Accrual of Consultancy Income under Mercantile System: Analysis of AJR Oil And Gas Engineering Services Pvt. Ltd. Vs DCIT (ITAT Mumbai)

1. Background and Context

This decision of the ITAT Mumbai in the case of AJR Oil And Gas Engineering Services Pvt. Ltd. Vs DCIT examines when professional fee income can be said to have accrued under the mercantile system of accounting, particularly where:

  • The payer has booked expenditure and deducted TDS under section 194J,
  • The recipient-assessee has not yet rendered services, raised invoices, or recognised income, and
  • The same amount is eventually offered to tax in the subsequent assessment year.

The dispute centred on ₹1,05,00,000/- shown in Form 26AS on account of consultancy fees from DAS Offshore Ltd., which the Revenue sought to tax in AY 2017-18, while the assessee had recognised and offered this income in AY 2018-19.

The Tribunal was called upon to decide:

  • Whether mere deduction of TDS and accounting treatment in the payer’s books could trigger accrual of income for the assessee in AY 2017-18; and
  • Whether taxing the same amount again in AY 2017-18 would amount to impermissible double taxation.

2. Key Facts of the Case

2.1 Incorporation and Agreement

  • The assessee-company, AJR Oil And Gas Engineering Services Pvt. Ltd., was incorporated on 28.02.2017.
  • On the same date, it entered into a consultancy agreement with DAS Offshore Ltd. for provision of professional services.
  • As per Article 4 of the agreement, the term was up to 30.06.2017.
  • Article 5 provided for a consolidated consultancy fee of INR 3,50,00,000/- (excluding taxes).
  • Article 7 set out a schedule of payments spread from 28.02.2017 to 31.07.2017, in specified percentages of the agreed fees.

2.2 Actual Commencement and Invoicing of Services

  • The assessee consistently maintained that:
    • No consultancy services were rendered up to 31.03.2017;
    • No invoice was issued in FY 2016-17; and
    • No amount became due or receivable during that period.
  • The first tax invoice towards consultancy services was raised on 03.04.2017.
  • Revenue from the DAS Offshore contract was recognised progressively in subsequent months based on invoices issued after actual commencement of services.

The assessee furnished invoice-wise details of revenue recognised from DAS Offshore Ltd., supported by books of account and corresponding tax invoices, demonstrating revenue recognition only after services had begun in the following year.

2.3 Reconciliation with Form 26AS

The assessee carried out a three-year reconciliation between:

  • Revenue as per audited financial statements; and
  • Receipts appearing in Form 26AS.

The reconciliation showed:

  • Total receipts over three assessment years aggregating to ₹15,72,99,995/- in the books,
  • Matching exactly with the aggregate receipts of ₹15,72,99,995/- reflected in Form 26AS.

The year-wise figures, as recorded in the order, were:

  • AY 2017-18 – Amount reflected as receipt in Form 26AS: ₹1,05,00,000/-, with a difference of (₹1,05,00,000/-) vis-à-vis books;
  • AY 2018-19 – Revenue as per books: ₹7,00,00,132/-; receipts as per Form 26AS: ₹6,82,50,165/-; difference ₹17,49,967/-;
  • AY 2019-20 – Revenue as per books: ₹8,72,99,863/-; receipts as per Form 26AS: ₹7,85,49,830/-; difference ₹87,50,033/-.

The Tribunal noted that the matching totals clearly indicated timing differences rather than any non-reporting or concealment of income.

2.4 Assessment and First Appeal

  • Reassessment for AY 2017-18 was initiated under section 147 r.w.s. section 144 r.w.s. section 144B based mainly on TDS data from Form 26AS / Insight Portal.
  • The Assessing Officer treated ₹1,05,00,000/- as income accrued to the assessee in FY 2016-17 on the footing that:
    • DAS Offshore Ltd. had accounted for corresponding expenditure on an accrual basis; and
    • TDS was deducted under section 194J in that year.
  • The AO disregarded the assessee’s stand that services commenced only after 31.03.2017 and that the first invoice was raised on 03.04.2017.
  • On appeal, the ld. CIT(A)/NFAC upheld the addition, holding that the payer’s deduction of TDS and booking of the expenditure indicated accrual of income in the assessee’s hands in AY 2017-18.

2.5 Grounds Before the ITAT

Before the Tribunal, the assessee’s principal contentions included: