MAHADEVAN HARIHARAN,NEW DELHI vs. ACIT, CIRCLE-61(1), NEW DELHI

ITA No. 1099/Del/2023, A.Y. 2011-12

“1. Under the facts and circumstances of the case, the penalty under section 271(1)(c) should not be imposed.”

A.Y. 2011-12 4. The facts, in brief, relevant for deciding these appeals are that the appellant/assessee, an engineering consultant, filed his Income Tax Return (hereinafter, the ‘ITR’) on 29.09.2011 declaring income of Rs.87,74,652/-. The case was picked up for scrutiny and the original assessment was completed at the income declared in the ITR vide order dated 11.03.2014 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter, the ‘Act’). Later on, this case was reopened under section 148 of the Act on 06.08.2015 based on the details mentioned in 26AS of the appellant/assessee. The re-assessment was completed vide order dated 31.03.2016 passed under section 147/143(3) of the Act. In the re-assessment, the Assessing Officer (hereinafter, the ‘AO’) made one and only one addition of Rs.3,80,170/- on the reasoning that the appellant/assessee who maintained his books of account on mercantile system, had not offered the sum of Rs.3,80,170/- (Rs.4,30,170/- minus Rs.50,000/- already offered for tax in the ITR) accrued to him for services rendered by him in the Month of February, 2011 to M/s. Afcons-Gunanusa Joint Venture. Aggrieved, the appellant/assessee filed appeal against the quantum addition of Rs.3,80,170/-; however, he did not succeed. On receipt of the CIT(A)’s order on quantum addition, the AO levied penalty vide order dated 19.03.2019 passed under section 271(1)(c) of the Act for concealment of income and furnishing of inaccurate particulars of income of Rs.3,80,170/-. The appeal filed against the penalty order was also upheld by the CIT(A). Hence, these appeals are before the Tribunal.

8. In the original assessment, the AO taxed professional receipt of Rs.1,00,000/-and allowed the credit of TDS of Rs.1,00,000/-.

However, later the case was reopened on the reasoning that the professional receipt of Rs.10,00,000/- on which TDS was made by M/s. Afcons-Gunanusa Joint Venture had not been offered for tax in the ITR though the appellant/assessee was maintaining his books of account on mercantile system. During the re-assessment proceedings, the AO made enquiries from M/s. Afcons-Gunanusa Joint Venture and the appellant/assessee and came to conclusion that the out of the sum of Rs.10,00,000/- on which TDS was made by Afcons- Gunanusa Joint Venture, the sum of Rs.4,30,170/- was the actual claim of professional fees by the appellant /assessee and remaining sum was excess provision made by Afcons-Gunanusa Joint Venture. Accordingly, he taxed the sum of Rs.3,80,170/- (Rs.4,30,170/- minus Rs.50,000/- already offered for tax in the ITR) on the reasoning that the appellant/assessee who maintained his books of accounts on mercantile system was required to offer the sum of Rs.4,30,170/- instead of Rs.50,000/- for tax on accrual basis. The appellant/assessee received the sum of Rs.4,30,170/- in July, 2012 relevant for the AY 2013-14 and offered the same for tax in the AY 2013-14 on receipt basis. It is evident from the impugned order that the appellant/assessee, on one hand, offered Rs.1,00,000/- out of the sum of Rs.4,30,170/- for tax on accrual basis to claim credit of TDS whereas the remaining sum of Rs.3,30,170/- was not offered for tax. Such contradiction; for the sum of Rs.3,30,170/- not offering for tax in the relevant year, has been explained placing reliance on the decision of the Tribunal, Mumbai in the case of Varsha G. Salunke, 98 ITD 147 (TM).

9. Admittedly, the appellant/assessee maintains his books of accounts on mercantile system; therefore, the income has to be taxed in his hands on accrual basis. Accrued income is a crucial concept in the realm of accounting. It represents revenue that has been earned but not yet received. This concept is based on the accrual accounting method, which aims to match revenues with expenses in the period they are incurred, regardless of the actual cash flow.

go to show that the income to be chargeable to tax must accrue or arise at any point of time during the previous year. This Court in E.D. Sassoon (supra) has held in categorical terms that income can be said to have accrued or arisen only when a right to receive the amount in question is vested in the appellant-assessee. The following extract from the judgment in E.D. Sassoon (supra) amply illustrates the above position:

“The word "earned" has not been used in Section 4 of the Income-tax Act. The section talks of "income, profits and gains" from whatever source derived which (a) are received by or on behalf of the assessee, or(b) accrue or arise to the assessee in the taxable territories during the chargeable accounting period. Neither the word "income" nor the words "is received", "accrues" and "arises" have been defined in the Act. The Privy Council in Commissioner of Income-tax, Bengal v. Shaw Wallace & Co.1 attempted a definition of the term “income” in the words following:-

"Income, their Lordships think, in the Indian Income-tax Act, connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall."

