Taxability of Retained Amount under Mercantile System: Tribunal Rules on Timing

The court considered the taxability of an amount retained by authorities under the mercantile system of accounting. The Tribunal ruled that the amount would be taxable only upon actual receipt by the assessee, rejecting the Revenue's argument for immediate taxation. The court emphasized the distinction between accounting systems and directed the Tribunal to refer the legal question on tax treatment to the court for its opinion.

---

---

Issues:
Taxability of amount retained by authorities from contract payment under mercantile system of accounting.

Analysis:
The case involves a petition under section 256(2) of the Income-tax Act, 1961, regarding the taxability of an amount of Rs.51,72,000 retained by authorities from a contract payment receivable by the assessee. The respondent, engaged in construction activities, filed a return declaring a loss, but the Assessing Officer disallowed the deduction of Rs.51,72,000 claimed by the assessee. The Commissioner of Income-tax (Appeals) allowed the deduction but stated that the amount would be charged to tax in the year of receipt. Both the Revenue and the assessee challenged this decision before the Tribunal, which partly allowed the appeals. The Tribunal held that the amount would be taxable only when actually receivable by the assessee. The Revenue's application for reference of a question of law was rejected by the Tribunal.

The senior advocate for the Revenue argued that the amount should be taxable in the relevant year as per the mercantile system of accounting followed by the assessee. On the other hand, the senior advocate for the assessee contended that the amount retained by authorities as security should not be treated as income for that assessment year. The court considered the arguments and reviewed relevant decisions, including those cited by the parties and a Supreme Court decision.

The court highlighted the distinction between the mercantile system and the cash system of accounting, emphasizing that under the mercantile system, amounts due are recorded immediately, even if not received at that time. The court acknowledged the differing viewpoints but concluded that the question sought by the Revenue regarding taxability under the mercantile system is a legal issue requiring determination by the court. Therefore, the petition was allowed, directing the Tribunal to draw up a statement of the case and refer the question to the court for its opinion, along with remitting the case record.

In conclusion, the judgment addresses the taxability of an amount retained by authorities from a contract payment under the mercantile system of accounting. The court emphasized the distinction between accounting systems and the need to determine the legal question raised by the Revenue regarding tax treatment under the mercantile system.

---