[Opinion] Admit Correct Income, Under the Correct Head and in the Correct Assessment Year

CA V K Subramani – [2023] 156 taxmann.com 195 (Article)

Admission of income and payment of tax is the fundamental compliance requirement expected of a taxpayer, every year. Issue arises when the taxpayer does not admit correct income and resorts to minimization of his tax liability through any artificial means. With AI technology available with the tax administration, in the days to come, it would not be wise on the part of the taxpayers to resort to any dubious tax planning strategy as it would only boomerang with multiplier effect by way of penal consequences. In spite of such robust technology in place and plugging of loopholes in the legal provisions, there are still certain taxpayers who resort to some subterfuge methodologies and when go scot-free, they presume that they have complied with the legal provisions properly. It is nothing but ignorance of the true nature of the legal provisions.

The Supreme Court in the case of ITO v. Ch. Atchaiah [1996] 84 Taxman 630/218 ITR 239 gave a ruling which is very easy to remember viz. the tax has to be charged on the right person and merely because some other person has paid tax on such income, the right person cannot be spared. This ruling is very valid in the recent times such as group of persons coming together and developing vast area of land but not having an income-tax assessment in relation thereto and resort to filing of ITR in individual status and claiming that to be perfect compliance of law.

1.1 Ch.Atchaiah’s case

It is worth recalling the facts of the case where the assessee and another person bought a land measuring 454.11 acres in a village in Medak District, Andhra Pradesh. Even before the execution of sale deeds, the lands were notified for compulsory acquisition under the Land Acquisition Act, 1894. The assessee and his partner appeared before the Land Acquisition Officer and claimed compensation. The assessee subsequently approached the Court and obtained enhanced compensation. Both compensation and enhanced compensation were admitted by the assessee and the other person in individual capacity and the tax was duly paid.

Later, a notice under section 148 was issued to assess the persons with regard to same income as AOP. The assessee raised objection that the Assessing Officer has already taxed the income in the individual assessment and therefore, taxing the income once again as AOP was not tenable in law. The High Court accepted the assessee’s contention that having exercised the jurisdiction vested in him, the Assessing Officer has taxed them individually and it was open to him to assess the income as AOP again. The High Court accepted the contention of the assessee.

The matter went to the Supreme Court where it was held that the discretion was vested with the Assessing Officer either to tax the individuals or tax in the status of AOP under the Income-tax Act, 1922 and whereas such option or discretion or power is not vested with the Assessing Officer under the Income-tax Act, 1961. The Court accordingly held that the Revenue must tax the right person and the right person alone. Thus, the decision was in favour of the Revenue.

Its observation reads ‘By “right person”, we mean the person who is liable to be taxed, according to law, with respect to a particular income. The expression “wrong person” is obviously used as the opposite of the expression “right person”. Merely because the wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income. This is so irrespective of the fact which course is beneficial to the Revenue”.

Recently, in Economical Credit & Construction (P) Ltd v. ITO [2023] 107 ITR (Trib)(S.N.) 51 (Delhi) the assessee was subjected to a similar experience. This refresher takes note of the essence of the decision and key takeaways thereon.

1.2 Economical Credit & Construction’s case

The assessee sold a land in March, 2007 for a consideration of Rs.106.70 lakhs but it was not accounted in the books of account for the year ended 31st March, 2007. The assessee claimed that it did not receive the payment from the purchaser and therefore it was not offered as income during the previous year relevant to the assessment year 2007-08. It submitted that it received cheques against the sale but did not deposit the instruments since they were misplaced. The purchaser too did not issue any other cheque/pay order. It came to the notice of the management during financial year 2011-12 and accordingly book entries were made for Rs.106.70 lakh under the head “prior period income” and Rs.76.92 lakh was shown as “prior period expense”. The tax on the profit on sale of land was also paid.

During the course of assessment, the Assessing Officer made independent verification under section 133(6) with the purchaser who admitted that there was no sale transaction during the previous year relevant to the assessment year 2012-13. The Assessing Officer taxed the income admitted as income from unexplained sources and did not allow the expenditure debited in the profit and loss account. The assessee explained the factual aspects of the case but it was of no avail.

The CIT(Appeals) in the order narrated the above facts cogently and held that the assessee did not bring any evidence on record to prove that it was a payment not received when the property was sold previously. When the assessee has not received any payment during the F.Y.2011-12, there is no source for crediting the same in the profit and loss account except as income from unexplained sources. The income which has accrued and offered to tax by the assessee was held as liable for assessment.

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