2024 (12) TMI 520 - AT - Income Tax

Deemed income - Accrual of Interest - Interest income not received by the assessee and subjected to tax - applicability of section 198 - difference in method of accounting followed by the assessee and the party from whom interest is receivable - Mercantile System of accounting - HELD THAT - In the present case, the amount of TDS reflected in Form 26AS of the assessee for the year under consideration in respect of TDS done by PBA Infrastructure Pvt. Ltd. is to be treated as an item of income under the head income from other sources and provisions of section 198 be applied accordingly. It is important to note that once TDS is deducted, assessee cannot be permitted to use the certificate to cover other amounts while refusing to show the amount of interest in his return by resorting to difference in method of accounting system. Scenarios given by the ld. AO in this behalf in his show cause notice cannot be treated as applying the parameters for mercantile system to a component of the returns filed under the cash system. The effect of the assessment made by the ld. AO is only that the assessee ought to desist from having the best of both the systems and discarding the one which is disadvantageous to him. If the assessee intends to take the TDS as component of tax paid by him, the corresponding income to the TDS must Form part of the return and the assessment. Thus as per provisions of section 198 and the judicial precedents discussed above, we direct the ld. AO to recompute the assessed total income in terms of our above observations and findings.

Summary

Issues Involved:

1. Condonation of delay in filing the appeal.
2. Taxation of interest income not received by the assessee due to differences in accounting methods.
3. Application of Section 198 of the Income-tax Act, 1961 regarding TDS as deemed income received.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:

The appeal was filed with a delay of 78 days. The assessee submitted a petition along with an affidavit citing medical reasons, specifically renal cell carcinoma, for the delay in filing. The Tribunal found the reasons satisfactory and supported by documentary evidence, thus condoning the delay and allowing the appeal to be adjudicated on merits.

2. Taxation of Interest Income Not Received:

The core issue was the taxation of interest income that was not received by the assessee due to a difference in accounting methods. The assessee followed the cash basis of accounting, whereas the company, PBA Infrastructure Pvt. Ltd., followed the mercantile system. The interest income of Rs. 35,56,571/- was accrued in the company's books and TDS of Rs. 3,55,657/- was deducted and reflected in Form 26AS, but the actual payment was not made to the assessee. The assessee claimed this interest as "income not received" under Section 57 of the Act to avoid a mismatch between Form 26AS and the return filed. The Assessing Officer disallowed this claim, and the CIT(A) upheld the disallowance, leading to the present appeal.

3. Application of Section 198 of the Income-tax Act, 1961:

Section 198 deems tax deducted at source (TDS) as income received by the assessee for computing income. The Tribunal referred to a similar case adjudicated by the Hon'ble High Court of Andhra Pradesh, which established that when TDS is deducted but the corresponding income is not received, the TDS amount is treated as income. The Tribunal noted that the assessee cannot benefit from TDS without recognizing the corresponding income in the return. The Tribunal held that the TDS amount reflected in Form 26AS should be treated as income under "income from other sources," applying Section 198. The Tribunal emphasized that the assessee cannot use the TDS certificate to offset other tax liabilities while refusing to declare the corresponding interest income.

Conclusion:

The Tribunal directed the Assessing Officer to recompute the assessed total income by treating the TDS amount as income, following the principles laid down in the cited judicial precedent. The appeal was partly allowed, reinforcing the application of Section 198 and the treatment of TDS as income in cases of non-receipt of interest due to differences in accounting methods.