2011 (11) TMI 721 - AT - Income Tax

Non-realization of provision of surcharge - accrual of income - accounting policies - Held that - Looking at the intricacies the facts may vary therefore basic principles of accrual or mercantile system as laid down by various authorities are to be applied in a careful manner. The assessee being a state PSU; the sur-charge on delayed payment being disputable item; was not mandatorily payable at the time of payment of electricity consumption bill; was not an accrued receipt in view of the accounting policy accepted by the revenue. Therefore such amount of surcharge cannot be held to be taxable as it is not the real income of the assessee and is hypothetical by nature in given facts and circumstances. We are of the view that the amount of surcharge not realized by the assessee does not amount to accrued of receipt taxable as income. CIT(A) has rightly deleted the addition which we uphold.

Issues Involved:
1. Deletion of addition on account of non-realization of provision of surcharge.
2. Method of accounting and recognition of income.
3. Applicability of principles of res judicata and consistency.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Non-Realization of Provision of Surcharge:
The primary issue was whether the CIT(A) erred in deleting the addition of Rs. 2,25,18,23,535/- made by the AO on account of non-realization of surcharge. The assessee, a Haryana Government undertaking, levied a surcharge for delayed payment of electricity bills, which was not realized in full. The AO argued that under the mercantile system of accounting, the right to receive surcharge matured, making it taxable income. The AO cited several judicial precedents to support this view. However, the CIT(A) deleted the addition, and the Tribunal upheld this decision, stating that the surcharge did not represent real income as it was contingent upon actual payment by consumers, which was often disputed or waived.

2. Method of Accounting and Recognition of Income:
The assessee followed the mercantile system of accounting but recognized surcharge income on a realization basis due to prudential norms and accounting standards (AS-1 and AS-9). The Tribunal noted that the assessee's method of accounting had been consistently accepted by the department in previous assessment years (2004-05 and 2005-06). The Tribunal emphasized that taxable income must be computed in accordance with recognized accounting standards and that hypothetical income entries in books do not constitute taxable income. The Tribunal cited various Supreme Court judgments, including CIT v. Shoorji Vallabh Das & Co., UCO Bank v. CIT, and Godhra Electricity Co. Ltd. v. CIT, to support the principle that only real income is taxable.

3. Applicability of Principles of Res Judicata and Consistency:
The Tribunal acknowledged that the principles of res judicata do not apply to income-tax proceedings. However, it emphasized the importance of consistency in departmental actions, as established by the Supreme Court in Radha Swami Satsang. The Tribunal noted that the department had accepted the assessee's accounting method for two consecutive years without objection, making it undesirable to deviate from this accepted practice without substantial changes in facts and circumstances. The Tribunal concluded that the department's acceptance of the assessee's accounting method in previous years should be maintained for consistency.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 2,25,18,23,535/- on account of non-realization of surcharge. The Tribunal emphasized that the surcharge did not represent real income due to its contingent nature and the accounting method consistently followed by the assessee and accepted by the department in previous years. The Tribunal also highlighted the importance of consistency in departmental actions and the application of recognized accounting standards in computing taxable income.

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