The Gujarat High Court in a recent judgment held that only receiving a sum of money cannot be chargeable to income tax.
The Gujarat High Court on 26th April, 2014 in the case of Amarshiv Construction Pvt. Ltd vs. DCIT appearing before it held that only retention of any money received after TDS subject to bank guarantee cannot be chargeable to income tax and cannot be considered as income until all conditions are fulfilled.
Receipt of income is not a test of chargeability:
Only receiving an income is not the only test of chargeability of tax. Receipt of income denotes the first instance when the authority or the person receives the money under his personal control.
The word “arises” does not refer to the actual receipt of any gain. The word is used in contrast to the word “receive”. It includes a right to receive. Hence, if an assessee gets a right to receive the income, the income accrues to him although the same is received at some other point of time. Whether such income accrued or not depends on whether the right to receive had accrued.
Right to receive an amount may depend upon many factors:
The right to receive an amount can be uncertain and dependent upon fulfillment of many factors. Many uncertainties may prevail. An assessee may not have an absolute right to receive the amount. There may be an obligation not to release the amount before completion of warranty period and the said amount may be released after making some adjustments.
A fact that no recovery has been made from a bank guarantee is of no result. The fact that TDS has been deducted at source on the said amount shall also have no consequence. The assessee cannot control such deduction. As such whether tax was deductible or not cannot decide the taxability of the receipts.
The manner in which the assessee accounted for the receipt of such cannot determine its taxability:
The way in which the assessee accounted for the receipt of such amount in his books of accounts too cannot determine its taxability, as it was held by the Apex Court in case of Kedarnath Jute Manufacturing Company Limited v. the Commissioner of Income Tax, [Central], Calcutta, 82 ITR 36.
Again in the case of Income Tax Officer Mumbai vs. Travels & Shopping (P) Ltd., it was held by the Supreme Court that deduction of TDS on expenditures which are reimbursed cannot be considered as the amount of income earned by the assessee.
The Gujarat High court categorically held that mere deduction of TDS and accounting treatment are irrelevant to decide accrual of an income.