Income Tax Appellate Tribunal - Delhi
Dcit Circle 16 1, New Delhi vs Microsoft Corporation (India) Private ... on 29 April, 2026
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH, E: NEW DELHI
BEFORE SHRI RAJ KUMAR CHAUHAN, JUDICIAL MEMBER
AND
SHRI BRAJESH KUMAR SINGH, ACCOUNTANT MEMBER
ITA No.- 7393/Del/2025
[Assessment Year: 2014-15]
DCIT, Microsoft Corporation (India) Pvt.
Circle 16(1), Ltd.,
th
419, 4 Floor, CR Building Vs 807, New Delhi House,
IP Estates, Barakhamba Road,
New Delhi- 110002. New Delhi-110001.
PAN- AAACM5586C
Revenue Assessee
Assessee by Shri Nageswar Rao, Adv. and
Shri Parth, Adv.
Revenue by Shri Shravan Kumar, CIT(DR)
Date of Hearing 18.03.2026
Date of Pronouncement 29.04.2026
ORDER
PER BRAJESH KUMAR SINGH, AM,
This appeal by the Revenue is against the order dated 10.09.2025 of National Faceless Appeal Centre (NFAC) [hereinafter referred to as the 'Ld. CIT(A)] arising out of the assessment order dated 26.12.2017 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the 'the Act') by the Additional ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
Commissioner of Income Tax, Special Range-6, New Delhi, (hereinafter referred to as the 'AO') pertaining to Assessment Year (AY) 2014-15.
2. The assessee filed e-Return with income of Rs 107,64,88,910/- on 28-11-2014. Subsequently, the return was revised on 30.03.2016 at an income of Rs. 114,44,80,290/-. The case was selected for scrutiny under CASS. Accordingly. notice u/s 143(2) of the Act dated 28.08.2015 was sent to the assessee which was duly served to the assessee company. Notice u/s 142(1) along with detailed questionnaire dated 13.04.2016 was sent to the assessee. In compliance to various notices issued, Shri Vishal Pandey, CA and Shri Sanjeev Jain, CA, authorized representatives of the assessee company attended the assessment proceedings from time to time and filed replies/details as called for during the course of assessment proceedings.
2.1 The assessee company is a wholly owned subsidiary of Microsoft Corporation, USA and is engaged in providing marketing support services to its associated enterprises in respect of sale of Microsoft software in India. The assessee company also provides certain service to independent customers in India being (i) consultancy services in supporting the development of client server applications; (ii) assist customers in the successful development of Microsoft technology, both directly and through service providers; and (iii) provide training through authorized training centers to assist customers in the operation of Microsoft software. 2
ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
2.3 The AO noted that during the year, the assessee had debited an amount of Rs. 352,79,66,392/- in P&L Account in respect of 'Advertisement, Publicity and Sales Promotion' expenses and the assessee had treated the expenses as revenue in nature. Vide order sheet entry dated 7.11.2017, the AR of the assessee was asked by the AO to explain why these advertisement, publicity and sales promotion were being incurred and also why a portion of it should not be considered as capital in nature as it was of enduring benefit going towards brand building of the Microsoft brand worldwide. The assessee was also asked to submit copies of their agreements with their AEs. The assessee submitted its reply but the same was not found to be acceptable by the AO and treated that 50% of 'Advertisement, Publicity and Sales Promotion' (50% of Rs. 352,79,66,392 = Rs. 176,39,83,196) of the said expenses incurred for brand building/promotion (which is an intangible asset) which was capital in nature and was accordingly disallowed. The relevant extract of the order of the AO is reproduced as under:
"17. It is evident that significant investment has gone to promotion of the Microsoft brand. I have no doubt in my mind that the Advertisement, Publicity and Sales Promotion expenses also included expenses incurred for efforts to make Microsoft USA's trademarks, service marks and trade names well known in India. I have also gone through the case laws relied on by the assessee. The facts of the assessee are distinguishable and the ratios of the case laws are not applicable to the case of the assessee.
