2014 (9) TMI 2 - HC - Income Tax

Claiming TDS credit whereas interest income was not recognized following cash basis of accounting - accrual of income Held that - By adopting the cash system for this component of his returns, the appellant did not pay any tax on the interest payable to him by the 1st company, on the ground that the amount has not been paid at all - The 1st company made TDS in respect of the amount payable to the appellant as interest and issued certificate - The assessee wanted to use the certificate in its entirety assessee cannot be permitted to blow hot and cold at one and the same time - If no TDS was affected and interest was not paid, he would not have been under an obligation to show the amount of interest in his returns, much less to pay tax - once TDS is affected, he cannot be permitted to use the certificate to cover other amounts even while refusing to show the amount of interest in his returns. Since the appellant has adopted the cash system and he did not receive the interest regarding which the TDS was affected, the TDS amount deserves to be treated as income. However, the attempt made by him to treat that amount as tax for the corresponding amount, cannot be permitted Decided partly in favour of Assessee.

Summary

Issues:
1. Adoption of cash system and mercantile system in income tax returns.
2. Treatment of interest income and tax deduction at source (TDS).
3. Applicability of Section 198 in cases of TDS.

Analysis:
1. Adoption of cash system and mercantile system in income tax returns:
The appellant, a Managing Director of two companies, adopted a hybrid procedure in filing income tax returns. While using the cash system for one company and mercantile system for the other, he did not pay tax on interest from the first company, which was accumulating in the account books without actual payment. The assessing officer objected to this approach, leading to appeals before the Commissioner and Tribunal. The appellant argued that it is permissible to adopt dual methods, but the authorities applied mercantile principles to the entire returns. The court clarified that under the cash system, tax liability arises only upon actual receipt of income, unlike the mercantile system where entitlement triggers tax obligations. The appellant's selective adoption of systems was deemed inappropriate, and he was directed to desist from cherry-picking advantageous aspects.

2. Treatment of interest income and tax deduction at source (TDS):
The appellant's contention that TDS certificates should cover unpaid interest income was rejected. The court emphasized that once TDS is deducted, the appellant cannot use the certificate to offset other income while disregarding the interest amount in returns. Authorities disapproved the appellant's attempt to claim the benefit of TDS without reflecting the interest income. The court held that TDS amount, when unadjusted, acquires the character of income under Section 198, necessitating its treatment as such in assessments. The appellant was directed to treat TDS as income rather than tax paid, preventing double benefit.

3. Applicability of Section 198 in cases of TDS:
In the context of TDS becoming unadjustable towards tax payable, Section 198 was invoked. The court clarified that when an amount deducted as TDS cannot be offset against tax liability, it transforms into income and must be handled accordingly during assessments. The appellant's attempt to treat TDS as tax paid for corresponding amounts was disallowed, emphasizing the distinction between TDS and actual tax payments. The court partially allowed the appeals, ruling that the TDS amount should be treated as income, not tax credit, for the relevant assessment year.

In conclusion, the judgment highlights the importance of consistent application of tax systems, proper treatment of interest income, and adherence to statutory provisions like Section 198 concerning TDS implications in income tax assessments.