2014 (1) TMI 694 - AT - Income Tax

Accrual of income versus Cash receipt - Disallowance on account of Compensation from customers - Shortfall in Minimum Guaranteed Offtake of gas - Delayed payment charges Held that - The assessee is following cash system as a matter of course or perhaps as a matter of convenience being so uniformly for all customers and in respect of an item/s of income which is regularly charged thereto and for which they are contractually bound - in the absence of any details it is not possible to say as to how much of Rs.78.18 lakhs offered by the assessee as income for the current year on receipt basis is in relation to the current year toward which the A.O. has estimated a sum of Rs.30 lakhs - Preparation of memoranda accounts would lend clarity in the matter the matter remitted back to the AO for fresh adjudication - the onus to prove its case with reference to uncertainty and its resolution would be on the assessee - the offer of income pertaining to a preceding year/s on cash basis would not justify non accounting of income for the current year or even for a preceding year which though not received yet stands accrued during the current year - there could be no option for following a mixed system of accounting and two the income not offered to tax on accrual basis would not preclude it being brought to tax on receipt basis (even for an assessee following accrual method) inasmuch as the same falls within the scope of income u/s. 5 of the Act. Deletion of disallowance on account of prior period expenses Held that - The expenses stand claimed only on the basis of crystallization - Where an expenditure is disputed or indeterminate liability in its respect to the extent of dispute would arise only in the year of resolution of the dispute Decided in favour of Assessee.

Summary

Issues:
1. Disallowance of compensation from customers for shortfall in guaranteed offtake of gas and delayed payment charges.
2. Disallowance of prior period expenses while taxing prior period income.

Issue 1 - Disallowance of Compensation from Customers:
The appeal challenged the order confirming disallowance of compensation for shortfall in guaranteed offtake of gas and delayed payment charges. The Tribunal referred to a previous order where the Revenue disputed the deletion of an addition of Rs.30 lakhs by the Assessing Officer. The Revenue argued that the company, engaged in gas supply, must follow either cash or mercantile system of accounting exclusively as per section 145 of the Act. The Tribunal agreed that the company, despite following accrual method, could defer recognition of revenue for uncertain income items. However, it noted that adopting cash method uniformly for all customers without clarity on year-wise collection details was not acceptable. The Tribunal directed the matter back to the Assessing Officer for necessary details, emphasizing that income not accounted on accrual basis could still be taxed on receipt basis under section 5 of the Act.

Issue 2 - Disallowance of Prior Period Expenses:
The second ground related to the deletion of disallowance of Rs.92,81,341 for prior period expenses. The Assessing Officer disallowed the amount, considering it as prior period income, despite the company following the mercantile method of accounting. The CIT(A) deleted the disallowance, stating that surplus income had already been offered for the year. The Tribunal upheld the CIT(A)'s decision, noting that all expense bills were received in the relevant year, and the company's accounting method was consistent with past practices accepted by the department. Similar issues for other assessment years were also decided in favor of the assessee. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order based on the facts and the accounting principles followed by the company.

In conclusion, the Tribunal allowed the appeal for statistical purposes, restoring the first issue to the Assessing Officer for further examination based on the previous order's observations. The second issue was decided in favor of the assessee, consistent with previous Tribunal decisions on similar matters.