18. Keeping in view the fact that other activities were also undertaken for incurring Advertisement, Publicity and Sales Promotion expenses, I hold that 50% of 'Advertisement, Publicity and Sales Promotion' (50% of Rs. 352,79,66,392 = Rs. 176,39,83,196) expenses are incurred for brand building/promotion (which is an intangible asset) which is capital in nature and is accordingly, disallowed."3
ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
3. Aggrieved with the said order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) deleted the addition and allowed the appeal of the assessee. The relevant extract of the order of the Ld. CIT(A) is reproduced as under:
"Analysis and Conclusion:
The AO's disallowance of 50% of the AMP expenses is found to be unsustainable in law and on facts. The reasoning provided by the AO is based on conjecture and a selective interpretation of the contractual agreements, which is contradicted by other clauses and a long-standing line of judicial pronouncements.
The foundational principle for determining whether an expenditure is revenue or capital is the "enduring benefit" test, as articulated by the Hon'ble Supreme Court. However, as established in the case of CIT vs. Monto Motors Ltd. [2012] (19 taxmann.com) 57 (Delhi), the impact of advertising and sales promotion, particularly for consumer products in a competitive market, is short-lived. Such expenses are a continuous and recurring necessity to maintain and attract customers, and their benefit is momentary, not enduring. They are part of the profit-earning process, not the capital structure of the business. The AO's claim that a "corporeal asset" has been created is factually incorrect and not substantiated by any evidence.
The AO's selective reliance on the intercompany agreements is also without merit. The appellant's submission correctly identifies a specific clause (4.1.4) in the License Agreement that explicitly disavows the notion that the AMP expenses constitute "brand building." The AO failed to consider this clause, leading to a flawed conclusion based on incomplete information.
Most importantly, the principle of judicial discipline is paramount in this matter. The issue of ad-hoc disallowance of AMP expenses for the same assessee has been a subject of appeal before higher appellate forums in subsequent years. The Hon'ble Delhi ITAT, in its order dated 01.08.2022 for the appellant's own case in AY 2016-17 (ITA No. 802/Del/2021), directly addressed and rejected a similar 50% disallowance. The Tribunal's finding was clear and unambiguous, holding that such ad-hoc capitalization lacks legal validity. This ruling has subsequently been followed by the CIT(A) for AY 2015-16, who also deleted a similar addition.
The operative part of the ITAT order for AY 2016-17 is particularly relevant and must be respected:
"6. We find that the determination of ALP or the capitalization of 50% of advertising expenses on ad-hoc basis has no legal validity. The Id. DRP distinguished the case laws relied upon by the assessee but could not substantiate by the way of any adjudication... In the absence of any tangible explanation or 4 ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
reasoning given in treating the advertisement expenses as capital as no corporeal asset has been created, we hold that no the expenses incurred cannot be treated as capital in nature".
Following this binding precedent and the principles of commercial expediency and legal consistency, the addition made by the AO on this ground cannot be sustained. Decision: The appeal on this ground is allowed. The disallowance of Rs. 1,76,39,83,196/- is hereby deleted."
(emphasis supplied by us)
4. Aggrieved with the said order, the Revenue is in appeal before us, on the following grounds of appeal:
"1. Whether on the facts and in the circumstances in the case. the ld. CIT(A) was right in deleting the addition of Rs. 1, 76,39.83,196/- made on account of treating 50% of advertisement, publicity and sales promotion expenses as Capital Expenditure ignoring the fact that a huge outlay on the advertisement and marketing ultimately results into creating improving the value of brand name of the company which is an intangible assets?
2. Whether on the facts and in the circumstances in the case, the ld. CIT(A) was right in deleting the addition of Rs. 1, 76,39,83,196/ mode on account of treating 50% of advertisement, publicity and sales promotion expenses as Capital Expenditure ignoring the fact that such expenses were incurred though in an accounting year, but yields benefits for several years and therefore, the entire AMP expenditure incurred by the assessee during the relevant AY cannot be considered as expended wholly and exclusively for the purpose of the business of the assessee transacted during the relevant accounting year?"
5. At the outset, the Ld. AR supported the order of the Ld. CIT(A) and submitted that this was a covered matter in favour of the assessee by the order dated 01.08.2022 in ITA No.- 802/Del/2021 for A.Y. 2016-17 and further by its common order dated 09.06.2024 in ITA No.- 3616/Del/2023 and ITA No. 3671/Del/2023 for A.Y. 2015- 16 in assessee's own case.
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6. On the other hand, the Ld. Sr. DR supported the order of the AO and the grounds of appeal filed by the assessee.
