2025 (6) TMI 1375 - AT - Income Tax

Excess income offered to tax erroneously by the assessee - assessee has accrued the unbilled revenue of one customer - AR submitted that the amount has been taxed twice once in the respective years as unbilled revenue and also in AY 2019- 20 based on invoices raised - HELD THAT - Amount which is reduced from the revenue for FY 2019-20 is added back in the statement of computation and the return of income filed for AY 2020-21 also substantiates this fact. We have also perused the updated computation of income of the assessee and the copy of the revised return for AY 2019-20. On the combined perusal of all the above stated facts along with the documentary evidences we are convinced of the fact that the income has been offered to tax twice once in the respective FYs as unbilled revenue and also in the year under consideration upon raising invoices. Accordingly we see merit in the submission of the ld AR that for the year under consideration the income to the tune has been excess stated. Therefore we direct the AO to reduce the income of the assessee to the extent which has been excess offered to tax erroneously by the assessee. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre erred in rejecting the assessee's claim for reduction of taxable income by Rs. 9,07,48,926, which the assessee contended was inadvertently offered to tax twice for the assessment year 2019-20.

(b) Whether the assessee's claim that income was taxed twice-once on accrual in prior years and again on raising invoices in the year under consideration-was substantiated and merited relief under the Income Tax Act, 1961.

(c) Whether the CIT(A) was justified in rejecting the fresh and additional claim made by the assessee during appellate proceedings on the ground that it did not form part of the rectification application under Section 154 of the Act.

(d) Whether the principles of natural justice and proper accounting treatment require that the income erroneously offered to tax twice be allowed as a deduction or adjustment in the year under consideration.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Double taxation of income of Rs. 9,07,48,926 and entitlement to relief

Relevant legal framework and precedents: The Income Tax Act, 1961 mandates computation of income on the basis of the method of accounting regularly employed by the assessee. The mercantile system of accounting recognizes income on accrual basis, and income once taxed in a particular year should not be taxed again in subsequent years. Rectification proceedings under Section 154 allow correction of mistakes apparent from the record. The principle against double taxation is well recognized, requiring that income not be taxed twice.

Court's interpretation and reasoning: The Tribunal noted that the assessee follows the mercantile system of accounting and had accrued unbilled revenue relating to a particular customer, Hindustan Thompson Pvt. Ltd., over the financial years 2016-17, 2017-18, and 2018-19. The total accrued unbilled revenue amounted to Rs. 9,92,66,252. During FY 2018-19, the assessee raised invoices amounting to Rs. 9,07,48,926 against this accrued revenue. However, the assessee inadvertently failed to reverse the accrued unbilled revenue in FY 2018-19, resulting in the same income being offered to tax twice: first on accrual in earlier years and again on invoicing in FY 2018-19.

The error was discovered during the preparation of accounts for FY 2019-20, when the statutory auditors identified the failure to reverse unbilled revenue. Consequently, the assessee reversed the amount of Rs. 9,07,48,926 in FY 2019-20, leading to understatement of income in that year. The assessee added back this reversal in the computation of income for FY 2019-20 and offered it to tax accordingly.

The Tribunal examined the ledger accounts, auditor's notes (Note 22), and the revised return filed by the assessee. It found the documentary evidence reliable and consistent with the claim that the income was indeed taxed twice. The Tribunal held that taxing the same income twice violates the fundamental principle of taxation and accounting standards, including the matching concept of income and expense recognition.

Key evidence and findings: The Tribunal relied on the following:

• Accrual of unbilled revenue in prior years as per mercantile accounting.
• Invoices raised in FY 2018-19 for Rs. 9,07,48,926 without reversal of accrued revenue.
• Auditor's note acknowledging the error and reversal of unbilled revenue in FY 2019-20.
• Revised computation of income and return filed by the assessee showing the addition and reversal entries.
• Ledger accounts supporting the transactions.

Application of law to facts: The Tribunal applied the principle that income recognized on accrual basis should not be taxed again on realization or invoicing. The failure to reverse accrued revenue when invoices were raised led to double taxation. The rectification under Section 154 was initiated by the assessee, but the CIT(A) rejected the claim for lack of substantiation and procedural grounds. The Tribunal found this rejection unjustified given the clear documentary evidence and accounting treatment.

