2012 (5) TMI 215 - AT - Income Tax

Mercantile method of accounting - Revenue recognition in construction service - AS-7 issued by ICAI and sectin 145 - (i) accrual of income in the case of retention money but TDS deducted including the retention money, year of accrual is the issue and (ii) same way work-in-progress and bills receivable is the other issue. - Decided in favor of assessee by majority decision. The question is whether the Tribunal has power to decide the issues in respect of assessment year which are not before it? In this regard, it is well-settled proposition that the Tribunal has no jurisdiction to give any finding for the earlier or subsequent year while dealing with the particular assessment year. Under the Income-tax Act, each assessment year is a separate unit and the decision of the AO given in a particular year cannot operate as res judicata in the matter of assessment of subsequent years. Similarly the jurisdiction of the Tribunal in the hierarchy created by the same Act is no higher than that of the AO and hence it also should confine to the year of assessment. It is clear that the Tribunal has no power to decide the issue in respect of assessment years which are not before it.

Issues Involved:
1. Accrual of retention money.
2. Adjustments to the value of work-in-progress (WIP) and bills receivable (BR).
3. Double taxation and corresponding tax credits.
4. Jurisdiction of the Tribunal to decide issues for years not under appeal.
5. Estimation of agricultural income and its adjustment against capitalized cash balance.

Detailed Analysis:

1. Accrual of Retention Money
Appellant's Argument:
The appellant argued that the retention money should be taxed in the year of receipt after the defect liability claims are cleared, not in the year it is retained. They cited several case laws, including Janatha Contract Co. v. CIT and CIT v. P & C Constructions (P.) Ltd., to support this view.

Revenue's Argument:
The Revenue contended that the retention money should be accrued in the year it is retained, as the defect liability is only a contingent liability at that time.

Tribunal's Decision:
The Tribunal held that the retention money should be taxed in the year of receipt, aligning with the appellant's argument and the cited case laws. The Tribunal emphasized that the legal right to receive the retention money accrues only upon the satisfaction of the contract terms.

2. Adjustments to the Value of Work-in-Progress (WIP) and Bills Receivable (BR)
Appellant's Argument:
The appellant provided reconciliation statements to highlight discrepancies in the AO's calculations of WIP and BR. They argued for adjustments based on actual figures and previous assessments.

Revenue's Argument:
The Revenue argued that the appellant had not raised these claims before the AO and that there was a violation of Rule 46A(3).

Tribunal's Decision:
The Tribunal remitted the matter back to the AO for verification and factual determination, emphasizing the need for a detailed examination of each item. The Tribunal also noted that the appellant's method of accounting should be consistent with the facts and previous assessments.

3. Double Taxation and Corresponding Tax Credits
Appellant's Argument:
The appellant argued that taxing the same income in multiple years would result in double taxation. They requested adjustments for amounts already taxed in previous years.

Revenue's Argument:
The Revenue maintained that the income should be taxed in the year it accrues, not when it is received.

Tribunal's Decision:
The Tribunal directed the AO to ensure that there is no double taxation and to adjust the assessments accordingly. The Tribunal also emphasized the need for a reconciliation statement that matches the income with the corresponding tax credits.

4. Jurisdiction of the Tribunal to Decide Issues for Years Not Under Appeal
Tribunal's Decision:
The Tribunal clarified that it does not have the jurisdiction to decide issues for assessment years not under appeal. Each assessment year is a separate unit, and findings for one year cannot be applied to another year not under appeal. This principle was supported by the Supreme Court's decision in ITO v. Murlidhar Bhagwan Das.

5. Estimation of Agricultural Income and Its Adjustment Against Capitalized Cash Balance
Appellant's Argument:
The appellant claimed that the agricultural income should be adjusted against the capitalized cash balance permitted by the Settlement Commission.

Revenue's Argument:
The Revenue argued that the appellant had not substantiated their claims with credible evidence and that the agricultural income should be assessed as income from other sources.

Tribunal's Decision:
The Tribunal upheld the Revenue's stand, stating that the appellant failed to provide sufficient evidence to substantiate their claims. The Tribunal also noted that the principle of res judicata does not apply to income tax proceedings, and each year should be assessed independently.

Conclusion:
The Tribunal, following the principles established in previous case laws and the Tribunal's own earlier decisions, ruled in favor of the appellant on the issue of retention money and directed the AO to ensure no double taxation occurs. The Tribunal also clarified its jurisdictional limits, emphasizing that it cannot decide issues for years not under appeal. The estimation of agricultural income was upheld as per the Revenue's assessment due to lack of evidence from the appellant.

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