7. We have heard both the parties and perused the material available on record. Similar issue came in assessee's own case for A.Y. 2016-17 wherein the co-ordinate Bench of the Tribunal in ITA No.- 802/Del/2021 deleted the addition made by the AO and confirmed by the Ld. CIT(A). The relevant ground no. 3 to 3.2 of the said appeal and the relevant extract of the said order is reproduced as under:
"3. That the Ld. AO and Hon'ble DRP have erred in facts and in law in treating 50% of the expenditure incurred on advertisement, publicity and sales promotion as capital expenditure disregarding the fact that the expenditure incurred is revenue in nature.
3.1 That on the facts and in the circumstances of the case and in law, the Ld. AO and Hon'ble DRP has grossly erred in disallowing 50% of the expenditure on notional/ ad-hoc basis without any cogent evidence and reasoning.
3.2 That on the facts and in the circumstances of the case and in law, the Ld. AO and Hon'ble DRP has grossly erred in not appreciating the principles laid down by Jurisdictional High Court judgments cited during the course of the assessment proceedings that the advertisement, publicity and sales promotion expenditure is revenue in nature.
6. We find that the determination of ALP or the capitalization of 50% of advertising expenses on ad-hoc basis has no legal validity. The Id. DRP distinguished the case laws relied upon by the assessee but could not substantiate by the way of any adjudication how the 50% of the expenses on account of advertisement, publicity and sales incurred by the assessee culminated in brand building and promotion of the Microsoft brand globally. In the absence of any tangible explanation or reasoning given in treating the advertisement expenses as capital as no corporeal asset has been created, we hold that no the expenses incurred cannot be treated as capital in nature."6
ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
7.1 Similar grounds of appeal for A.Y. 2015-16 in assessee own case and the common order of the Co-ordinate Bench of the Tribunal in ITA Nos.- 3616/Del/2023 and 3671/Del/2023 are also reproduced as under:
"5.1 The Revenue has also filed the appeal raising the following grounds:-
(1) Whether on the facts and in the circumstances in the case, the Ld. CIT(A) was right in deleting the addition of Rs. 165,18,15,000/- made on account of treating 50% of advertisement, publicity and sales promotion expenses as Capital Expenditure ignoring the fact that a huge outlay on advertisement and marketing ultimately results into creating/improving the value of brand name of the company which is an intangible assests?
(2) Whether on the facts and in the circumstances in the case, the Ld. CIT(A) was right in deleting the addition of Rs. 165,18,15,000/- made on account of treating 50% of advertisement, publicity and sales promotion expenses as Capital Expenditure ignoring the fact that such expenses were incurred though in an accounting year, but yields benefits for several years and therefore, the entire AMP expenditure incurred by the assessee during the relevant AY cannot be considered as expended wholly and exclusively for the purpose of the business of the assessee transacted during the relevant accounting year?"
6. Heard and perused the record. The Id. AR submitted that the issue involved in the appeal of the Revenue is covered in favour of the assessee in assessee's own case for AY 2016-17 in ITA No.802/Del/2021 vide order dated 01.08.2022. The relevant observation of the Tribunal at para 6 of the said order read as under:-
"6. We find that the determination of ALP or the capitalization of 50% of advertising expenses on ad-hoc basis has no legal validity. The Id DRP distinguished the case laws relied upon by the assessee but could not substantiate by the way of any adjudication how the 50% of the expenses on account of advertisement, publicity and sales incurred by the assessee culminated in brand building and promotion of the Microsoft brand globally. In the absence of any tangible explanation or reasoning given in treating the advertisement expenses as capital as no corporeal asset has been created, we hold that no the expenses incurred cannot be treated as capital in nature."
6.1 As there are no distinguishing facts or proposition of law pointed by ld. DR, to vary with the conclusions of co-ordinate bench, we find no substance in the grounds of appeal. The appeal of the Revenue dismissed."
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7.2 In the present year also, as there are no distinguishing facts or proposition of law pointed by ld. DR, to vary with the conclusions of co-ordinate bench, we find no substance in the grounds of appeal. Accordingly, the appeal of the Revenue is dismissed.
7.3 Further, the AO noted that during the course of assessment proceedings that TDS as per Form 26AS was Rs 306,52,05,017/- and as per the ITR was Rs 259,22,42,325/- and there was corresponding mismatch in income returned in the ITR (as seen in the AIR information). The Assessee was asked vide order sheet entry dated 16.11.2017 to reconcile the same. In reply dated 27.11.2017 the Assessee stated that:
"It is respectfully submitted that section 199 of the Act read with Rule 37BA of the Income Tax Rules, provides that credit for TDS shall be given for the assessment year for which such income is assessable. It also provides that where tax has been deducted at source and income is assessable over a number of years, credit for TDS shall be allowed across those years in the same proportion in which the income is assessable to tax.
