Re: Treatment of mobilization advance received
SUBASH AGARWAL
26.10.2010
Re: Treatment of mobilization advance received
Dear Deepakji,
The ITO seems to have misconstrued the provision of section 198 which states that all sums deducted shall be deemed to be the income of the assessee. In interpreting the statutory provisions there should be harmonious interpretation and regard should be had to other related provisions as well. Section 199(3) authorizes CBDT to frame rules for the purposes of giving credit in the relevant assessment year / assessment years. Accordingly, Rule 37BA has been framed clause 3 thereof states as under-
(i) Credit for tax deducted at source and paid to the Central Government shall be given for the assessment year for which such income is assessable.
(ii) Where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax.
It is pertinent to note here that section 198 does not speak about the year in which the amount is treated as income. We get the reply from section 199(3) r.w. Rule 37BA(3). It appears that your contractor client is following mercantile system of accounting as well as AS 7 (Percentage of completion method of accounting which is applicable to contractors). Accordingly, they are raising invoices as per the percentage of contracts completed. These are the acceptable methods and it appears that A.O. is also not having objection to it. Advance received by your client is nothing but income received in advance for future years. Your case is directly covered by clause (3) of Rule 37BA and your client is entitled to the credit on a proportionate basis in the future years though entire TDS has been deducted on the amount advanced in the year in which advance has be en received. The proposed action of the ITO in treating the advance received as income in complete disregard of the method of accounting regularly employed is not proper and is against the provisions of the Act as explained.
Please also note the view of the celebrated author Sampath Iyengar in his famous treatise “ Law of Income Tax”, 6th Volume, 10th edition at page 9712- “ TDS certificate does not create liability- Where the recipient maintains account on cash basis, there is a mis-match between TDS certificates and the taxable income offered by the assessee in the return. This is envisaged by law, which does not require income from which tax is deducted should be offered in the same year as TDS certificates. There may be instances where TDS-deducted income may not be taxable at all as in the case of many payments, which are eligible for deductions under section 10A or 10B or under Chapter VI-A. Provisions relating to tax deduction at source are not provisions for computation of income, so that taxpayer’s income is not required to be computed m erely with reference to the TDS certificates. There is no provision in the statute, which requires such computation”.
Regards,
Subash Agarwal, Advocate
Dear All,
One of our client engaged in the business of Construction of road & dams on contract with from Govt undertakings. In some cases, the assessee recived the Mobilisation Advance from Contractee and the said advance will be adjusted from the invoice raised by the assessee. So the total advance will be adjusted before completion of the contract, i.e. in 12 to 30 months depending on the size of the contract. The Contractee deducted TDS from the advance payment made and the client has accounted the gross amount received as Liability in the books of account. Also the gross amount of invoice are accounted as income even if the mobilisation advance are adjusted from bill amount.
In the case of Scrutiny assessment, ITO wants to treat the mobilisation advance received as Income. As per the ITO, TDS can not be claimed if the said, advance will not be treated a
s income.
So can you, give any note on the same as well as Case law regarding advance received can not be treated as income.
Regards,
Deepak Agarwal
CA. Deepak Agarwal
DEEPAK K AGARWAL & CO.
CHARTERED ACCOUNTANTS
BHUBANESWAR-751010
Tel: +91 674 2582225
M: +91 9437 582225
kaushick mallick
I would like seek oneclarification from Subhasji:-
Mobilization Advances do not have any income element in itself. They are liability to the concern receiving the same. Income is embedded in the runnung bills raised by the contractor assessees and the advances received are adjusted as payments towards such running bills by the principal of the contractor assessee.
What happens when the contractor due to some reason fails to execute the full contract and has to refund the mobilization advance received, to the principal?
As TDS on mobilzation advance is in the name and pan of the contractor, he can only avail or use the TDS and the principal cannot retract or undo the same on grounds of refund of mobilization advance. TDS on mobilzation Advance is made to comply with the Income Tax law and the such advance is not for income but towards payment of future bills, which are incomes of the contractor assessee.
