2024 (7) TMI 1626 - HC - Income Tax

Ascertain income of the bonded warehouses which has been added on mercantile basis and is not subjected to tax on cash basis - Taxation of income actually accrued under mercantile system of accounting - HELD THAT - As decided in ITA. No. 3942/Del/2011 for assessment year 2006-07 2021 (6) TMI 68 - ITAT DELHI in the case the assessee has credited the income from the bonded warehouse on realisation basis i.e. cash basis but the assessee is following Mercantile system of the accounting and therefore income has to be credited in the profit and loss account as and when it is accrued to the assessee. AO has added the income from warehousing charges which is accrued during the year under consideration. Ld Counsel has agreed in principle that warehousing charges is liable to be assessed on accrual basis in view of Mercantile system followed by the assessee but he emphasized that income which has been tax on accrual basis in the year under consideration should not subjected to tax twice i.e once on Mercantile basis and second on cash basis. We concur with the above contention of assessee. Accordingly the bonded warehouse income added by the AO on accrual basis is hereby confirmed however the AO is directed to ascertain that bonded warehouse income which has been added on mercantile basis in the year under consideration is not again subjected to tax on cash basis in subsequent years . No justification to entertain this appeal.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions raised for consideration by the Court are:

a. Whether under the mercantile system of accounting, only income which has actually accrued is required to be offered for tax?

b. Whether income in respect of unclaimed goods stored at Container Freight Stations (CFS) / Inland Container Depots (ICDs) maintained by the assessee can be said to accrue merely because the goods continue to be stored indefinitely?

c. Whether the Income Tax Appellate Tribunal's (ITAT) direction to telescope income already offered for tax on receipt basis against income taxable on accrual basis is misconceived or perverse on the facts of the case and on the interpretation of section 150(2) of the Customs Act, 1962?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Accrual of Income under Mercantile System and Income from Unclaimed Goods Storage

The legal framework relevant to these issues involves the principles of accounting systems, specifically the mercantile (accrual) system versus the cash system, and the tax treatment of income under the Income Tax Act. The mercantile system requires income to be recognized when it accrues, regardless of receipt, whereas the cash system taxes income upon actual receipt.

The Tribunal's earlier decision for assessment year 2006-07 was pivotal and was extensively relied upon. It was noted that the assessee operated bonded warehouses under a license from the customs department, where importers deposited consignments and paid customs duty and warehousing charges upon actual release of goods. The assessee accounted for warehousing charges on realization (cash) basis, contending that realization was uncertain because importers might find it commercially unviable to take delivery, thus not paying the charges.

The Assessing Officer (AO) adopted the mercantile system and held that income accrued when warehousing charges became payable, including amounts recoverable from auction proceeds if the importer failed to take delivery. Accordingly, the AO added income on an accrual basis. The Commissioner of Income Tax (Appeals) deleted the addition, finding uncertainty in income realization.

Upon appeal, the Tribunal observed that the assessee could not follow a mixed accounting system (both cash and mercantile). The Tribunal agreed that income should be taxed on accrual basis but emphasized that income already taxed on cash basis in earlier years should not be taxed again. The Tribunal directed the AO to ascertain and ensure no double taxation on income from bonded warehouses.

The Court, reviewing these findings, noted the concession by the appellant that income must be taxed on accrual basis under the mercantile system but insisted on avoiding double taxation where income was already offered on cash basis. The Tribunal's approach was thus upheld as reasonable and consistent with accounting principles and tax law.

Issue (c): Validity of ITAT's Direction on Telescoping Income and Interpretation of Section 150(2) of Customs Act, 1962

The issue pertains to whether the ITAT's direction to telescope income offered on receipt basis against income taxable on accrual basis was legally sound and consistent with section 150(2) of the Customs Act, 1962, which deals with the levy of warehousing charges and their recovery.

The Tribunal's direction was to prevent double taxation by ensuring that income already taxed on a cash basis in earlier years was not taxed again on accrual basis in subsequent years. This was a practical application of the principle against double taxation and consistent with the statutory framework governing customs warehousing charges.

The Court observed that the appellant had conceded these aspects, and the Tribunal's direction was not found to be perverse or misconceived. The approach harmonized the mercantile accounting system with statutory provisions and avoided unjust enrichment by the revenue.

3. SIGNIFICANT HOLDINGS

The Court recorded the following crucial legal reasoning verbatim from the Tribunal's order:

"In the case, the assessee has credited the income from the bonded warehouse on realisation basis i.e. cash basis, but the assessee is following Mercantile system of the accounting and therefore income has to be credited in the profit and loss account as and when it is accrued to the assessee. The Assessing Officer has added the income from warehousing charges which is accrued during the year under consideration. The learned Counsel has agreed in principle that warehousing charges is liable to be assessed on accrual basis in view of Mercantile system followed by the assessee, but he emphasized that income which has been tax on accrual basis in the year under consideration, should not subjected to tax twice i.e once on Mercantile basis and second on cash basis. We concur with the above contention of the Learned Counsel of the assessee. Accordingly, the bonded warehouse income added by the Assessing Officer on accrual basis, is hereby confirmed, however, the Assessing Officer is directed to ascertain that, bonded warehouse income which has been added on mercantile basis in the year under consideration, is not again subjected to tax on cash basis in subsequent years."

The core principles established are:

- Income under the mercantile system must be taxed on accrual basis, not merely on receipt.

- Income from bonded warehouses or warehousing charges accrues when the right to receive payment arises, including amounts recoverable from auction proceeds if goods remain unclaimed.

- The assessee cannot adopt a mixed accounting system; consistency is required.

- Income already taxed on a cash basis should not be taxed again on accrual basis, thereby preventing double taxation.

- The Assessing Officer must ensure proper computation of income, avoiding duplication, and provide the assessee adequate opportunity to be heard.

Final determination was that the appeal lacked merit due to the appellant's concession and the Tribunal's directions were upheld. The issue was remanded to the Assessing Officer for fresh adjudication in line with these principles, ensuring no double taxation and adherence to mercantile accounting standards.