In this regard, the assessee wishes to submit that in the case of contracts for sale of certain products where customers are entitled to software assurance, web support and other benefits, revenue is recognized proportionately over the course of the contract rather than in the month of billing. Revenue from such contracts is recognized on a time proportion basis over the period of contract in accordance with the Accounting Standard-9 on Revenue Recognition.
Further, in accordance with the provisions of Chapter XVII-B of the Act, the customers while making an accrual / payment to the Assessee, deduct tax at source on the entire amount paid/ accrued and accordingly, the entire amount along with the TDS is duly reported in the Form 26AS of the Assessee. Thus, the timing of deduction of tax by customers at the time of payment to the assessee is linked to the date of invoicing to such customers and is independent of the assessee's revenue recognition policy.
The Assessee offers revenue basis its revenue recognition policy and claims only that proportion of TDS in the return of income as relates to revenue that is being offered to tax. It is submitted that the TDS as appearing in Form 26AS of the subject AY at the time of filing the revised return of income was INR 306,52,58,152 8 ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
respectively. However, in accordance with provisions of section 199 of the Act read with Rule 37BA of Income Tax Rules, the assessee has claimed TDS of only INR 259,22,42,325 in the revised return of income which is corresponding to revenue offered to tax."
7.3 The AO did not accept the above explanation of the assessee and added a sum of Rs. 472,96,26,920/-. The relevant extract of the order of the AO is reproduced as under:
"22. During the course of assessment proceedings it was seen that TDS as per Form 26AS was Rs 306,52,05,017 and as per the ITR was Rs 259,22,42,325 and there was corresponding mismatch in income returned in the ITR (as seen in the AIR information). The Assessee was asked vide order sheet entry dated 16.11.2017 to reconcile the same. In reply dated 27.11.2017 the Assessee stated that:
"It is respectfully submitted that section 199 of the Act read with Rule 37BA of the Income Tax Rules, provides that credit for TDS shall be given for the assessment year for which such income is assessable. It also provides that where tax has been deducted at source and income is assessable over a number of years, credit for TDS shall be allowed across those years in the same proportion in which the income is assessable to tax.
In this regard, the assessee wishes to submit that in the case of contracts for sale of certain products where customers are entitled to software assurance, web support and other benefits, revenue is recognized proportionately over the course of the contract rather than in the month of billing. Revenue from such contracts is recognized on a time proportion basis over the period of contract in accordance with the Accounting Standard-9 on Revenue Recognition.
Further, in accordance with the provisions of Chapter XVII-B of the Act, the customers while making an accrual / payment to the Assessee, deduct tax at source on the entire amount paid/ accrued and accordingly, the entire amount along with the TDS is duly reported in the Form 26AS of the Assessee. Thus, the timing of deduction of tax by customers at the time of payment to the assessee is linked to the date of invoicing to such customers and is independent of the assessee's revenue recognition policy.
The Assessee offers revenue basis its revenue recognition policy and claims only that proportion of TDS in the return of income as relates to revenue that is being offered to tax. It is submitted that the TDS as appearing in Form 26AS of the subject AY at the time of filing the revised return of income was INR 306,52,58,152 respectively. However, in accordance with provisions of section 9 ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
199 of the Act read with Rule 37BA of Income Tax Rules, the assessee has claimed TDS of only INR 259,22,42,325 in the revised return of income which is corresponding to revenue offered to tax."
23. The reply of the Assessee was considered. Here the assessee is recognizing revenue proportionately over the course of the contract rather than in the month of billing which is leading to mismatch of the revenue in the return of income. The reply of the Assesse is not acceptable as the Assessee has himself billing in this year. This implies that contract income has already accrued and the contract terms can vary. However, correct computation for income tax assessment also involves due pre-ponement of taxes while the assessee is unduly postponing taxes by reorganizing the revenue over a period of time. In a nutshell, on accrual basis, the entire receipt is to be taken in the period of billing which is the current AY.
24. As income should be declared in the year it accrues, Assessee has failed to show revenue to the tune of Rs 472,96,26,920 (as undisclosed TDS was Rs 47,29,62,692). In view of the above, an addition of Rs 472,96,26,920 is being made."
