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2021 (12) TMI 782 - AT - Income TaxAccrual of income - Receipt of conversion charges - addition as expenditure in the relevant assessment year and consequently confirming the inclusion of income in the hands of the Assessee - HELD THAT:- Under the Income-tax Act, liability to pay Income-tax arises on the accrual of income and it is not from the computation made by the assessee or AO. The section 4 of the Income-tax Act, is the charging provision in the Income-tax Act. The charge arises when the person earns income and computation of income there upon to be made To bring the receipt of conversion charges to be income as mentioned in sec.2(24) of the Income-tax Act, it is necessary that it should be computed in accordance with method of accounting regularly employed by the assessee In the present case, the assessee, admittedly following the mercantile system of accounting and in such a method, deduction for expenses allowed irrespective of fact where such an amount has been actually paid or remained unpaid at the end of the financial year. In the similar manner, the income, under such a method of accounting is required to be recognized on accrual basis - when the assessee following mercantile system of accounting and right to receive such an income is accrued, then it is chargeable to tax and receipt of such amount, whether before or after accrual is of no consequences. In the similar way, some amount has been received, which does not represent income accrued for the year, it shall not be charged to tax and will assume the nature of liability till the time of its accrual. Only when such amount accrues as income, the earlier liability will get converted into income. Till that time, it will continue as liability, despite the fact that it was received. Thus, receipts relevant to tax under mercantile system of accounting are the fact of accrual of income during the financial year and actual receipt of income is irrelevant. The explanation of assessee is that it has not received that income. The explanation offered by the assessee has been perused and found against the facts of the case. As per Clause-K, SMEORE is agreeable to pay to SMPPL a conversion fee to be determined in two parts, namely, fixed cost per month to meet manpower, administration, finance cost etc., and a variable cost per tonne of ferroalloy produced. Conversion costs payable as determined on the date of execution of this agreement is at ₹ 40 lakh per month towards fixed costs and ₹ 20,000 per tonne towards variable costs. From this, it is evident that the SMIORE has to pay fixed conversion fee of ₹ 40.00 lakh per month to the assessee to meet manpower, administration, finance cost etc. irrespective the ferroalloy produced. Receipt of fixed conversion fee of ₹ 40.00 lakh per month does not depends on production as explained by the assessee. Again, it is also evident from the statement of receipt that the assessee has done processing/production for the month of April-12 and Sept. 12 to March 2013 - in all 8 months. Under this circumstances, the assessee failed explain as to why fixed conversion fee at least for 8 months has not been recognized in the books. Similarly, revised conversion agreement entered into on 24/04/2013, after the end of relevant previous year, with retrospective effect from 01/10/2012, could be afterthought and hence cannot be relied upon. AO can, by applying s. 5 of the Income-tax Act, in the background of proviso to sub-s. (1) of s. 145 of the IT Act, compute income on accrual basis. The statute must be read as a whole and one provision thereof should be construed with reference to another provision, so as to make a consistent enactment of the whole statute. It is a rule now firmly established that intention of the legislature must be found by reading the statute as a whole. If the interpretation suggested by the counsel for the assessee is accepted, the very charging section would be rendered inoperative and ineffective, which is impossible to be done. The machinery provisions cannot be interpreted as to restrict the scope of the charging section. As a matter of fact, authorities are expected to construe the machinery provisions in such a manner that a charge to tax is not defeated. The CIT(A) was therefore correct in law in concluding that AO has rightly made computation of the income on accrual basis, rejecting the income of the assessee income of the assessee. It cannot be said that fixed income of ₹ 4 crores not accrued to the assessee. As per this agreement cited supra, the said income of ₹ 4 crores has accrued to the assessee. The assessee has the right to receive it, if it is not actually received, which cannot go out of the total income of the assessee to say that it is not accrued to the assessee. The said amount has been accrued to the assessee under the mercantile system of accounting as per the provisions of sec. 145(2) of the Income-tax Act and the same has to be brought to tax. The other contention of the assessee is that there was revised agreement dated 24/4/2013 with retrospective effect on 1/10/2012, which cannot be given any importance which is entered after the end of financial year 31/3/2013 and it is only self serving document so as to facilitate to tax payable by the assessee. - Decided against assessee.
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