2022 (2) TMI 273 - AT - Income Tax

Determination of income - Accrual of income - profits gains of the assessee's cold storage business keeping of the accounts of the said business by it on mercantile basis - whether income in the nature of interest, rent, etc., i.e., period income, which is principally a function of time and, thus, inures with it, would accrue to the service provider with the lapse of time or only in terms of the underlying contract? - HELD THAT - Context of cold storage charges, which are essentially charges for storing goods (agriculture produce) under defined (controlled) conditions, as to temperature, etc., the contours of the contract, largely oral, as well as the conduct of the parties, which were in agreement, were examined to find that the right to receive the charges, and thus the accrual of income in its respect, is only on the cold storage fully performing its' part of the contract, i.e., where it delivers, or is in a position to deliver the agriculture produce (potatoes) stored to the farmer in a good, marketable condition at the end of the period for which it is contracted to be stored. Of course, it stands clarified that this does not give rise to any general proposition, being essentially a question of fact as to the accrual or the vesting of the right to receive in the given, undisputed facts and circumstances, and it was well open to the parties to, independent of the time set for the payment of charges, agree differently on the terms of the accrual or the vesting of the right to receive. It stands accordingly held that in the given facts and circumstances of the case no part of the cold storage charges for the business cycle Feb. - Nov. accrues on the part performance of the contract by the cold storage upto March-end. That being the case, the direct, input cost on the said part performance of the contract for the months of February March shall be set aside as 'closing stock' for being adjusted on the accrual of the corresponding income, with a similar adjustment being made for the opening stock, and for the same reason, altering thus the returned income to the extent of a difference between the two. Not so doing, it is explained, would result in the profit of one period being transferred to another; that being the premise of stock accounting for a going concern. There had been no statement of the general principle/s of law nor indeed of the issue or the legal problem arising, with even the relevant facts, material to the decision, being not as presented before the Tribunal - which can only decide on the basis of the facts brought forth based on the material on record, on the earlier occasions, which orders were thus sub silentio the relevant aspects/issues. Why, even in the instant appeals, the appellant's case, as presented, was not with reference to the accrual or otherwise of rental income in the given facts and circumstances of the case, i.e., as presently discerned by the Tribunal, resulting, consequently, in the statement of a different issue or legal problem arising for adjudication, i.e., from that presented before it. In fact, as found, the issue arises; the law being well-settled, only in view of the income under reference being a period income. - Decided in favour of assessee.

Summary

Issues Involved:
1. Correct determination of income for the assessee's cold storage business.
2. Application of mercantile basis of accounting.
3. Accrual of income and matching principle.
4. Validity of Tribunal's earlier decisions and their binding effect.
5. Tax treatment of direct and indirect expenses.

Detailed Analysis:

1. Correct Determination of Income for Cold Storage Business:
The primary issue in these appeals is the accurate determination of income from the assessee's cold storage business. The business model involves storing agricultural produce (potatoes) from February to November. The revenue is recognized only after the removal of goods, typically starting from mid-October. The Revenue, however, seeks to spread the income uniformly over the storage period, which causes a mismatch between revenue and expenditure streams.

2. Application of Mercantile Basis of Accounting:
The assessee follows the mercantile system of accounting. Under this system, income and expenses are recognized when they accrue, not necessarily when they are received or paid. The Tribunal previously ruled against the assessee, stating that income should be recognized proportionately over the storage period, irrespective of the actual receipt of rent.

3. Accrual of Income and Matching Principle:
The Tribunal's earlier decisions emphasized that under the mercantile system, income accrues when it becomes legally due. The assessee argued that the right to receive income only vests upon the completion of the storage period or the removal of goods. The Revenue's position was that expenses incurred during the first quarter of the year should be matched with the corresponding revenue, even if not yet received. The Tribunal found that the assessee's income should be proportionately recognized for the period January to March, aligning with the expenses incurred.

4. Validity of Tribunal's Earlier Decisions and Their Binding Effect:
The Tribunal's earlier decisions in the assessee's case and in M.B. Cold Storage Pvt. Ltd. were considered binding unless distinguishing facts were presented. The Tribunal noted that there had been no consideration of the relevant facts or the case law cited by the assessee in the earlier decisions. The Tribunal decided to re-examine the issue on merits, considering the facts and circumstances presented.

5. Tax Treatment of Direct and Indirect Expenses:
The Tribunal addressed whether any adjustment to expenses incurred during February and March was necessary. It was argued that the expenses should be deferred to match the corresponding revenue, which accrues in the following financial year. The Tribunal agreed that direct input costs should be set aside as 'Prepaid expenses' for being claimed against the revenue in the subsequent year. Indirect expenses, being period costs, were allowed to be charged to the operating income statement of the period in which they were incurred.

Conclusion:
The Tribunal concluded that no part of the cold storage charges for the business cycle February to November accrues on part performance of the contract by March-end. The direct input costs for February and March should be set aside for adjustment against the corresponding income in the following year. The Tribunal's earlier decisions were found to be sub silentio on the relevant aspects and thus not binding precedents. The appeals were allowed on these terms.