8. Aggrieved with the said order the assessee filed an appeal before the ld. CIT(A). The Ld. CIT(A) deleted the said addition. The relevant extract of the said order of the Ld. CIT(A) is reproduced as under:
"6. round No. 4: Addition on Account of Undisclosed TDS (TDS Mismatch) The appellant has appealed against the addition of Rs.4,72,96,26,920/-, which the AO added to the total income by grossing up the alleged undisclosed" TDS credit of Rs.47,29,62,692/-. The appellant contends that this addition is erroneous, as it violates its regular method of accounting and the provisions of the Act regarding TDS credit.
AO's Finding:
The AO observed a mismatch between the TDS claimed by the appellant in its revised return (Rs.2,59,22,42,325/-) and the TDS reflected in Form 26AS (Rs.3,06,52,05,017/-). The AO rejected the appellant's explanation that the revenue from certain long-term contracts is recognized proportionately over the contract period rather than at the time of billing. The AO's view was that because the appellant had raised the bill in the current year, the entire income had accrued, and the entire receipt should be taxed. The AO concluded that by deferring the recognition of income, the appellant was "unduly postponing taxes" and thus made the addition by grossing up the difference in TDS.
Appellant's Submissions:10
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The appellant's submission explains that its method of accounting is consistent and in line with Accounting Standard 9 (AS-9) on 'Revenue Recognition'. This method, which is followed regularly and certified by the statutory auditors, mandates that for contracts offering software assurance and other benefits over a defined period, revenue is to be recognized on a time-proportion basis over that period, not at the time of billing. The appellant correctly pointed out that the Income Tax Act itself, under section 145(1), allows an assessee to compute income in accordance with the mercantile system of accounting regularly employed.
More critically, the appellant's practice is in direct compliance with section 199 of the Act, read with Rule 37BA of the Income Tax Rules. These provisions explicitly state that TDS credit must be given for the assessment year in which the corresponding income is assessable. They further provide that if income is assessable over multiple years, the TDS credit is to be allowed proportionately in those years. The appellant clarified that the unclaimed TDS, corresponding to the deferred revenue, was duly carried forward and disclosed in the return, and thus, it was not "undisclosed" as alleged by the AO.
The appellant further demonstrated that the AO's methodology would lead to absurd results and a situation of double taxation, as the deferred revenue is recognized and offered to tax in subsequent years. The appellant also cited judicial precedents that discourage the revenue authorities from litigating on "timing issues" where the rate of tax remains the same, as is the case here.
Analysis and Conclusion:
The AO's addition on account of the TDS mismatch is a fundamental misinterpretation of both accounting principles and statutory provisions. The AO's contention that the entire receipt should be taxed in the year of billing is a direct rejection of the appellant's regularly employed and statutorily compliant method of accounting under the mercantile system.
The AO's position is a clear violation of Section 145 of the Act, which, during the relevant period, permitted the use of the mercantile system and mandated adherence to Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) unless superseded by notified Income Computation and Disclosure Standards (ICDS) The AO did not make any finding that the appellant's accounts were incomplete or incorrect, which would have been a prerequisite for rejecting the accounting method under section 145(3).
The AO's action also completely disregards the specific provisions of section 199 and Rule 37BA, which were enacted precisely to handle situations where income is spread over multiple years. The appellant's practice of claiming TDS credit proportionately with the recognition of income is a correct application of these provisions. The allegation of "unduly postponing taxes" is baseless, as the tax has already been deducted and deposited with the government in the year of billing. The appellant has only deferred the claim for the credit, not the tax payment itself. The legal position on this matter is well-established. The Hon'ble Supreme Court, in cases like Virtual Soft System Ltd. [2018] 92 taxmann.com 370 (SC), has emphasized that where the Act is silent, the accounting standards prescribed by the 11 ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
ICAI should be followed to compute "real income". By making an addition based on gross receipts rather than income, the AO has violated this settled principle.
Decision: The appeal on this ground is allowed. The addition of Rs.4,72,96,26,920/- is hereby deleted."
(emphasis supplied by us)
9. Aggrieved with the said order, the Revenue is in appeal before us, on the following ground of appeal:
"3. Whether on the facts and in the circumstances in the case, the id CIT(A) was right in deleting the addition of Rs. 4,72,96,26,920/- corresponding to an undisclosed Tax Deducted at Source (TDS) credit arising from a mismatch between the figures in Form 26AS and the Income Tax Return."