If the contractor maintains it's books of accounts on accrual basis , income is recognised on the bills raised and not on the amount of advance adjusted. in such case why the credit for TDS on mobilization Advance cannot be taken in the year of its deduction.
With regards
CA Kaushick Mallick
On Wed, 27 Oct 2010 12:10:24 +0530 wrote
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SUBASH AGARWAL
Re: Treatment of mobilization advanced received
Dear Mr. Kaushik,
I am glad to furnish my clarification as sought by you.
The position of law has been clarified in Rule 37BA(3) which states that credit for TDS shall be given for the assessment year for which such income is assessable. I do not agree with your view that mobilization advances do not have any income element in itself. If that is so, the contractee has illegally deducted tax thereon (since he is liable to deduct tax only on payment towards carrying out any works, which has element of income embedded therein, and not towards any security deposits/payments of capital nature) and in that case the assessee is not entitled to the credit of TDS at all (In that event, the only recourse open to him is to approach High Court with Writ Petition to claim money withheld). Probably then the A.O.’s contention would be correct – let me take the entire advance amount as your income, I will give you credit for the entire TDS amount.
I think you are considering the issue entirely from the assessee-contractor’s point of view and an accountant’s point of view without appreciating the legal angle. One cannot loose sight of the contractee-payer’s perspective also. When it makes advance payment to the assessee, it passes on the income embedded in advance payments for future work.
If we closely read the language of section 194C(1), it will be amply clear that the TDS deducted is nothing but income tax on income comprised in the payment made or amount credited (whichever is earlier). In my opinion, mobilization advance is nothing but a bundle of income embedded therein for future years and the assessee will be entitled to credit of TDS as and when he offers the income for taxation.
This position as well as your apprehension on a hypothetical scenario as to what will happen to the balance TDS amount if the contract is terminated prematurely has been explained by the CBDT in circular no. 5/2001, dated 02.03.01. The relevant text of the said circular is reproduced hereunder –
.
The credit for tax deducted at source shall be allowed to the assessees on whose behalf such tax has been deducted and to whom Certificate for tax deducted at source has been furnished under section 203 of the Act as under :
(i) In such cases where advance rent is spread over more than one financial year and tax is deducted thereon, credit shall be allowed in the same proportion in which such income is offered for taxation for different assessment years based on the single Certificate furnished for tax so deducted on the entire advance rent.
(ii) In respect of the situation where credit for the entire balance of tax deducted at source, which has not been given credit so far, shall be allowed in the assessment year relevant to the financial year during which the rent agreement gets terminated/cancelled or rented property is transferred and balance of advance rent is refunded to the transferee or the tenant, as the case may be.
Though the circular relates to rents received in advance, I hope the authorities would be judicious enough to apply the principle suggested in the current scenario as well.
I hope I have amply clarified the legal position on the issue you have sought clarification.
Regards,
Subash Agarwal, Advocate.
---------- Original message ----------
From:""kaushick mallick""< kaushick...@rediffmail.com >
Date: 28 Oct 10 16:33:19
Subject: Re: [PDRUNGTA] Re: Treatment of mobilization advance received
To: <foru...@googlegroups.com>
Dear Sir,
I would like seek oneclarification from Subhasji:-
Mobilization Advances do not have any income element in itself. They are liability to the concern receiving the same. Income is embedded in the runnung bills raised by the contractor assessees and the advances received are adjusted as payments towards such running bills by the principal of the contractor assessee.
What happens when the contractor due to some reason fails to execute the full contract and has to refund the mobilization advance received, to the principal?
As TDS on mobilzation advance is in the name and pan of the contractor, he can only avail or use the TDS and the principal cannot retract or undo the same on grounds of refund of mobilization advance. TDS on mobilzation Advance is made to comply with the Income Tax law and the such advance is not for income but towards payment of future bills, which are incomes of the contractor assessee.
