2022 (4) TMI 180 - AT - Income Tax

Accrual of income - TDS on Advance received for contract work - whether or not an amount of TDS on advance revenue receipts exigible to tax as Income , of the year of deduction, where the assessee follows mercantile system of accounting? - HELD THAT - Section 198 r.w.s. 190, is an anti-tax evasion mechanism provided by the legislature to safeguard against the probable claim of non-receipt or non-materialisation of income when accounted in accordance with the method of accounting regularly employed as per section 145(1) of the Act and by no means the provisions of chapter XVII were intend to create any deeming fiction for the chargeability of income overriding the provisions of section 4 r.w.s. 28 of the Act. We do not hesitate to hold that, by no stretch of imagination, an amount of TDS as appearing in the Form No 26AS shall be brought to tax as Income under the head Profits and Gains of business or profession applying the provisions of section 198, without reference to the method of accounting regularly employed by the assessee in relation to such business in question. As decided in Lloyd Insulation (India) Ltd 2013 (1) TMI 35 - ITAT NEW DELHI action of taxing the amount of TDS as income without reference to the method of accounting regularly employed by the assessee were held as contra legem. We do not subscribe the views of lower tax authorities in holding that, the amount of TDS credit as appearing in Form No 26AS can be brought to tax on the sole basis of its utilization against the present tax liability, without first disputing the method of accounting regularly employed by the assessee firm or correctness completeness of accounts in terms of section 145 of the Act. Since the income u/s 28 is to be computed with reference to section 145 of the Act, we find no merits in the impugned assessment order, ergo we set aside the orders of the authorities below and decide the issue in favour of the assessee.

Summary

Issues involved:
Whether TDS on advance revenue receipts is exigible to tax as "Income" in the year of deduction under the mercantile system of accounting?

Detailed Analysis:

Issue 1: Taxability of TDS on advance revenue receipts
The appeal pertains to the taxability of TDS on advance revenue receipts under the mercantile system of accounting for the assessment year 2012-2013. The assessee, a partnership firm engaged in Civil & Road Construction business, maintained its books on a mercantile basis. The Assessing Officer (AO) added an amount of TDS deducted on advance contract receipts to the firm's income for the year, leading to a dispute. The CIT(A) upheld the taxability, prompting the appeal to the ITAT.

Issue 2: Interpretation of Section 145 of the Income Tax Act
The ITAT delved into the interpretation of Section 145 of the Income Tax Act, which governs the method of accounting for income computation. Under this provision, income chargeable to tax under the head "Profits and Gains of Business or Profession" should be computed based on the method of accounting regularly employed by the assessee. The ITAT emphasized that under the mercantile system, income is recognized on an accrual basis, irrespective of the year of receipt, contrasting it with the cash system where income is taxed based on receipts, regardless of accrual.

Issue 3: Application of Section 198 and Section 190
The ITAT analyzed the interplay between Section 198 and Section 190 of the Act concerning tax deduction and advance payment. Section 198 deems sums deducted as income received for computing the assessee's income. However, Section 190 clarifies that the provisions of Chapter XVII, which includes Section 198, should not override the charging mechanism under Section 4. The ITAT emphasized that these provisions aim to prevent tax evasion and do not create deeming fictions for income chargeability.

Judgment and Conclusion
The ITAT held that TDS appearing in Form No. 26AS should not be taxed as "Income" under the mercantile system without considering the method of accounting regularly employed by the assessee. Referring to precedent cases, the ITAT ruled in favor of the assessee, rejecting the lower tax authorities' view. The appeal was allowed, setting aside the orders of the authorities below. The judgment underscores the importance of aligning tax assessments with the method of accounting adopted by the assessee for accurate income computation.