10. The Ld. Sr. DR supported the assessment order and the ground of appeal.
11. On the other hand, the ld. Counsel for the assessee supported the order of the Ld. CIT(A) and filed a written submission, which is reproduced as under:
"GROUND NO. 3 ADDITION ON ACCOUNT OF ALLEGEDLY UNDERREPORTED INCOME PRESUMING TOS MISMATCH
9. Respondent Assessee reiterates its contentions made in submissions dated 27.11.2017 [Pg. 247/FTB before Ld. AO and in its appeal before Ld. CIT(A) [Pgs. 346- 347/FPB] as well as in submissions dated 22.02.2019 [Pgs. 386-398/FPB), and 06.05.2024 [lgs. 421-430/FPB] before Ld. CIT(A)
10. As per Revenue Recognition Policy of Respondent-Assessee, where revenue relates to contracts for sale of certain products where customers are entitled to software assurance, web support and other benefits, revenue is recognized proportionately over term of contract rather than in the month of billing [Para 2.7, Pg. 100/FPB] Such revenue recognition is in consonance with. Accounting Standard-9 11 For example: If an invoice of 100 was raised on 01.01.2014 under a contract valid for a period of 12 months, revenue to be recognized in the return of income for FY 2013-14 will be Rs. 25 for 3 months Customer will deduct tax on the total amount of invoice i.e, Rs. 100 but Respondent-Assessee claims credit only for TDS made on revenue of Rs. 25 and balance TDS credit is carried forward to next year for claim and is reflected as excess credit in Form 26AS For AY 2014-15, Respondent-Assessee in its 12 ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
revised return of income claimed TDS credit of Rs. 259,22,42,325/ in accordance with section 199 of the Act read with rule 37BA of the Income Tax Rules, 1962 whereas the TDS as appearing in Form 26AS was Rs. 306,52,05,017- /resulting in unclaimed TDS which was carried forward (disclosed in return) to subsequent year as the corresponding income was recognized in the subsequent year
12. Disputed addition which was made by Ld AO, proceeded on a fundamentally incorrect premise that the quantum of TDS reflected in Form 26AS determines the quantum of taxable income It is not disputed, that Respondent Assessee had raised invoices for services to be rendered over a period spanning different financial years and that in accordance with its consistently followed method of accounting and the principles of revenue recognition (AS-9), had recognised income proportionately over the service period. The fact that entire consideration was received upfront, after deduction of TDS by payer, does not alter the year of taxability of income. TDS provisions are merely a mode of tax collection under section 190 and cannot override the substantive provisions governing accrual of Income Section 199(3) read with Rule 37BA(3)(1) explicitly mandates that credit for TDS shall be allowed in the assessment year in which the corresponding income is assessable Therefore, a higher amount of TDS appearing in Form 26AS only indicates timing difference and cannot lead to an inference that the assessee has under reported income.
13. It is well settled that income must be taxed on the basis of real accrual and not on the basis of receipts or TDS entries. Hon'ble Supreme Court in CIT vs. Excel Industries Ltd., [2013] 358 ITR 295 (SC) and E.D. Sassoon & Co. Ltd. v. CIT, [1954] 26 ITR 27 (SC) has affirmed that only real income can be brought to tax in the correct year.
Further, in Virtual Soft Systems Ltd. vs. CIT, (2018) 92 taxmann.com 370 (SC), Hon'ble Supreme Court recognised that, in the absence of any express prohibition, accounting standards and ICAI guidance can be relied upon to determine real income.
14. Above position is correctly appreciated by Ld. CIT(A) while deleting the disputed addition. Ld. CIT(A) also rightly held allegation of postponement of taxes to be misconceived, as the tax had already been deducted and deposited with the Government; only the credit was deferred to align with the year of assessability of income. Thus, ground no. 3 in Ld. AO's appeal deserves to be dismissed by this Hon'ble Tribunal."
