(ii) of agreement (p. 41 of paper book) stipulates price reduction as follows : "Price reduction for late deliveries shall be made @ 1/2 per cent per week with maximum ceiling of 5 per cent. Except for these figures structure of cl. 27 of form ' B ' shall remain same." Clause 27 of form ' B ' is as follows : "If Contractor shall fail in due performance of his Contract within time fixed by contract or any extension thereof, Contractor agrees to accept reduction of Contract price by half per cent per week reckoned on contract value of such portion only of plant as cannot in consequence of delay be used commercially and efficiently during each week between appointed or extended time, as case may be, and actual time of acceptance under cl. 29, and such reduction shall be in full satisfaction of Contractor's liability for delay but shall not in any case exceed 10 per cent of contract value of such portion of plant." In light of above clauses, it is only in respect of invoices against Sl. Nos. 8, 9 and 10, price reduction was imposed by customer (vide pp. 24 and 25 of paper book) and, therefore, decision of Bombay High Court would apply. In respect of invoices against Sl. Nos. 1, 2 and 3, no such price reduction was imposed by customer though customer was protesting against excess billing. relevant extract of communication dt. 31st July, 1980 (page 26 of paper book) on which assessee places reliance is as follows : "In this connection, rates of ACSR Weasel have been fixed by them @ Rs. 1,717.57 till such time of delivery extension is considered. You have charged rates of ACSR Weasel @ Rs. 1,921.57 against undernoted Invoices." (Refer to invoices against Sl. Nos. 1, 2 and 3) "In end, it is requested to please send copy of extension in delivery, otherwise send Bank Draft for Rs. 58,937.92 in favour of undersigned or clarify if there is any amendment in order." From this communication, it is apparent that customer himself is not aware of fact whether any extension of time limit was granted or whether there was any amendment to order etc. It is also significant that unlike case of invoices against Sl. Nos. 8, 9 and 10, in respect of these invoices customer had not chosen to invoke cl. 3(ii) of order r/w cl. 27 of form ' B ' cited supra. decision of Bombay High Court will be of no avail in respect of these invoices. As for invoices against Sl. Nos. 4, 5, 6 and 7, we have already indicated that there is no correspondence placed before us and, therefore, we are unable to apply ratio of decision of Bombay High Court in respect of excess amount covered by said invoices. 12. In result, appeal is partly allowed. *** DECCAN CONDUCTORS (P) LTD. v. INCOME TAX OFFICER