Mukerji, J., has defined these terms in Rogers Pyatt Shellac & Co. v. Secretary of State for India2 "Now what is income ? The term is nowhere defined in the Act.....In the absence of a statutory definition we must take its ordinary dictionary meaning -'that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation "

(Oxford Dictionary) The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. 'Accrues', 'arises' and 'is received' are three distinct terms. So far as 8 receiving of income is concerned there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning (1925) 1 I.T.C. 363 at 371 plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three Expressions 'accrues', 'arises' and 'is received' having been used in the section, strictly speaking 'accrues' should not be taken as synonymous with 'arises' but on the distinct sense of growing up by way of addition for increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry, L.J. in Colquhoun v. Brooks, [this part of the decision not having been affected by the reversal of the decision by the House of Lords] that both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate.

One other matter need be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income'."

The observations of Lord Justice Fry quoted above by Mukerji J. were made in Colquhoun v. Brooks4 while construing the provisions of 16 and 17 Victoria Chapter 34, Section 2 , Schedule'D'. The words to be construed there were “profits or gains, arising or accruing” and it was observed by Lord Justice Fry at page 59:-

"In the first place, I would observe that the tax is in respect of 'profits or gains arising or accruing.' I cannot read those words as meaning 'received by'. If the enactment was limited to profits and gains 'received by' the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this country. The result would be that no income-tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words 'arising or accruing' are general words descriptive of a right to receive profits."

To the same effect are the observations of Satyanarayana Rao J. in Commissioner of Income-tax, Madras v. Anamallais Timber Trust Ltd., and Mukherjea J. in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai& Co., Bombay , where this passage from the judgment of Mukerji J. in Rogers Pyatt Shellac & Co. v. Secretary of State for India7, is approved and adopted. It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro; See W. S. Try Ltd. v. Johnson (Inspector of Taxes8), and Webb v. Stenton and Others, Garnishees9. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.” (1950) 18 I.T.R. 333 at 342 (1950) S.C.R. 335 at 389: 18 I.T.R. 472 (1925) 1 I.T.C. 365 at 372 (1946) 1 All E.R. 532 at 539 11 Q.B.D. 518 at 522, 527

with retrospective effect, in our considered view, does not alter the situation as retrospectivity is with regard to the right to receive rent with effect from an anterior date. The right, however, came to be vested only in the year 1994.”

[Emphasized by us.] 11. In the case of Varsha G. Salunke, 98 ITD 147 (TM) relied upon by the appellant/assessee, the Tribunal, Mumbai, has held as under: “8. We considered the matter in detail. There is no dispute regarding the method of accounting followed by the assessee. He is following the Mercantile System of Accounting. Therefore, whenever income is recognized, the assessee has credited the same in his books of account, irrespective of its actual receipt. This accrual of income is something different from raising bills against the services rendered by the assessee from month to month. The question of following either Accrual System of Accounting or Cash System of Accounting arises only when the income is recognized. In the method of billing employed by the assessee, income is recognized only on raising of bills. The assessee raised the bills after the expiry of the month in which the services are rendered. In one way that alone is possible. The assessee can raise bills for the services rendered in March only in the month of April because the assessee has to wait till the end of the month of March. As far as the assessee is concerned, the income is to be recognized on issue of bills for services rendered. For the services rendered by the assessee in the month of March 1997, he has raised the bills in the succeeding month, i.e., April 1997. Therefore, the income could be recognized only in the month of April 1997 and not in the month of March 1997. Once the bill has been raised in the month of April 1997, the assessee has to credit bill amount as his receipts for the month of April 1997 irrespective of the fact whether he received amount or did not receive the amount immediately. Even if the assessee did not receive the amount till March 1998, still the assessee had to show it as its receipt in the books of account.

10. As rightly pointed out by the learned Chartered Accountant, if the addition is sustained, the assessee would be subject to tax for the income relating to 13 months, which is not justified. In the preceding assessment year 1996-97 also, the assessee had offered the receipts for the 12 months period from March 1995 to February 1996. In the present assessment year, he has shown the receipts for the month of March 1996 to February 1997. He has followed the consistent method of billing. Once bills are raised and the income is recognized, he has again followed the Mercantile System of Accounting.” 12. The present case is different. It is surprising to note that the appellant/assessee who rendered the services to Afcons-Gunanusa Joint Venture in February 2011 and raised the bill of Rs.4,30,170/- (including service tax) for the same in June 2011, has not offered the receipts for tax in AY 2012-13 even after raising the bill (the appellant/assessee received the sum of Rs.4,30,170/- in July, 2012 and offered the same for tax in the AY 2013-14 on receipt basis). It is undisputed fact that the appellant/assessee, out of the sum of Rs.4,30,170/-, has offered the sum of Rs.1,00,000/- in the relevant year. It means that the appellant/assessee has considered part of incomeof Rs.4,30,170/-, to the extent of TDS claim, in the relevant year and remaining not even before raising the bill.