(emphasis supplied by us)
12. We have heard both the parties and perused the material available on record. The assessee has explained its methodology of offering of its income and corresponding proportionate claim of TDS in para no. 11 of its submission as reproduced above as per the provision of Section 199(3) of the Act r.w. Rule 13 ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
37BA(3)(1) of the IT Rules, 1962. In its submission, it is stated that the assessee in its revised return of income claimed TDS credit of Rs. 259,22,42,325/- in accordance with section 199 of the Act read with rule 37BA of the Income Tax Rules, 1962 whereas the TDS as appearing in Form 26AS was Rs. 306,52,05,017- /resulting in unclaimed TDS which was carried forward (disclosed in return) to subsequent year as the corresponding income was recognized in the subsequent year. We agree with this submission of the assessee as it is the correct position in law. The claim of TDS of Rs. 259,22,42,325/- and the corresponding income therein offered for taxation for A.Y. 2014-15 was also before the Ld. CIT(A), who after analysing the facts and legal position deleted the said addition. No contrary facts or any contrary position of law has been brought on record by the Ld. CIT(DR) to controvert the above findings of the Ld. CIT(A). We, therefore agree with the findings of the Ld. CIT(A). Accordingly, the grounds of appeal filed by the assessee are not sustainable and the same are dismissed.
13. The AO made an addition of Rs. 54,32,424/- on account of interest u/s 244A of the Act received by the assessee, which according to the AO was not declared by the assessee. The relevant extract of the order of the AO is reproduced as under:
"20. From the ITS details it is found that during the F.Y. 2013-14, a refund of Rs. 50702620/- was generated on 28.03.2014 which included interest u/s 244A amounting to Rs. 54,32,424/-. However this interest u/s 244A was not included in the total income by the assessee. As the information was already available in 26AS it should have been added back to the income of the assessee.14
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21.I am satisfied that the assessee has furnished inaccurate particulars of income. Hence, penalty proceeding u/s 271(1)(c) is initiated."
(Addition: Rs. 54,32,424/-)
14. Aggrieved with the said order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) deleted the said addition and allowed the ground of the assessee. The relevant extract of the Ld. CIT(A)'s order is reproduced as under:
" 7. Ground No. 5: Addition on Account of Interest Income under Section 244A The appellant has appealed against the addition of Rs.54,32,424/-, which was treated as interest income under section 244A of the Act. The appellant argues that this interest was notional, contingent, and had not "accrued as per the "real income theory".
AO's Finding:
The AO made the addition on the basis that a refund of Rs.5,07,02,620/-, which included interest under section 244A of Rs.54,32,424/-, was generated for FY 2011- 12 and was reflected in the appellant's Form 26AS for the subject year. The AO concluded that this interest should have been included in the total income.
Appellant's Submissions:
The appellant clarified that the interest on the refund was not actually received in cash but was adjusted against an "erroneous demand for AY 2008-09. Crucially, the refund itself pertained to AY 2012-13 (FY 2011-12), and the matter was still pending before the CIT(A). The appellant contended that until the final adjudication of the appeal for the earlier year, the right to the refund and the associated interest had not crystallized. It argued that since the refund could potentially be withdrawn or converted into a demand upon the conclusion of the appellate proceedings, the income was contingent and not an absolute right to receive. Relying on the "real income theory." the appellant maintained that a notional or hypothetical income, which has not truly accrued, cannot be subjected to tax.
Analysis and Conclusion:
The addition made by the AO on this ground is in clear contravention of the fundamental principle of the "real income theory" as established by the Hon'ble Supreme Court. Income is said to have accrued only when there is a present, legally enforceable right to receive it. In legal parlance, this is expressed as debitum in praesenti, solvendum in futuro. In this case, since the very basis of the refund the 15 ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
assessment for AY 2012-13-was under appeal, the right to the interest income was not absolute. The income was contingent on the outcome of the pending litigation.
The Hon'ble Supreme Court, in the case of Hindustan Housing and land Development Trust Ltd. v. CIT[1986] 27 Taxman 450A (SC), held that income accrues only upon the "final determination" of an amount, and until then, there is no "liability in praesenti." A similar position was taken by the Delhi High Court in CIT vs. Sarvatra Roadrunners P Ltd. [2008] 173 Taxman 141 (Delhi). The AO's action of taxing a contingent and notional income, which may not ultimately materialize, is therefore erroneous.
Decision: The appeal on this ground is allowed. The addition of Rs. 54,32,424/- is hereby deleted."
15. Aggrieved with the said order, the Revenue is in appeal before us on the following ground of appeal:
"4. Whether on the acts and in the circumstances in the case the ld. CIT(A) has failed to appreciate that the interest under section 244A, being statutory in nature, automatically accrues to the assessee once the refund is determined and credited or adjusted by the Department. irrespective of its actual receipt in cash?
