Assessee for the income under the head of “Business or Profession “ or “Income from Other sources” has got option either to follow cash or mercantile system of accounting. Once he chooses the option, he has to follow on regular basis.
As per Rule 37BA , (i) credit for tax deducted at source and paid to the Central Govt. , 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 Govt., and 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. This implies that if the interest income is accumulative in nature, and to be paid on the maturity, assessee has option either to show on the accrual basis or in the year of maturity under the cash method of accounting. If the assessee, follows cash method of accounting then TDS deducted under accrual method, to be claimed in the year of maturity. Each year, assessee has to differ the TDS credit and to be claimed in the year of maturity. This is compliant to the Rule 37BA of the income Tax Rule ,1962.
Whenever an amount deducted as tax at source becomes incapable of being being adjusted or counted towards tax payable, it acquired the character of an income. In such an event, it partake the character of any other income and is liable to be dealt with accordingly. In this case, TDS amount will be treated as an income and no credit of TDS to be allowed. For example, Mr. PQR follows cash method of accounting on the Director commission to be received from M/s ABC Corporation on regular basis. M/s ABC Corporation follows mercantile method of accounting and deduct TDS on the Director commission accrual basis. In this case, assesee Mr. PQR, U/s 198 of the IT Act, may treat TDS as an income and pay the tax thereon. The stand of the assessee is supported in the Andhra Pradesh High Court judgment Y. Rathiesh V. CIT.
FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:
These two appeals filed under Section 260A of the Income Tax Act, 1961 (for short the Act) arise out of common order dated 09-11-2001 passed by the Visakhapatnam Bench of the Income Tax Appellate Tribunal (for short the Tribunal) in I.T.A No. 2254 and 2257 of 1996 and batch. The assessee is the appellant.
2. The appellant was functioning as a Managing Director of M/s. A.P. Tanneries Limited (for short, the 1st company). He gave loan of certain amounts to the said company as well as to another company by name M/s. Associated Tanners (for short, the 2nd company). The latter was paying interest on the amount advanced by him regularly, whereas the former was just showing the accumulated interest, in its account books without making actual payment. It was also his case that even while showing the interest payable to him in the account books, the 1st company deducted tax at source (TDS) on the amount of interest payable and issued certificates, in relation thereto.
3. In the returns filed by him, the appellant was adopting a hybrid procedure. While in respect of his transaction with the 1st company, he adopted cash system, as regards the transaction with the 2nd company, he adopted the mercantile system. The result was that he did not pay the tax on the interest payable to him by the 1st company, even while he enjoyed the entire benefit of TDS made in that behalf. There is no dispute about the interest paid by the 2nd company, since the appellant has shown the same as income and paid tax thereon.
4. The assessing officer took objection to this and passed an order of assessment treating the interest payable by the 1st company on transfer basis, as income and levied tax. The same result ensued for various fmancial years. Aggrieved by that, the appellant filed appeals before the Commissioner of Income Tax, Visakhapatnam. The appeals were dismissed. Thereupon, the appellant filed further appeals before the Tribunal. Through order dated 09-11-2001, the Tribunal dismissed the appeals.
5. Learned counsel for the appellant submits that it is open for an assessee to adopt partly the cash system and partly, the mercantile system and even while holding the same as permissible, the authorities under the Act have adopted the principles underlying the mercantile system for the entire returns. It is pleaded that when the 1st company did not pay the interest at all, the appellant ought not to have been levied tax on such amount. She has also urged that once TDS is deducted even while withholding the payment of the corresponding amount, the appellant was entitled to claim the benefit thereof.
6. Sri S.R. Ashok, learned Senior Counsel for the Income Tax Department submits that though it is permissible for an assessee to adopt dual method for the same returns, the appellant cannot claim the benefit of TDS in its entirety and at the same time, refuse to pay tax on the corresponding interest. Learned Senior Counsel submits that the appellant acquired a right to receive interest from the 1st company once it was shown in the account books of that organization; and that is sufficient to levy tax upon the appellant, particularly when he is taking full advantage of the amount recovered as TDS.
7. The assessee has option to file returns by adopting the cash system or mercantile system. In a given case, he can adopt both the systems for different components in one and the same returns. The broad distinction between these two systems is well known. Under the cash system, the assessee would be under an obligation to pay tax only on such of the amount which has been actually received by him. In contrast, under the mercantile system, mere entitlement to receive would bring about the obligation to pay tax. The assessees choose one of them or both of them for different parts, after taking note of the advantages and disadvantages in adopting these methods.
8. We are concerned with the income of the assessee in the form of interest, on the loans which he has advanced to the two companies referred to above. As a matter of fact, he is the Managing Director of the 1st company. His case is that the 2nd company was paying interest regularly and in relation to the transaction of that company, he adopted mercantile system. There is no dispute about payment of tax on that. For the transaction with the 1st company, he has chosen to adopt the cash system. He stated that though the amount payable to him as interest was being shown in the account books of the company, the actual payment of the amount was not done. Another contention was that even while not paying the amount, TDS was affected.
9. By adopting the cash system for this component of his returns, the appellant did not pay any tax on the interest payable to him by the 1st company, on the ground that the amount has not been paid at all. If that were to have been all, there would not have been any controversy. The reason is that under the cash system, the liability to pay tax arises only when the concerned amount is received as income. The 1st company made TDS in respect of the amount payable to the appellant as interest and issued certificate. The appellant wanted to use the certificate in its entirety. In other words, the amount reflected in the TDS certificate was being shown as tax already paid. This would have devastating effect. The amount covered by the certificate would take care of the interest payable on other income of the appellant. For example, if the amount reflected in TDS constitutes tax payable on a sum of Rs.1,00,000/-, that would have taken care of the income of the appellant to the extent of Rs.1,00,000/- from other sources, though the interest as regards which the TDS was affected, was not reflected in the returns at all. All the authorities under the Act i.e., the assessing officer, the Commissioner and the Tribunal did not approve the method adopted by the appellant.
10. The appellant cannot be permitted to blow hot and cold at one and the same time. If no TDS was affected and interest was not paid, he would not have been under an obligation to show the amount of interest in his returns, much less to pay tax thereon. However, once TDS is affected, he cannot be permitted to use the certificate to cover other amounts even while refusing to show the amount of interest in his returns. The steps taken by the authorities in this behalf cannot be treated as applying the parameters for mercantile system to a component of the returns filed under the cash system. The effect of the order passed by the assessing officer as upheld by the Commissioner and the Tribunal is only that the appellant must desist from having the best of both the systems and discarding the one, which is disadvantageous to him. Once he intends to treat the amount deducted as TDS as a component of tax paid, the corresponding to the TDS must form part of the returns and assessment. On the other hand, if he intends to pay the tax on the interest as and when he receives it, the amount covered by the TDS certificate can be treated as just income outstanding, till the actual date of receipt.
11. In the facts of the present case, Section 198 gets attracted. Whenever an amount deducted as tax at source becomes incapable of being adjusted or counted towards tax payable, it acquires the character of income. In such an event, it partakes the character of any other income and is liable to be dealt with accordingly, in the order of assessment. Since the appellant has adopted the cash system and he did not receive the interest regarding which the TDS was affected, the TDS amount deserves to be treated as income. However, the attempt made by him to treat that amount as tax for the corresponding amount, cannot be permitted.
12. For the foregoing reasons, we partly allow the appeals holding that the appellant cannot be permitted to give credit to the amount representing TDS as tax and on the other hand, it shall be treated as an item of income for the concerned assessment year.
13. The miscellaneous petitions filed in these appeals shall also stand disposed of. There shall be no order as to costs.