Income Would Accrue Only When The Assessee Gets A Right To Receive The Income: ITAT

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that the income would be receivable only when the income accrues to the assessee, and the income would accrue to the assessee only when the assessee gets such a right to receive the income.

The bench of George George K. (Vice President) and Laxmi Prasad Sahu (Accountant Member) has observed that the assessee would get a right to receive only when it is sanctioned to the assessee by the customs authorities and not when the assessee makes a claim.

The appellant/assessee filed its return of income, which was processed, and the case was selected for scrutiny. The assessee was asked to furnish the details of the duty drawback in a specified format. The assessee furnished the details.

The AO noticed that there was a duty drawback received and service tax. However, in the computation of the assessee, the duty drawback and service tax received were shown with a difference that was received in a subsequent year, but the assessee has not offered it to tax in the assessment year.

The AO has not disputed that the difference amount has been offered for taxation in the subsequent assessment year. The AO observed that following the cash system of accounting for receipt of duty drawback instead of the mercantile system of accounting, the difference of Rs. 1,50,215 should be taxed in the year of accrual, i.e., FY 2017-18.

The AO observed from the computation of duty drawback and service tax that the assessee was refunded in the relevant year Rs. 38,95,350 as excess duty drawback claimed at the rate of 1% instead of 0.15%.

Resultantly, the assessee paid interest of Rs. 3,30,674 on the excess amount of refund claimed. Thus, by claiming interest against the duty drawback, the assessee has shown less duty drawback, which cannot be adjusted towards the duty drawback refund.

The CIT (A) confirmed the order of the AO on the addition of Rs. 1,50,215. The CIT (A) observed that interest payments of Rs. 3,30,674 on excess refunds received are not allowable expenditures under Section 37. The nature of interest is not of duty drawback but is regular or normal interest, whereas drawback is a special facility by the government, and hence interest cannot be said to be part of duty drawback wrongly paid and cannot be adjusted to show less duty thereafter. The interest cannot be allowed under Section 37.

The assessee submitted that the right to receive occurred in the subsequent year 2019-20 when the customs authority granted the refund of duty drawback; therefore, the amount has been offered as income in the subsequent assessment year 2019-20.

The ITAT held that for the refund of the duty drawback, the assessee accounts the same when it gets the right to receive the duty drawback, which is nothing but a mercantile system of accounting.

Case Title: Mahalasa Exports Versus ITO

Case No.: ITA No.282/Bang/2023

Date: 17.07.2023

Counsel For Appellant: Sandeep Chalapathy

Counsel For Respondent: Nischal B.

Click Here To Read The Order