2025 (6) TMI 646 - AT - Income Tax

Tribunal allows appeal on undisclosed professional income but requires TDS credit adjustment under Section 198

ITAT Delhi ruled in favor of the appellant regarding addition of undisclosed professional income. The tribunal found that since the disputed amount was ... Addition on account of undisclosed professional income - ultimate collection of such receipts was uncertain and therefore, the same was not recognized by the Appellant in its books of accounts - recognition of revenue - credit of Tax Deducted at Source (TDS) claimed by the appellant on the unreceived royalty income HELD THAT:- It is a matter of record that the impugned sum did not reach the company at all because the same remained uncollected and the assessee ultimately wrote the sum of from his books by way of bad debts. It is beyond doubt that there was no ultimate collection of the sum; in fact, it is the assessee had recognised the income in the subsequent Financial Year 2012-13. Thus, it cannot be the case that the income has already escaped from the exchequer because at the most there is timing difference in the accounting of the income and the tax rates were uniform for both years. In fact, invoices were also raised in the subsequent financial year. The payee company on the other hand may have deducted tax at source but ipso facto it does not tantamount to have crystallized the income in the hand of the appellant company in view of the fact that the ultimate collection with reasonable certainty was lacking and the revenue recognition was postponed to the extent of certainty involved. In the accounting standards prescribed by the Institute of the Chartered Accountant of India are binding upon the preparation of financial statements u/s 211 of the Companies Act 1956. Therefore, the financial statements are subject to statutory audit and the auditors have not qualified the accounts thereby contemplating the preparation of accounts is correct and free from any technical infirmities and also compliant with Accounting Standards. We have no hesitation in overturning the order of the Ld. CIT(A) and directing that the addition be deleted. However, there is no doubt to the fact that the assessee has taken credit of Rs. 7,98,200/- towards tax deducted at source. As per section 198 of the Income Tax Act, any tax deducted shall for the purpose of computing the income of the assessee, be deem it to be income received. There is no laid down process in law to withdraw claim of TDS altogether. The core legal questions considered in this appeal are:1. Whether the addition of Rs. 79,81,999 on account of undisclosed professional income (royalty income) was justified, given that the appellant had not recognized this income in its books due to uncertainty regarding its ultimate collection.2. Whether the credit of Tax Deducted at Source (TDS) claimed by the appellant on the unreceived royalty income necessitates inclusion of that income for taxation, despite the appellant's contention that the income was hypothetical and not accrued.3. Whether the interest levied under section 234B of the Income Tax Act, 1961, consequent to the addition of undisclosed income, was correctly imposed.Issue-wise Detailed Analysis:1. Addition of Undisclosed Professional Income (Royalty Income)Relevant legal framework and precedents: The appellant relied heavily on Accounting Standard 9 (AS-9) on Revenue Recognition, which mandates postponement of revenue recognition when there is uncertainty about ultimate collection. The appellant also cited several Supreme Court and Tribunal decisions emphasizing that income tax is a levy on actual income and that hypothetical or unrealized income cannot be taxed. Notable precedents include CIT v. Shoorji Vallabhdas & Co., Godhra Electricity Co. Ltd. v. CIT, CIT v. Birla Gwalior (P.) Ltd., and Vishwaroop Infotech Pvt. Ltd. v. ACIT, among others. These cases establish that income accrues only when it is factual and practically realizable, not merely when it is legally recoverable or recorded in books.Court's interpretation and reasoning: The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] initially held that the appellant had willfully avoided including the royalty income, especially since the appellant claimed credit for TDS on the same. They reasoned that deduction of TDS by the licensee indicated certainty of income and hence, the income should be taxed. The CIT(A) rejected the appellant's explanation that the income was not recognized due to uncertainty and that TDS credit was claimed inadvertently.The Tribunal, however, after a detailed review of the facts and submissions, overturned the CIT(A)'s decision. It noted that the royalty income was never actually received by the appellant and was ultimately written off as bad debts in a subsequent year. The appellant had raised invoices in the subsequent year and created provisions reflecting uncertainty of collection, consistent with AS-9. The Tribunal emphasized that the appellant did not recognize the income in the year under consideration due to genuine uncertainty about its realization.The Tribunal further analyzed the accounting standards, particularly AS-9, which requires revenue recognition only when ultimate collection is reasonably certain. It highlighted that the appellant's financial statements were audited and unqualified, indicating compliance with accounting principles. The Tribunal held that the mere