5. Whether on the facts and in the circumstances in the case the ld. CIT(A) has erred in applying the "real income theory'" to a case of statutory interest under section 244A, overlooking the settled legal position that such interest arises by operation of low upon grant or adjustment of refund and therefore, constitutes taxable income in the year of accrual."
16. The Ld. Sr. DR supported the assessment order and the grounds of appeal.
17. On the other hand, the ld. Counsel for the assessee supported the order of the Ld. CIT(A) and filed a written submission, which is reproduced as under:
"GROUND NOS 4 AND 5: ADDITION ON ACCOUNT INTEREST INCOME UNDER SECTION 2448 OF THE ACT 15 Respondent-Assessee reiterates its contentions made in its submissions before Ld. CIT(A) [Pgs. 347. 348/FPB) dated 22.02.2019 [Pgs. 399-404/FPB), and 06.05.2024 [Pgs. 430-431/FPB] 16 ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
16. Ld. CIT(A) has correctly applied doctrine of "real income" in concluding that impugned interest under section 244A granted in intimation u/s 143(1) did not accrue during the relevant year. It is trite law that income can be said to accrue only when there exists a vested and enforceable right to receive it. In the present case, the very basis of refund (arising from AY 2012-13) was sub judice in appellate proceedings. Consequently, the right to receive both the principal refund and accompanying interest lacked finality and was inherently defeasible. Mere reflection of an amount in Form 26A5 or its mechanical computation by the system cannot override the legal test of accrual. As noted by Ld. CIT(A). Hon'ble Supreme Court in CIT us. Hindustan Housing & Land Development Trust Ltd., [1986) 161 ITR 524 (5C) has unequivocally held that where the right to receive is subject to pending adjudication, no income can be said to accrue. The same principle has been consistently followed by Hon'ble Courts. including CIT. Delhi III vs. Sarvatra Roadrunners (P) Ltd., [2008] 301 (TR 443 (Dell).
17. Further, the factual matrix reinforces that alleged "receipt" itself was illusory, as it is undisputed that refund was not disbursed but merely adjusted against a disputed and pending demand for AY 2009-10. Disputed interest of 154,32,424/-
calculated tentatively in favour of Respondent-Assessee pursuant to processing of the tax return under section 143(1) for AY 2012-13 was subsequently reversed in the assessment order passed on 26.12.2017 for such year. Thereafter, Respondent settled the pending litigation for AY 2012-13 under the Vivad Se Vishwas Scheme, 2020 by accepting the income computed in the assessment order Consequently, Form-5, final certificate of closure of litigation, was issued on 27.09.2021. Thus, factually interest of Rs. 254,32,424/- was never received by Respondent-Assessee in relation to Ay 12-
13. Further, reversal of said interest has become absolute in the hands of Respondent. A copy of Form 5 issued for AY 2012-13 is annexed herewith as Annexure 1 for Hon'ble Tribunal's kind reference.
18. In view of the above, conclusion of Ld. CIT(A) is aligned with settled legal principles, it warrants no interference and ground nos. 4 and 5 of Ld. AO's appeal deserve to be dismissed.
Respondent respectfully requests consideration of present note as supplementing and not substituting material already on appeal record, during the hearing. Present note is only aide to memoire and may kindly be considered."
(emphasis supplied by us)
18. We have heard both the parties and perused the material available on record. We agree with the legal basis of the decision of the Ld. CIT(A). Further, the assessee in its written submissions as reproduced above in para no. 17, states that the assessee had settled the pending litigation for AY 2012-13 under the Vivad Se Vishwas 17 ITA No.- 7393/Del/2025 Microso Corpora on (India) Pvt. Ltd.
Scheme, 2020 by accepting the income computed in the assessment order and consequently, Form-5, final certificate of closure of litigation, was issued on 27.09.2021. It was further submitted that factually interest of Rs. 54,32,424/- was never received by assessee in relation to Ay 12-13 and further, reversal of said interest had become absolute in the hands of assessee. In view of these facts also, the interest of Rs. 54,32,424/- will be not taxable in the hands of the assessee for the present assessment year and we uphold the order of the Ld. CIT(A) on this issue. Accordingly, this ground of appeal is dismissed.
19. In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 29th April 2026.
Sd/- Sd/-
[RAJ KUMAR CHAUHAN] [BRAJESH KUMAR SINGH]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated- 29.04.2026.
Pooja.
Copy forwarded to:
1. Assessee
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar,
ITAT, New Delhi,
18