Treatment of competing arguments: The CIT(A) had rejected the claim primarily on procedural grounds, including the contention that the claim was not part of the rectification application and lack of substantiation. The Tribunal disagreed, holding that the claim was substantiated by detailed accounting records, auditor's notes, and revised returns. The Tribunal emphasized substance over form, recognizing the error as an inadvertent accounting mistake corrected upon discovery.

Conclusions: The Tribunal concluded that the income of Rs. 9,07,48,926 was indeed offered to tax twice and that the assessee was entitled to relief by reducing the taxable income for AY 2019-20 by this amount. The AO was directed to allow the reduction after giving the assessee a reasonable opportunity of being heard.

Issue (c): Rejection of fresh and additional claim not forming part of rectification application

Relevant legal framework: Section 154 of the Income Tax Act permits rectification of mistakes apparent from the record. However, claims or grounds not raised in the rectification application may be rejected if they do not qualify as mistakes apparent from record.

Court's interpretation and reasoning: The Tribunal noted that although the fresh claim was not originally part of the rectification application, it was supported by detailed documentary evidence and accounting records demonstrating the mistake. The Tribunal took a pragmatic view, holding that the claim related to an inadvertent accounting error and thus constituted a mistake apparent from the record warranting rectification.

Application of law to facts: The Tribunal applied the principle that rectification should be allowed where a genuine mistake is demonstrated, regardless of procedural technicalities, especially when the mistake affects the computation of income and tax liability.

Treatment of competing arguments: The CIT(A)'s procedural objection was overruled by the Tribunal, emphasizing the need to prevent double taxation and uphold the correctness of income computation.

Conclusions: The Tribunal held that the fresh claim was admissible and should be considered for relief.

Issue (d): Violation of principles of natural justice and accounting standards

Relevant legal framework: The principles of natural justice require fair treatment and avoidance of arbitrary decisions. Accounting standards and the matching concept require income and expenses to be recognized in the appropriate periods to avoid distortion of profits.

Court's interpretation and reasoning: The Tribunal observed that taxing the same income twice violates natural justice and accounting principles. The failure to reverse accrued revenue upon raising invoices led to overstatement of income in the year under consideration, which the assessee sought to rectify.

Application of law to facts: The Tribunal applied these principles to find that the assessee's claim for reduction was justified and refusal to allow it would be unfair and contrary to accepted accounting practices.

Conclusions: The Tribunal held that the reduction of income to avoid double taxation aligns with natural justice and proper accounting treatment.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"On the combined perusal of all the above stated facts along with the documentary evidences, we are convinced of the fact that the income of Rs. 9,07,48,926/- has been offered to tax twice once in the respective FYs as unbilled revenue and also in the year under consideration upon raising invoices. Accordingly we see merit in the submission of the ld AR that for the year under consideration the income to the tune of Rs. 9,07,48,926/- has been excess stated. Therefore we direct the AO to reduce the income of the assessee to the extent of Rs. 9,07,48,926/- which has been excess offered to tax erroneously by the assessee. Needless to say that the assessee be given a reasonable opportunity of being heard."

Core principles established include:

• Income recognized on accrual basis should not be taxed again on invoicing or realization.
• Errors in accounting leading to double taxation can be rectified under Section 154 even if the claim is made during appellate proceedings, provided it is substantiated and constitutes a mistake apparent from record.
• Substance and correctness of income computation prevail over procedural technicalities.
• Principles of natural justice and accounting standards require correction of inadvertent double taxation to ensure fair taxation.

Final determinations:

• The CIT(A) erred in rejecting the claim for reduction of income by Rs. 9,07,48,926 on procedural grounds and lack of substantiation.
• The assessee's claim of inadvertent double taxation was substantiated and merited relief.
• The AO was directed to reduce the taxable income by Rs. 9,07,48,926 for AY 2019-20 after affording the assessee a reasonable opportunity of hearing.
• The appeal of the assessee was allowed accordingly.