♦ When an assessee (contractor) is awarded a contract by railways/state government (contractee) for the construction or other related services, the contractor is eligible to receive mobilization/secured advance. The Mobilization advance is primarily received after furnishing of Bank Guarantees in favour of the Payee Customer for the execution of work allotted. The mobilization advance is repaid proportionality by a contractor over a period of time, generally the same is deducted from bills submitted by the contractor in respect of work executed. The payee has a right over bank guarantees to encash it on any issue such as cancellation of work order, stopping of work and even after partial execution of work without compensating for TDS deducted. Therefore, advance received by the contractor in form Mobilization/secured advance is recoverable by the contractee, in case of non-execution of contract, delay in execution of a contract, etc. Therefore, it is more like a loan (capital receipt) given by the contractee to a contractor in order to enable it to deploy machinery and manpower in sufficient quantity at the worksite, awarded to the assessee. It is further submitted that since the mobilization advance is not in the nature of income, no TDS is required to be deducted it is seen generally TDS is deducted on such advance given by contractor.

♦ Sections, 198 and 199, fall within Chapter XVII of the Income-tax Act, 1961, which are titled ‘Collection and Recovery of Tax’.  In other words, these are machinery provisions for effectuating the collection and recovery of the taxes that are determined under the other provisions of the Act. In other words, these 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 computation provisions of sections 28 to 43A deal with the assessment of profits and gains of business

♦ In computing the income from business or profession, the method of accounting followed by the assessee becomes relevant. 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) of the Income-tax Act, 1961. Sections 198 and 199 of the Act nowhere provide for an exception either to the determination of the income under the aforesaid provisions of section 28, 29 or as to the method of accounting employed under section 145 of the Act, which alone could be the basis for computation of income under the provisions of sections 28 to 43A of the Act. 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 i.e. one 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.

♦ Section 199 of the Income Tax Act, 1961 read with rule 37BA of the Income Tax Rules, 1962 mainly talks about credit for TDS deduction at source and paid to the Central Government for the assessment year for which such income is assessable and not vice versa. It is further submitted that clause (ii) of sub-Rule 3 of Rule 37BA envisages that credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax. I repeat once again that this clause nowhere prescribes the addition of income component since dealing with the TDS credit issue only. The relevant extract of the above-stated section and the rule is reproduced hereunder for the sake of convenience:-

“Credit for tax deducted.

199. (1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of property or of the unit-holder, or of the shareholder, as the case may be.

(2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made.

(3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rules for the purposes of giving credit to a person other than those referred to in sub-section (1) and sub-section (2) and also the assessment year for which such credit may be given.

[Credit for tax deducted at source for the purposes of section 199.

37BA. (1) Credit for tax deducted at source and paid to the Central Government in accordance with the provisions of Chapter XVII, shall be given to the person to whom payment has been made or credit has been given (hereinafter referred to as deductee) on the basis of information relating to deduction of tax furnished by the deductor to the income-tax authority or the person authorised by such authority.

*******

(3) (i) Credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable.

(ii) Where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax.”

On perusal of above-stated section and rule i.e. section 199 of the Income Tax Act, 1961 read with rule 37BA of the Income Tax Rules, 1962, it is clear that these expressions make it clear that the main endeavor in the Rule in question deals with an issue of claim of TDS wherein an income (i.e. revenue receipt only) is split over in more than one assessment year as against taxing income based on TDS claimed. Further, reliance is placed on the following case laws:

♦ Now the question arises whether a contractor should claim TDS deducted on mobilization advance, it is submitted that Mobilization advance is more like a loan (capital receipt; as explained supra) given by the contractee to a contractor in order to enable it to deploy machinery and manpower in sufficient quantity at the worksite, awarded to the contractor. Therefore, there was no legal obligation to deduct tax at source of the contractor by the contractee. It was further contended that since the mobilization advance is not in the nature of income, no TDS can be deducted but it was however, deducted by the contractee. Therefore, the credit of the same is to be allowed to the assessee in the year of deduction as the mobilization amount would not be adjusted against one contract receipt. It would be adjusted in part in subsequent years whenever the subcontract bills were raised. Therefore, it would be very difficult to claim a proper set-off of the TDS deducted in subsequent years in which no separate certificate would be issued and no income related to the same will be offered ever. The certificate was issued in the year in which this mobilization amount was paid to the contractor.

