2015 (4) TMI 139 - AT - Income Tax

Accrual of income - Contingent income not credited to Profit & Loss account - CIT(A) deleted the addition - as per revenue claim of expenditure by the principal and credit of income to the account of assessee after deduction of tax thereof are irrelevant considerations as per the method of accounting regularly followed by the assessee - Held that - Work relate to the installation and erection of the equipment has been completed in subsequent years as the time taken varies between 1 month to 21 months. Therefore, the accrual of income earned happened only in subsequent years and not in the impugned F.Y. 2008-09 relevant to A.Y. 2009-10 as held by the Assessing Officer. Therefore, the assessee was justified to content that income accrues only in subsequent year when the assessee gets an enforceable right to receive the same. The similar view has been taken in the case of CIT Vs Lucas Indian Services Ltd. (2008 (11) TMI 217 - MADRAS HIGH COURT). In view of above factual and legal discussion, the addition made by Assessing Officer was rightly deleted by CIT(A). This reasoned finding of CIT(A) needs no interference from our side. - Decided in favour of assessee.

Issues:
1. Deletion of addition of contingent income not credited to Profit & Loss account.
2. Interpretation of Mercantile System of accounting in relation to contingent income.
3. Relevance of claim of expenditure by principal and credit of income to the assessee.
4. Applicability of matching principles in tax accounting.

Analysis:

Issue 1: Deletion of addition of contingent income not credited to Profit & Loss account
The appeal was filed by the revenue against the deletion of the addition of contingent income not credited to the Profit & Loss account by the Commissioner of Income Tax (Appeals) for the assessment year 2009-10. The Assessing Officer had treated the contingent income as income for the year, which was opposed by the assessee. The CIT(A) deleted the addition after considering the explanation provided by the assessee regarding the recognition of revenue based on the mercantile system of accounting. The ITAT Pune upheld the decision of the CIT(A) and dismissed the appeal filed by the revenue.

Issue 2: Interpretation of Mercantile System of accounting in relation to contingent income
The dispute revolved around the interpretation of the Mercantile System of accounting in relation to the contingent income not credited to the Profit & Loss account. The revenue contended that under the Mercantile System, the contingent income should have been recognized as income since tax deducted at source had been claimed during the year. However, the CIT(A) and ITAT Pune held that the income accrual should be based on completion of service and installation contracts, as consistently followed by the assessee. The method of accounting under AS-9 was also considered to determine the recognition of revenue only upon installation and acceptance by the customer.

Issue 3: Relevance of claim of expenditure by principal and credit of income to the assessee
The relevance of the claim of expenditure by the principal and the credit of income to the assessee after deduction of tax was a key point of contention. The Assessing Officer argued that the TDS made on the contingent income should lead to its inclusion as income for the year. However, the CIT(A) and ITAT Pune emphasized that the income should be recognized based on the completion of service and installation contracts, not merely on the basis of TDS claimed during the year.

Issue 4: Applicability of matching principles in tax accounting
The judgment delved into the applicability of matching principles in tax accounting, highlighting the difference between taxable income and income as per accounts under the Mercantile System. It was emphasized that income accrues when there is a legal right to receive it, irrespective of actual receipt. The decision referenced the Dana India Pvt. Ltd. case and the Madras High Court case to support the contention that income accrual happens in subsequent years when the enforceable right to receive the income arises. The addition made by the Assessing Officer was deemed unjustified and rightly deleted by the CIT(A), which was upheld by the ITAT Pune.

In conclusion, the ITAT Pune upheld the decision of the CIT(A) to delete the addition of contingent income, emphasizing the importance of recognizing income based on completion of contracts rather than solely on TDS claimed during the year. The judgment provided a detailed analysis of the Mercantile System of accounting and the application of matching principles in tax accounting, ultimately dismissing the revenue's appeal.

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