THE issue before the Bench is - Whether when there is nothing on record that assessee has claimed TDS credit for deduction made against advance received from customers, any addition is warranted. And the verdict goes in favour of the assessee.
Facts of the case
AO made an addition on account of TDS claimed on advance against running contracts observing that assessee itself had admitted that the TDS claim had been made in respect of advances receipts also. As per the provisions of Rule 37BA read
with Sec. 199, ‘credit for tax deducted at source and paid to the Central government, shall be given in assessment year in which such income is assessable.’ Since TDS credit had been claimed during the year, the corresponding advance receipts had also to be taken in the income related to AY 2008-09.
Assessee contended that AO had understood advance against running contracts appearing in the liability side and concluded that the said amount of advance money received from various customers is after deduction of TDS and consequently surmises the amount as income of the assessee which was factually wrong. The said amount was not advance received by the assessee from the customers but was the balance resulting upon working as per the method of revenue recognition prescribed by Accounting Standard 7. The corresponding amount reflected in the said TDS certificates aggregate to Rs.259.42 crores. The assessee had already filed along with the income tax return showing total contract sales of Rs. 306.73 crores. This satisfies the requirements of the provisions of sec. 199 in so far as the claim for TDS has been made by the assessee in the assessment year in which such income is assessable. Both the sections 198 and 199 are only machinery provisions dealing with the matters of procedure and do not deal with either the computation of income or chargeability of income. The basis of charge of income to tax in the case of business income is provided in section 28 of the Act. The profits and gains of business or profession carried on by the assessee should be computed in accordance with the method of accounting regularly followed by the assessee as provided in section 145(1). Section 198 has a limited intention. It only declares the amounts deducted at source to be treated as an income received. The purpose of section 198 is not to carve out an exception to section 145 of the Act. Section 199 of the Act has two objectives—to declare the tax deducted at source as payment of tax on behalf of the person on whose behalf the deduction was made and to give credit for the amount so deducted on the production of the certificate in the assessment made for the assessment year for which such income is assessable. Income is recognized considering net revenue or expenses as on reporting date and adjusting for any additional revenue / cost with reference to stage of individual contracts. The assessee-company is carrying on the business of product sales and job contracts. The profits on contracts entered into by the assessee-company undisputedly had been recognized on percentage of completion method as per the accounting standards indicated above and offered for taxation accordingly. The income is, therefore, earned from year to year as per the method of recognizing income. The provisions of section 199 provided that credit for TDS shall be given to the assessee for the amount so deducted on the production of the certificate furnished u/s 203 in the assessment made in the Act in the assessment year in which such income is assessable. Such income is impregnated in the value of the jobs completed during the year as well as jobs which are in work-in-progress and considered as income based on percentage completion method of recognizing income. Earning of income is a continuous, indivisible process embedded in the business dynamics especially in the case of contractors’ job contract accounting. Section 199 does not contemplate that there should be immediate nexus between the income as such and the TDS made out of a particular payment. When the law has used the words in section 199 of the Income-tax Act that “credit shall be given to the tax deducted at source” on production of the certificate for the assessment year for which such income is assessable; it implied that the nexus between TDS and the corresponding income element would remain rather notional/conceptual. The deduction of tax is not a levy of tax. Deduction of tax at source is merely one of the mode of collection of tax. The amount on which TDS is deducted is subject to charge as per the provisions of the Act. An income of a taxpayer is not required to be computed merely with reference to the TDS Certificate but assessment of an income is altogether an independent exercise. A chart was submitted depicting the contract job income reflected in the P&L account, the TDS claim made by the assessee in the income tax return with the corresponding amount reflected in the TDS certificates. In all the years the contract job income is more in comparison to the amount reflected in the TDS certificates. Thus, addition should be deleted.
CIT (A) allowed the appeal of assessee observing that no addition is warranted as these are not advances on account of receipt but are on account of advance on running jobs. Neither assessee has offered advance of Rs. 29 lacs and odd to tax in the relevant year nor claimed any TDS corresponding to this amount.