If the contractor maintains it's books of accounts on accrual basis , income is recognised on the bills raised and not on the amount of advance adjusted. in such case why the credit for TDS on mobilization Advance cannot be taken in the year of its deduction.
With regards
CA Kaushick Mallick
On Wed, 27 Oct 2010 12:10:24 +0530 wrote
>
>
26.10.2010
Re: Treatment of mobilization advance received
Dear Deepakji,
The ITO seems to have misconstrued the provision of section 198 which states that all sums deducted shall be deemed to be the income of the assessee. In interpreting the statutory provisions there should be harmonious interpretation and regard should be had to other related provisions as well. Secti on 199(3) authorizes CBDT to frame rules for the purposes of giving credit in the relevant assessment year / assessment years. Accordingly, Rule 37BA has been framed clause 3 thereof states as under-
(i) Credit for tax deducted at source and paid to the Central Government shall be given for the assessment year for which such income is assessable.
(ii) Where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax.
It is pertinent to note here that section 198 does not speak about the year in which the amount is treated as income. We get the reply from section 199(3) r.w. Rule 37BA(3). It appears that your contractor client is following mercantile system of accounting as well as AS 7 (Percentage of completion method of accounting which is applicable to contractors). Accordi ngly, they are raising invoices as per the percentage of contracts completed. These are the acceptable methods and it appears that A.O. is also not having objection to it. Advance received by your client is nothing but income received in advance for future years. Your case is directly covered by clause (3) of Rule 37BA and your client is entitled to the credit on a proportionate basis in the future years though entire TDS has been deducted on the amount advanced in the year in which advance has be
en received. The proposed action of the ITO in treating the advance received as income in complete disregard of the method of accounting regularly employed is not proper and is against the provisions of the Act as explained.
Please also note the view of the celebrated author Sampath Iyengar in his famous treatise “ Law of Income Tax”, 6th Volume, 10th edition at page 9712- “ TDS certificate does not create liability- Where the recipient maintains account on cash basis, there is a mis-match between TDS certificates and the taxable income offered by the assessee in the return. This is envisaged by law, which does not require income from which tax is deducted should be offered in the same year as TDS certificates. There may be instances where TDS-deducted income may not be taxable at all as in the case of many payments, which are eligible for deductions under section 10A or 10B or under Chapter VI-A. Provisions relating to tax deduction at source are not provisions for computation of income, so that taxpayer’s income is not required to be computed m
erely with reference to the TDS certificates. There is no provision in the statute, which requires such computation”.
Regards,
Subash Agarwal, Advocate
Dear All,
>
>One of our client engaged in the business of Construction of road & dams on contract with from Govt undertakings. In some cases, the assessee recived the Mobilisation Advance from Contractee and the said advance will be adjusted from the invoice raised by the assessee. So the total advance will be adjusted before completion of the contract, i.e. in 12 to 30 months depending on the size of the contract. The Contractee deducted TDS from the advance payment made and the client has accounted the gross amount received as Liability in the books of account. Also the gross amount of invoice are accounted as income even if the mobilisation advance are adjusted from bill amount.
>
>In the case of Scrutiny assessment, ITO wants to treat the mobilisation advance received as Income. As per the ITO, TDS can not be claimed if the said, advance will not be treated a
s income.
>
>So can you, give any note on the same as well as Case law regarding advance received can not be treated as income.
>
>Regards,
>
>Deepak Agarwal
>
>CA. Deepak Agarwal
>
>DEEPAK K AGARWAL & CO.
>CHARTERED ACCOUNTANTS
> ;BHUBANESWAR-751010
>Tel: +91 674 2582225
>M: +91 9437 582225
Dear forum4ca ! Get Yourself a cool, short @in.com Email ID now!
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Nisith Kumar Dutta
To: foru...@googlegroups.com
From: subash...@in.com
Date: Tue, 26 Oct 2010 12:53:16 +0530
Subject: [PDRUNGTA] Re: Treatment of mobilization advance received