deduction of TDS by the licensee does not equate to actual receipt or accrual of income for the appellant.Key evidence and findings: The appellant submitted extensive documentary evidence, including the sublicense agreement, journal entries showing non-recognition of income, creation of provisions, subsequent write-off of receivables, copies of invoices and credit notes, reconciliation of Form 26AS with financial statements, and audited financials. These documents demonstrated the appellant's consistent treatment of the royalty income as uncertain and ultimately irrecoverable.Application of law to facts: Applying the principles from AS-9 and judicial precedents, the Tribunal found that the appellant's treatment of the royalty income was justified. The income was not accrued in the year under consideration due to uncertainty of collection, and the subsequent write-off confirmed the non-realization. The Tribunal rejected the Revenue's argument that TDS deduction alone mandates taxation of the income.Treatment of competing arguments: The Revenue's contention rested on the premise that TDS credit claimed by the appellant indicated accrual and hence taxable income. The Tribunal distinguished this by explaining that TDS deduction by the payer is a separate transaction and does not guarantee receipt by the payee. The Tribunal also noted the appellant's bona fide attempt to rectify the TDS credit claim during assessment proceedings. The Tribunal found the Revenue's reliance on TDS insufficient to override the accounting and factual reality of non-realization.Conclusion: The addition of Rs. 79,81,999 as undisclosed professional income was unwarranted and was accordingly deleted by the Tribunal.2. Claim of Tax Deducted at Source (TDS) Credit on Unreceived IncomeRelevant legal framework and precedents: Section 198 of the Income Tax Act provides that tax deducted at source shall be deemed to be income received by the assessee for computing income. Rule 37BA(3) of the Income Tax Rules mandates that income corresponding to TDS credit must be brought to tax. However, judicial precedents clarify that unrealized or hypothetical income should not be taxed merely because TDS was deducted on accrual basis.Court's interpretation and reasoning: The Tribunal acknowledged that the appellant had claimed TDS credit of Rs. 7,98,200 despite not recognizing the corresponding royalty income. The Tribunal noted that there is no established legal mechanism to withdraw a TDS claim once made. Consequently, the Tribunal held that the amount of TDS credit must be added back as income, as per the statutory provisions.Key evidence and findings: The appellant's Form 26AS and tax audit reports confirmed the TDS credit claimed. The appellant admitted inadvertent claim of TDS credit without corresponding income recognition and requested the AO to disregard the TDS credit, but no formal withdrawal was possible under law.Application of law to facts: While the underlying income was not recognized or realized, the TDS credit stood as a fact. The Tribunal applied the statutory deeming provision to include the TDS amount as income, resulting in partial addition of Rs. 7,98,200 to the appellant's income.Treatment of competing arguments: The appellant argued that TDS credit should not lead to income inclusion since the income was unrealized. The Revenue insisted on inclusion based on statutory provisions. The Tribunal balanced these views by deleting the large addition of undisclosed income but including the TDS credit amount as income, reflecting the statutory mandate.Conclusion: The Tribunal directed addition of Rs. 7,98,200 as income corresponding to TDS credit claimed, while deleting the rest of the disputed amount.3. Levy of Interest under Section 234BRelevant legal framework: Section 234B mandates levy of interest for default in payment of advance tax. The Supreme Court has held that charging of interest under this section is mandatory and procedural.Court's interpretation and reasoning: The CIT(A) had upheld the interest levy consequent to the addition of undisclosed income. The Tribunal noted that since the addition was deleted (except for TDS amount), the interest should be computed accordingly. The Tribunal directed the AO to compute interest under section 234B as per law, considering the revised taxable income.Conclusion: The interest levy is to be recalculated in accordance with the Tribunal's revised income determination.Significant Holdings:'Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a 'hypothetical income' which does not materialise.''The mere deduction of TDS by the licensee does not equate to actual receipt or accrual of income for the appellant.''The Accounting Standard-9 mandates postponement of revenue recognition where ultimate collection is uncertain. The appellant's financial statements were audited and unqualified, indicating compliance with accounting principles.''There is no laid down process in law to withdraw claim of TDS once made. Therefore, the TDS credit claimed must be added as income.''Charging of interest under section 234B is mandatory and procedural; interest is to be computed as per law on the revised income.'The Tribunal's final determination was to delete the addition of Rs. 79,81,999 as undisclosed professional income, allow addition of Rs. 7,98,200 corresponding to TDS credit, and remit the interest computation to the AO for recomputation based on the revised taxable income.