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2005 (9) TMI 226 - AT - Income TaxCredit of tax deducted at source - Mercantile system of accounting - business of providing security and housekeeping services to different clientele - difference of opinion between the Members - Third Member Order - Whether, the learned CIT(A) is justified in confirming the addition, made by the Assessing Officer in respect of 3 TDS certificates pertaining to the period 1-4-1996 to 31-3-1997 issued to the assessee by RCF? - HELD THAT - The assessee, in this case, is following mercantile system of accounting. All expenses, to which liability is accrued in the accounting year, are deductible as business expenditure. In the same manner all business receipts will have to be determined on the basis of method of accounting employed by the assessee. Unless the assessee renders services for the entire month, it is not open to him to raise the bill upon his clientele. In other words, some of the services rendered in March 1997 will have to be necessarily billed after the close of the month which falls outside the accounting year under consideration and, in fact, the assessee has billed the same immediately after the close of the accounting year, in the month of April 1997 which is subsequent to the previous year for the year under consideration and has treated the same as part of business receipts for the next assessment year. I do not think that there is any flaw in this method of accounting regularly employed by the assessee and accepted by the department from year to year in the past. After all, the TDS certificates which are again dated and received in the months subsequent to the accounting year cannot be accounted in the assessment year under consideration, which has already been closed. It is not necessary for the assessee to account those receipts by re-opening the books of account of the earlier year because the assessee himself has raised the bills in the subsequent month after the close of the accounting year in question. Therefore, it is incorrect on the part of the revenue to workout any addition, on the basis of the bills subsequently raised, in the accounting year which has already passed wherein according to the method of accounting employed by the assessee, such receipts have not been recognized as part of business profits. It may be mentioned that sections 198 and 199 do not in any way change the year of assessability of income, which depends upon the method of accounting regularly employed by the assessee. They only deal with the year in which the credit has to be given by the Assessing Officer. It cannot be disputed that according to the method of accounting employed by the assessee the income in respect of the three TDS Certificates, which are mentioned in paragraph 3 above, does not pertain to the assessment year in question, but it pertains to the next assessment year and, in fact, in that year the assessee has offered the same to tax. Therefore, the credit in respect of these three TDS Certificates shall not be given in the assessment year under consideration, but the credit for the same shall be given in the next assessment year in which the income is shown to have been assessed. Thus, I agree with the reasoning given by the learned Accountant Member, who has correctly directed the exclusion of the income represented by these three TDS Certificates from being assessed in the assessment year 1997-98, i.e., the year under consideration. But the assessee, in the light of the scheme of the provisions of sections 198 and 199 of the Act, shall not be allowed to claim the credit in respect of these TDS Certificates for which the income has not been returned by her as a result of the method of accounting employed. The credit shall be carried forward and the assessee will get the credit for the present TDS Certificate in the year in which she offers the income to tax on the basis of the method of accounting regularly employed. I think it is necessary for me to deal with certain observations regarding the claiming of the expenditure as discussed by the learned Judicial Member. The claim of deduction for an expenditure depends upon again the method of accounting regularly employed by the assessee. There is no dispute that the assessee has incurred these expenses even in respect of the services rendered to its clientele in the month of March, 1997 (to which the bills are not raised). These expenses have been undoubtedly incurred during the previous year in question. Only the matching receipts have not accrued to the assessee in the accounting year in question due to the method of accounting employed by her. But over the years, the effect on the Profit Loss Account gets neutralized. Sections 198 and 199, it may again be stressed, do not in any way determine the year of assessability of profits and gains of business. They only deal with the year in which the TDS Certificates have to be given credit to. In my humble opinion, the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. 1997 (7) TMI 4 - SUPREME COURT relied upon by the learned Judicial Member, does not in any way alter the year of assessability of income, which is governed under sections 28, 29 and 145 as has been interpreted by the Apex Court and as discussed. Thus, I am in agreement with the view expressed by the learned Accountant Member. The matter will now be placed before the regular Bench to dispose of the appeal in accordance with the opinion of the majority. The Hon'ble President has nominated Shri G.E. Veerabhadrappa, Vice-President (Mumbai Benches) as a Third Member to resolve the controversy. Shri G.E. Veerabhadrappa, Vice President, has since vide his Order dated 27-9-2005, has agreed with the view expressed by the learned Accountant Member, in his proposed order on this issue. Accordingly, inconformity with the majority view, we hold that the addition is deleted and it is further held that the assessee was not be allowed to claim credit in respect of the TDS certificates for which the income has not been returned by her as a result of the method of accounting employed. The credit shall be carried forward and the assessee will get the credit for the present TDS certificates in the year in which she offers the income taxed on the basis of the method of accounting regularly employed. The assessing authority is therefore directed to modify the assessment accordingly. In result, this appeal filed by the assessee is partly allowed.
