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2021 (12) TMI 782 - AT - Income TaxAccrual of income - Receipt of conversion charges - addition as expenditure in the relevant assessment year and consequently confirming the inclusion of income in the hands of the Assessee - HELD THAT - Under the Income-tax Act, liability to pay Income-tax arises on the accrual of income and it is not from the computation made by the assessee or AO. The section 4 of the Income-tax Act, is the charging provision in the Income-tax Act. The charge arises when the person earns income and computation of income there upon to be made To bring the receipt of conversion charges to be income as mentioned in sec.2(24) of the Income-tax Act, it is necessary that it should be computed in accordance with method of accounting regularly employed by the assessee In the present case, the assessee, admittedly following the mercantile system of accounting and in such a method, deduction for expenses allowed irrespective of fact where such an amount has been actually paid or remained unpaid at the end of the financial year. In the similar manner, the income, under such a method of accounting is required to be recognized on accrual basis - when the assessee following mercantile system of accounting and right to receive such an income is accrued, then it is chargeable to tax and receipt of such amount, whether before or after accrual is of no consequences. In the similar way, some amount has been received, which does not represent income accrued for the year, it shall not be charged to tax and will assume the nature of liability till the time of its accrual. Only when such amount accrues as income, the earlier liability will get converted into income. Till that time, it will continue as liability, despite the fact that it was received. Thus, receipts relevant to tax under mercantile system of accounting are the fact of accrual of income during the financial year and actual receipt of income is irrelevant. The explanation of assessee is that it has not received that income. The explanation offered by the assessee has been perused and found against the facts of the case. As per Clause-K, SMEORE is agreeable to pay to SMPPL a conversion fee to be determined in two parts, namely, fixed cost per month to meet manpower, administration, finance cost etc., and a variable cost per tonne of ferroalloy produced. Conversion costs payable as determined on the date of execution of this agreement is at ₹ 40 lakh per month towards fixed costs and ₹ 20,000 per tonne towards variable costs. From this, it is evident that the SMIORE has to pay fixed conversion fee of ₹ 40.00 lakh per month to the assessee to meet manpower, administration, finance cost etc. irrespective the ferroalloy produced. Receipt of fixed conversion fee of ₹ 40.00 lakh per month does not depends on production as explained by the assessee. Again, it is also evident from the statement of receipt that the assessee has done processing/production for the month of April-12 and Sept. 12 to March 2013 - in all 8 months. Under this circumstances, the assessee failed explain as to why fixed conversion fee at least for 8 months has not been recognized in the books. Similarly, revised conversion agreement entered into on 24/04/2013, after the end of relevant previous year, with retrospective effect from 01/10/2012, could be afterthought and hence cannot be relied upon. AO can, by applying s. 5 of the Income-tax Act, in the background of proviso to sub-s. (1) of s. 145 of the IT Act, compute income on accrual basis. The statute must be read as a whole and one provision thereof should be construed with reference to another provision, so as to make a consistent enactment of the whole statute. It is a rule now firmly established that intention of the legislature must be found by reading the statute as a whole. If the interpretation suggested by the counsel for the assessee is accepted, the very charging section would be rendered inoperative and ineffective, which is impossible to be done. The machinery provisions cannot be interpreted as to restrict the scope of the charging section. As a matter of fact, authorities are expected to construe the machinery provisions in such a manner that a charge to tax is not defeated. The CIT(A) was therefore correct in law in concluding that AO has rightly made computation of the income on accrual basis, rejecting the income of the assessee income of the assessee. It cannot be said that fixed income of ₹ 4 crores not accrued to the assessee. As per this agreement cited supra, the said income of ₹ 4 crores has accrued to the assessee. The assessee has the right to receive it, if it is not actually received, which cannot go out of the total income of the assessee to say that it is not accrued to the assessee. The said amount has been accrued to the assessee under the mercantile system of accounting as per the provisions of sec. 145(2) of the Income-tax Act and the same has to be brought to tax. The other contention of the assessee is that there was revised agreement dated 24/4/2013 with retrospective effect on 1/10/2012, which cannot be given any importance which is entered after the end of financial year 31/3/2013 and it is only self serving document so as to facilitate to tax payable by the assessee. - Decided against assessee.
