2018 (2) TMI 190 - HC - Income Tax

License fees - method of accounting followed by the Respondent has been consistently accepted by the Revenue - Held that - There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax-effect. Therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers. The manner in which the Respondent Assessee has reflected his income by following mercantile system of accounting cannot be found fault with as the amounts attributable to the period post 31st March is income which has not accrued during the previous year relevant the subject Assessment Year. This is so as it is not due during the period for which the Revenue seeks to bring it to tax. Appellant has not been able to show that the method followed by the Respondent does not correctly bring out the income chargeable to the tax. The obligation in respect of the license fees billed for the entire calender year is yet to be discharged at the end of the previous year related to the subject Assessment Year and would be due only in the next previous year related to the next Assessment Year.

Summary

Issues involved:
Challenge to order of Income Tax Appellate Tribunal under Section 260-A of Income Tax Act, 1961 regarding taxation of license fees under mercantile accounting system.

Analysis:
1. The main issue in this case is whether the Tribunal was correct in holding that license fees, although billed in the previous year, should be partly accrued to the assessee in the next Assessment Year due to the mercantile system of accounting being followed by the respondent.

2. The respondent, engaged in quality control of agricultural products, had income from license fees billed in January for the entire calendar year. However, as the respondent maintained accounts on a financial year basis (1st April to 31st March), it accounted for the license fee attributable to January to March in the previous year relevant to the subject Assessment Year and the balance in the next previous year relevant to the next Assessment Year.

3. The Assessing Officer contended that the entire income billed in January should be taxed in the previous year relevant to the subject Assessment Year, even though the billing was for the entire calendar year. The CIT (A) and Tribunal held that the respondent's method of accounting, consistent with the mercantile system, was acceptable, as the income was accounted for as per the period to which it was attributable.

4. The Revenue argued that under Section 145(1) and (3) of the Act, the entire license fees billed should have been taxed in the previous year ending 31st March of the relevant Assessment Year. However, it was acknowledged that the respondent's accounting method had been consistently accepted by the Revenue.

5. The Court noted that the respondent's accounting method did not incorrectly reflect the income chargeable to tax, as the amounts attributable to the period post 31st March had not accrued during the previous year relevant to the subject Assessment Year. The obligation to pay the license fees for the entire calendar year was not due until the next previous year relevant to the next Assessment Year.

6. Referring to previous judgments, the Court emphasized that the dispute raised by the Revenue was academic and would not affect the taxability or the tax collected. The Court concluded that the question raised did not give rise to any substantial question of law and dismissed the appeal, upholding the Tribunal's decision.

7. In conclusion, the Court dismissed the appeal, highlighting that the respondent's method of reflecting income under the mercantile system of accounting was acceptable and did not warrant any change.