Issues Involved:
1. Addition of Rs. 2,96,460.92 to the gross total income. 2. Interest charged under section 234B. 3. Credit for tax deducted at source (TDS) and the corresponding income assessment year. Issue-wise Detailed Analysis: 1. Addition of Rs. 2,96,460.92 to the Gross Total Income: The assessee, an individual providing security and housekeeping services, followed the Mercantile System of Accounting. The Assessing Officer (AO) found a discrepancy between the total receipts as per TDS certificates (Rs. 1,06,15,995.55) and the receipts credited in the Profit & Loss account (Rs. 95,19,657). The assessee attributed this difference to the billing practice where services rendered in March 1997 were billed in April 1997, and thus included in the assessment year 1998-99. The AO, however, added Rs. 2,96,460.92 to the income for the assessment year 1997-98, arguing that under the Mercantile System, income should be recognized when it accrues, not when billed. The CIT(A) upheld this addition, leading to the second appeal. The Tribunal considered the consistent accounting method followed by the assessee, recognizing income upon raising bills. It was noted that billing for services rendered in March 1997 in April 1997 was consistent with past practices and did not deviate from the Mercantile System. The Tribunal concluded that the addition of Rs. 2,96,460.92 was unjustified as it would result in taxing 13 months of income in one assessment year. Thus, the addition was deleted, and it was ordered that the corresponding TDS amount of Rs. 4,925 be treated as income for the assessment year 1997-98 and reduced from the receipts of the ensuing assessment year. 2. Interest Charged Under Section 234B: The assessee contended that the interest charged under section 234B should be revised to reflect the date of filing the return, i.e., up to October 1997. This issue was not elaborated upon in the judgment, and the primary focus remained on the addition to the gross total income and the TDS credit. 3. Credit for Tax Deducted at Source (TDS) and Corresponding Income Assessment Year: The learned Judicial Member disagreed with the Accountant Member's conclusion, citing sections 198 and 199 of the Income-tax Act. According to section 198, sums deducted as TDS are deemed income received, and section 199 mandates that credit for TDS is given in the assessment year in which the corresponding income is assessable. The Judicial Member argued that since the assessee claimed TDS credit in the assessment year 1997-98, the corresponding income must also be assessed in the same year. The Judicial Member emphasized that the system of accounting cannot override statutory provisions. The Third Member, Vice-President G.E. Veerabhadrappa, was brought in to resolve the difference of opinion. He clarified that sections 198 and 199 are procedural, dealing with the timing of TDS credit and not altering the method of accounting for income recognition. The Third Member agreed with the Accountant Member that the income from the three TDS certificates should be assessed in the subsequent year, consistent with the assessee's accounting method. However, the TDS credit should be deferred to the year in which the income is assessed. Conclusion: The Tribunal, in conformity with the majority view, deleted the addition of Rs. 2,96,460.92 and held that the assessee could not claim TDS credit for income not returned in the assessment year 1997-98. The credit for TDS would be carried forward to the year in which the income is offered to tax. The appeal was partly allowed, directing the assessing authority to modify the assessment accordingly.
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