By TIOL News Service

CHENNAI, MAR 19, 2019: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether when buyer under contract has himself become bankrupt, then certainty of recovering contractual sum cannot be reasonably expected within relevant A.Y and hence, such receivable cannot be counted on mercantile basis. YES IS THE VERDICT.

Facts of the case:

The Assessee company, engaged in the business of software develpment, had filed its return declaring loss of Rs.87,94,316/-. Thereafter the case was selected for scrutiny and assessment was completed after making additions of Rs.18,94,96,500/- for not having recognized the revenue in accordance with Mercantile System of Accounting. The AO also held that since the assessee had rendered services to its clients against which the assessee was liable to receive an amount of Rs.18,94,96,500/- in accordance with Mercantile System of Accounting. Therefore, the amount receivable towards service rendered by the assessee should be recognized as revenue income.

On appeal, the Tribunal considering the Accounting Standard 9 of ICAI, held that revenue need not be recognized when there was an uncertaininty in the ultimate collection of revenue. The Tribunal also took note of the fact that there was a dispute in recovering the dues from the clients of the assessee and the suit was also pending.

High Court held:

++ it is admitted that the assessee entered into service contract for providing software to a South African Government Undertaking called "Province" for three years. It appears that subsequently the said undertaking become bankrupt which forced the assessee to file a suit against the said Undertaking in South Africa in the month of April 2014. From the factual narration found in the Orders of AO and CIT(A), it could be seen that the amount assessed is not recognized. When the Defendant has already become a bankrupt, realisation of the amount cannot be certain. Admittedly, certainty of recovering of amount cannot be reasonably expected within the assessment year. The Tribunal considered this aspect and found that there is no point in recognizing the income which cannot be recovered and subsequently writing of bad debts in the subsequent years and come to the conclusion that the Revenue need not be recognized for a sum of Rs.18,94,96,500/- for the relevant A.Y 2013-14. Accordingly, there is no substantial questions of law involved in this matter.

(See 2019-TIOL-618-HC-MAD-IT)