After hearing both the parties, the ITAT held that,
++ the assessee has shown contract sales of Rs.306.73 crores after reducing advance of Rs. 29.08 Crore which implies that the said advance has not been considered as income of AY 2008-09 but considered as liability in the balance sheet. It is not understandable on what basis, AO has arrived a conclusion that this advance money from various customers has been received after deduction of Tax at source (TDS) the credit of which has been claimed in the year under appeal. There is absolutely nothing on record brought about by the AO to suggest that TDS credit corresponding to advance of Rs.29.08 crores has been claimed by the assessee during the year under appeal. If credit for TDS corresponding to advance would have been claimed by the assessee, the AO would had been fully justified in denying credit of the said TDS as the corresponding advance were not offered to tax for the relevant year, but it is not understandable as to why the advance should be brought to tax only during the year under appeal. The assessee has neither offered advance to tax in the relevant year nor claimed credit for TDS corresponding to the said advance;
++ the obligations cast as per the various provisions relating to TDS in Chapter XVII of the Act are for deduction of tax at source at the earlier of the two points in time, i.e., payment or credit. In other words, the tax deduction has to match in time the earlier of the payment (receipt) or accrual. The deduction of tax at source does not necessarily, or is not required to, match alongside the corresponding income, recognition of which by the recipient could be either on accrual or on receipt basis. There is thus an inherent mismatch, in terms of time, between the payment of tax (per TDS) and the accrual of tax liability against the corresponding income. It is in view of and to address this mismatch in time, so that the tax stands deducted while the corresponding income is yet to accrue, the law clarifies that the credit for the TDS shall be available for the year for which the corresponding income is assessable;
++ the important conditions for getting benefit of TDS as per section 199 of the Act are (a) the assessee should produce the certificate for the amount of tax deducted at source (b) show that income subjected to TDS is disclosed in the return of the assessment year as ‘assessable’. The assessee will not be entitled to have benefit or credit for the amount though mentioned in the certificate for the assessment year if income relatable to the amount is not shown and is not assessable in that assessment year. Credit allowed on pro rata basis in the year in which the certificate is issued and also in future where balance or such income is found to be assessable is as per the mandate of provision of section 199 of the Act;
++ in the present case, the assessee has been following accounting for construction contracts prescribed by the AS 7 which is a mandatory accounting standard and has been followed by the assessee for recognizing income from the time it came into existence. Benefit for the tax deducted at source is to be allowed as per statutory provisions contained in section 199 of the Act. Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable and incorrect. The procedure of the Assessing Officer is of judicial nature and in making the assessment he should proceed on judicial principles. If evidence is produced by the assessee in support of its return it should be accepted unless it is rebutted by admissible evidence and not by mere hearsay. Thus, the view taken by CIT (A) that addition is not warranted is confirmed;
Assessee contended that AO had understood advance against running contracts appearing in the liability side and concluded that the said amount of advance money received from various customers is after deduction of TDS and consequently surmises the amount as income of the assessee which was factually wrong. The said amount was not advance received by the assessee from the customers but was the balance resulting upon working as per the method of revenue recognition prescribed by Accounting Standard 7. The corresponding amount reflected in the said TDS certificates aggregate to Rs.259.42 crores. The assessee had already filed along with the income tax return showing total contract sales of Rs. 306.73 crores. This satisfies the requirements of the provisions of sec. 199 in so far as the claim for TDS has been made by the assessee in the assessment year in which such income is assessable. Both the sections 198 and 199 are only machinery provisions dealing with the matters of procedure and do not deal with either the computation of income or chargeability of income. The basis of charge of income to tax in the case of business income is provided in section 28 of the Act. The profits and gains of business or profession carried on by the assessee should be computed in accordance with the method of accounting regularly followed by the assessee as provided in section 145(1). Section 198 has a limited intention. It only declares the amounts deducted at source to be treated as an income received. The purpose of section 198 is not to carve out an exception to section 145 of the Act. Section 199 of the Act has two objectives—to declare the tax deducted at source as payment of tax on behalf of the person on whose behalf the deduction was made and to give credit for the amount so deducted on the production of the certificate in the assessment made for the assessment year for which such income is assessable. Income is recognized considering net revenue or expenses as on reporting date and adjusting for any additional revenue / cost with reference to stage of individual contracts. The assessee-company is carrying on the business of product sales and job contracts. The profits on contracts entered into by the assessee-company undisputedly had been recognized on percentage of completion method as per the accounting standards indicated above and offered for taxation accordingly. The income is, therefore, earned from year to year as per the method of recognizing income. The provisions of section 199 provided that credit for TDS shall be given to the assessee for the amount so deducted on the production of the certificate furnished u/s 203 in the assessment made in the Act in the assessment year in which such income is assessable. Such income is impregnated in the value of the jobs completed during the year as well as jobs which are in work-in-progress and considered as income based on percentage completion method of recognizing income. Earning of income is a continuous, indivisible process embedded in the business dynamics especially in the case of contractors’ job contract accounting. Section 199 does not contemplate that there should be immediate nexus between the income as such and the TDS made out of a particular payment. When the law has used the words in section 199 of the Income-tax Act that “credit shall be given to the tax deducted at source” on production of the certificate for the assessment year for which such income is assessable; it implied that the nexus between TDS and the corresponding income element would remain rather notional/conceptual. The deduction of tax is not a levy of tax. Deduction of tax at source is merely one of the mode of collection of tax. The amount on which TDS is deducted is subject to charge as per the provisions of the Act. An income of a taxpayer is not required to be computed merely with reference to the TDS Certificate but assessment of an income is altogether an independent exercise. A chart was submitted depicting the contract job income reflected in the P&L account, the TDS claim made by the assessee in the income tax return with the corresponding amount reflected in the TDS certificates. In all the years the contract job income is more in comparison to the amount reflected in the TDS certificates. Thus, addition should be deleted.