♦ The same issue came before the Hon’ble ITAT, New Delhi in the case of BIKRAMJIT AHLUWALIA Vs. JOINT COMMISSIONER OF INCOME TAX ITA No. 5842/Del/2013 where ITAT held that since mobilization advance is not chargeable to tax, a credit of the same should be given to the assessees in the year of deduction itself. The relevant extract of the judgment is reproduced hereunder:-

“1. That the Hon’ble Commissioner of Income Tax (Appeal) is not justified in sustaining arbitrarily the disallowance of TDS claim for Rs. 8,77,950/- made on Outstanding Mobilization Advance of Rs. 8,99,06,816/- as on 31st March 2009 for alleged is execution of work contracts is subsequent years. The deduction on Mobilization has all along been claimed and allowed in the year of deduction on the basis of the Consistent Method of Accounting regularly followed by the Appellant.

6. We have heard the rival submissions and have also gone through the relevant records. We agree with the contentions of the ld. AR that the assessee’s case is covered in favour of the assessee by the order of the ITAT, Visakhapatnam in the case of ACIT vs Peddu Srinivasa Rao (supra). ITAT Visakhapatnam Bench has discussed the issues at length in paragraphs 3, 4, 6, 8 and 10 of the impugned order. The relevant portions of these paragraphs are being reproduced for a ready reference:-

“3. …….this mobilization advance is in the nature of loan, on which interest @8% is chargeable as per the terms of subcontract agreement. The mobilization advance is a capital receipt being in the nature of a loan and therefore, there was no legal obligation to deduct tax at source. However, M/s Gammon India Limited deducted tax at source in respect of such mobilization advance also…4… ……..mobilization advance was granted to the assessee in order to enable it to deploy machinery and man power in sufficient quantity at the work site, awarded to the assessee. It was further contended that since the mobilization advance is not in the nature of income, no TDS can be deducted but it was however, deducted by M/s. Gammon India Limited. Therefore, the credit of the same is to be allowed to the assessee. The contentions of the assesses were examined by the CIT(A) and following the order of the Tribunal, Mumbai Bench in the case of Toyo Engineering India Limited, 5 SOT 616 = 2005-TIOL-234-ITAT-MUM directed the A.O. to allow the credit of TDS in the year under consideration.6.……Undisputedthlye, tax was deducted at the source on payment of the mobilization amount though this mobilization amount is merely an advance given to the assessee and not chargeable to tax. But once the tax is deducted on any payment made to the assessee, though it is not chargeable to tax, a credit of the same should be given to the assessees. …m…ob ilization amount would not be adjusted against one contract receipt. It would be adjusted in part in subsequent years whenever the subcontract bills were raised. Therefore, it would be very difficult to claim a proper set off of the TDS deducted in subsequent years in which no separate certificate would be issued. The certificate was issued in the year in which this mobilization amount was paid to the assessees. The Ld. Counsel for the assessee further contended that all these aspects were examined by the Tribunal in the case of Supreme Renewable Energy Limited Vs. ITO 32 DTR 140.8. ….As per amended provisions of section 199, in subsection 1, it has been stated that any deductions made in accordance with the foregoing provisions of this chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made. Therefore, as per the amended provisions, once the TDS was deducted, a credit of the same to be given to the assessees, irrespective of the year to which it relates.

From a careful perusal of the legal propositions laid down through the aforesaid orders by the Tribunal and the relevant provisions of the Act, we are of the view that once the TDS was deducted and paid to the Central Government, a credit of the same should be given to the assessees in order to avoid all sorts of complications in the year of deduction of the TDS. Therefore, we find no infirmity in the order of the CIT(A) who has rightly directed the A.O. to allow the credit of the TDS in the impugned assessment year. Accordingly, the order of the CIT(A) is confirmed.”

7. In view of the aforesaid order of the ITAT, Visakhapatnam Bench, we set aside the order of the Ld. CIT(A) and direct the Assessing Officer to grant credit of TDS of Rs. 8,77,950/- .8. In the result, the appeal of the assessee stands allowed.”

Conclusion

In view of the above, it is amply clear that credit of tax deducted on mobilization advance by the contactee can be claimed in the year of deduction itself.

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