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2022 (5) TMI 93 - AT - Income TaxAccrual of income - deduction on account of Special Additional Duty (SAD) receipts in its computation of income - treating the Special Additional Duty payment of custom duty as income of the assessee on receipt basis - whether the receipts were in the nature of contingent receipt and actually the assessee has offered for taxation in subsequent year, as and when actually sanctioned by the Customs Department and received by the assessee? - HELD THAT - As noted that the claim of assessee seems reasonable but the claim is subject to verification. As decided in M/S EXCEL INDUSTRIES LTD. AND MAFATLAL INDUSTRIES P. LTD. 2013 (10) TMI 324 - SUPREME COURT that income accrues when it becomes due but it must also accompanied by a corresponding liability of the other party to pay the amount. Further held that, only then it can be said that for the purpose of taxability that income was hypothetical and it had really accrued to the assessee. As in the present case, the subject verification of SAD receipts whether approved by customs authorities and when it was approved, the income accrued in that year only. This is a matter of verification by the AO. Even the AO will verify whether the assessee in subsequent year has declared the corresponding income or not. As the issue is clear that income will accrue when the corresponding liability of the other party to pay the amount and on this principle we remand the matter back to the file of the AO for verification. The appeal of the assessee is allowed subject to verification of facts.
Issues Involved:
1. Treatment of Special Additional Duty (SAD) receipts as income on receipt basis. 2. Nature of SAD receipts as contingent receipts. 3. Taxability of SAD receipts based on the mercantile system of accounting. 4. Verification of SAD receipts by Customs Authorities. 5. Consistency in accounting treatment of SAD receipts. Detailed Analysis: 1. Treatment of Special Additional Duty (SAD) receipts as income on receipt basis: The core issue in the appeals was whether the SAD receipts should be treated as income on receipt basis. The Assessing Officer (AO) treated the SAD receipts as income for the year they accrued, while the assessee argued that these receipts were contingent and should be taxed in the year they were actually received and sanctioned by the Customs Department. 2. Nature of SAD receipts as contingent receipts: The assessee claimed a deduction of Rs. 1,40,28,289/- for SAD receipts, arguing that these were contingent receipts pending verification by the Customs Authorities. The AO contended that since the assessee followed the mercantile system of accounting, the income should be recognized on accrual basis. The CIT(A) upheld the AO's decision, stating that the SAD receipts should be considered income when accrued, not when received. 3. Taxability of SAD receipts based on the mercantile system of accounting: The CIT(A) confirmed the AO’s view that under the mercantile system of accounting, income should be recognized when it accrues. The assessee argued that the SAD receipts were not accrued as they were contingent upon approval from the Customs Authorities, and hence should be taxed in the year of actual receipt. 4. Verification of SAD receipts by Customs Authorities: The Tribunal noted that the SAD receipts were subject to verification and approval by the Customs Authorities. The assessee provided a Chartered Accountant's certificate showing the amounts excluded and included in the income computation for various years, indicating that the SAD receipts were offered for tax in subsequent years as and when they were verified and approved by the Customs Authorities. 5. Consistency in accounting treatment of SAD receipts: The Tribunal referred to the Supreme Court's judgment in CIT vs. Excel Industries Ltd., which emphasized that income tax cannot be levied on hypothetical income and that income accrues when it becomes due and is accompanied by a corresponding liability of the other party to pay the amount. The Tribunal found the assessee's claim reasonable but subject to verification. It remanded the matter back to the AO to verify whether the SAD receipts were declared as income in subsequent years when they were approved by the Customs Authorities. Conclusion: The Tribunal allowed the appeals of the assessee, subject to verification of facts by the AO. The AO was directed to verify whether the SAD receipts were approved by the Customs Authorities and included in the income of subsequent years. The Tribunal emphasized that income should be taxed when it accrues, accompanied by a corresponding liability to pay, aligning with the principles laid down by the Supreme Court in the case of Excel Industries Ltd. Result: Both appeals filed by the assessee for the assessment years 2015-16 and 2016-17 were allowed, subject to verification of facts by the AO. The order was pronounced on 6th April 2022 at Chennai.
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