CIT (A) allowed the appeal of assessee observing that no addition is warranted as these are not advances on account of receipt but are on account of advance on running jobs. Neither assessee has offered advance of Rs. 29 lacs and odd to tax in the relevant year nor claimed any TDS corresponding to this amount.
After hearing both the parties, the ITAT held that,
++ the assessee has shown contract sales of Rs.306.73 crores after reducing advance of Rs. 29.08 Crore which implies that the said advance has not been considered as income of AY 2008-09 but considered as liability in the balance sheet. It is not understandable on what basis, AO has arrived a conclusion that this advance money from various customers has been received after deduction of Tax at source (TDS) the credit of which has been claimed in the year under appeal. There is absolutely nothing on record brought about by the AO to suggest that TDS credit corresponding to advance of Rs.29.08 crores has been claimed by the assessee during the year under appeal. If credit for TDS corresponding to advance would have been claimed by the assessee, the AO would had been fully justified in denying credit of the said TDS as the corresponding advance were not offered to tax for the relevant year, but it is not understandable as to why the advance should be brought to tax only during the year under appeal. The assessee has neither offered advance to tax in the relevant year nor claimed credit for TDS corresponding to the said advance;
++ the obligations cast as per the various provisions relating to TDS in Chapter XVII of the Act are for deduction of tax at source at the earlier of the two points in time, i.e., payment or credit. In other words, the tax deduction has to match in time the earlier of the payment (receipt) or accrual. The deduction of tax at source does not necessarily, or is not required to, match alongside the corresponding income, recognition of which by the recipient could be either on accrual or on receipt basis. There is thus an inherent mismatch, in terms of time, between the payment of tax (per TDS) and the accrual of tax liability against the corresponding income. It is in view of and to address this mismatch in time, so that the tax stands deducted while the corresponding income is yet to accrue, the law clarifies that the credit for the TDS shall be available for the year for which the corresponding income is assessable;
++ the important conditions for getting benefit of TDS as per section 199 of the Act are (a) the assessee should produce the certificate for the amount of tax deducted at source (b) show that income subjected to TDS is disclosed in the return of the assessment year as ‘assessable’. The assessee will not be entitled to have benefit or credit for the amount though mentioned in the certificate for the assessment year if income relatable to the amount is not shown and is not assessable in that assessment year. Credit allowed on pro rata basis in the year in which the certificate is issued and also in future where balance or such income is found to be assessable is as per the mandate of provision of section 199 of the Act;
++ in the present case, the assessee has been following accounting for construction contracts prescribed by the AS 7 which is a mandatory accounting standard and has been followed by the assessee for recognizing income from the time it came into existence. Benefit for the tax deducted at source is to be allowed as per statutory provisions contained in section 199 of the Act. Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable and incorrect. The procedure of the Assessing Officer is of judicial nature and in making the assessment he should proceed on judicial principles. If evidence is produced by the assessee in support of its return it should be accepted unless it is rebutted by admissible evidence and not by mere hearsay. Thus, the view taken by CIT (A) that addition is not warranted is confirmed;
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