Issues Involved:
1. Error in the order passed by CIT(A). 2. Reduction of loss by ?4 crores alleging fixed cost accrual. 3. Accrual of fixed cost of ?4 crores based on the old agreement. 4. Method followed by the assessee in accordance with the contract. 5. Non-claim of deductions by the other contracting party. 6. Exclusion of additional income offered by the assessee. 7. Arbitrariness and excessiveness of the addition confirmed by CIT(A). Detailed Analysis: 1. Error in the order passed by CIT(A): The assessee contended that the CIT(A) erred in passing the order without appreciating the explanation provided by the assessee. The CIT(A) confirmed the action of the AO in reducing the loss by ?4 crores, alleging that the fixed cost of ?4 crores had accrued for the relevant year. 2. Reduction of loss by ?4 crores alleging fixed cost accrual: The assessee argued that the fixed cost of ?4 crores did not accrue in the relevant year, even considering the terms of the old agreement dated 23.09.2010. The AO estimated the fixed cost based on ?40 lakhs per month as provided in the old agreement and arrived at ?4.8 crores for the relevant assessment year, as against ?80 lakhs declared by the assessee up to September 2012. 3. Accrual of fixed cost of ?4 crores based on the old agreement: The AO did not appreciate the terms of the agreement dated 29.09.2010 and failed to consider the understanding between the contracting parties adopted in preceding years. The revised tariff was effective from 01.10.2012, and the agreement of 24.04.2013 was only the recording of the agreement between the parties, effective from 01.10.2012. 4. Method followed by the assessee in accordance with the contract: The method of computation of conversion charges in pursuance of the agreements between the assessee and SMIORE was declared and offered for taxation after claiming expenditure by the assessee. The method followed by the assessee had been accepted by the Revenue for the assessment years 2011-12 and 2012-13. 5. Non-claim of deductions by the other contracting party: The assessee argued that the other contracting party did not claim deductions for the impugned addition as expenditure in the relevant assessment year, and consequently, confirming the inclusion of income in the hands of the assessee was opposed to law and unwarranted. 6. Exclusion of additional income offered by the assessee: The assessee contended that the CIT(A) should have excluded the additional income offered by the assessee for the period from 01.10.2012 to 31.03.2013 in accordance with the duly agreed terms recorded in the agreement dated 24.04.2013. 7. Arbitrariness and excessiveness of the addition confirmed by CIT(A): The assessee argued that the addition confirmed by the CIT(A) was arbitrary, excessive, and should be deleted in full. Tribunal's Findings: The Tribunal upheld the AO's decision, stating that under the Income-tax Act, liability to pay Income-tax arises on the accrual of income. The Tribunal emphasized that the fixed conversion fee of ?40 lakhs per month did not depend on production and should have been recognized in the books. The revised conversion agreement entered on 24.04.2013, with retrospective effect from 01.10.2012, was considered an afterthought and not reliable. The Tribunal concluded that the fixed income of ?4 crores had accrued to the assessee under the mercantile system of accounting as per the provisions of sec. 145(2) of the Income-tax Act and should be brought to tax. The revised agreement dated 24.04.2013 was deemed a self-serving document to facilitate tax avoidance. Consequently, the Tribunal found no infirmity in the order of the lower authorities and dismissed all grounds raised by the assessee. Conclusion: The appeal of the assessee was dismissed, confirming the addition of ?4 crores to the assessee's income for the relevant assessment year. The Tribunal upheld the AO's computation of income on an accrual basis, rejecting the assessee's arguments regarding the revised agreement and the method of accounting.
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