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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
PER G. MANJUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-8, Chennai, dated 27.09.2019 and pertains to assessment year 2016-17.
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The assessee has raised the following grounds of appeal: “1. The order of the CIT(A) is erroneous in law and opposed to the facts and circumstances of the case to the extent prejudicial to the interest of the Appellant, and is opposed to the principles of equity, natural justice and fair play.
2. The CIT(A) failed to adjudicate on the additional and revised grounds of appeal submitted on 19 August 2019.
3. The order of the CIT(A) is against the principles of natural justice without granting adequate opportunity of being heard to the Appellant.
4. The order of the CIT(A) is erroneous as the CIT(A) failed to adjudicate on the Appellant's ground that the order of the AO is against the principles of natural justice as the Ld. AO failed to comply with instruction 20/2015 dated 29.12.2015 by not issuing show cause notice to the Appellant detailing the reasons for the additions / disallowances. In connection with the Storage fee receipts: [Tax effect: Rs. 30,99,63,079]
5. The order of the CIT(A) is erroneous on law and on facts by treating the storage fees of Rs.89,56,39,966/- received in advance, as the income of the Appellant for the AY 2016-17.
6. The order of the CIT(A) is erroneous on law and on facts by treating the amount received towards advance storage fees contrary to the Appellant's facts as being a revenue receipt chargeable to tax in the year of receipt.
7. The CIT(A) failed to note that in respect of the 21 years plan and life time plan, the income accrues only in the year in which the storage service is provided and not in the year in which the sums are received. The CIT(A) also failed to note that in respect of the annual plans, the receipts are accounted, accrued and taxed in the year of provision of service, and accordingly in the 21 years plan and life time plan also, the same is righty followed by the Appellant.
8. The CIT(A) failed to appreciate that the Appellant is under obligation to provide storage service over the contracted period (21 years or life time, as the case may be) and that the income can be apportioned over the said contracted period.
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The CIT(A) ought to have appreciated that the Appellant's financial statements have been prepared on mercantile or accrual basis of accounting following the applicable accounting standards and the matching principle of the expenditure and income admitted, and the Appellant has offered income as and when the services are rendered following the mercantile or accrual basis.
The order of the CIT(A) is perverse in contending that, the Appellant did not follow the matching concept. 11. The order of CIT(A) is erroneous in law and on facts, in as much as, the CIT(A) or the AO failed to establish which specific items of expenditure is incurred during the AY 2016-17 which relates to the storage income of 21 years or life time, as the case may be. 12. The order of the CIT(A) is erroneous on law and on facts in concluding that the Appellant did not follow the matching concept without appreciating that the Appellant had deferred relevant expenditure as "prepaid expenditure" in respect of which the benefits accrued in subsequent years. The order of the CIT(A) is perverse since such conclusion was arrived without any material to conclude so. 13. The order of the CIT(A) is incorrect in arriving a conclusion that the entire expenditure has direct nexus only to the receipts in respect of advance storage fees. 14. The CIT(A) failed to appreciate that the expenditure also have direct nexus to the other annual incomes like enrolment fees and processing, extraction and sample collection fee5 which are offered to tax in the year of rendering the service and not merely to advance storage fees for 21 years and life time plans. 15. The CIT(A) failed to appreciate that in respect of taxing advance storage fees for 21 year and life time plans as against the stand taken in respect of assessing income fro processing, extraction and sample collection fees. The CIT(A) has always allowed the claim of the Appellant that the receipt from processing, extraction and sample collection fees assessable only in year of providing service and not in the year of receipt. 16. Without prejudice to the ground that the Appellant had duly charged only expenditure, the order of AO erred in :-4-: ITA. No:3334/Chny/2019 contention that the appellant failed to defer certain expenditure, the concept of deferred revenue expenditure is alien to income tax.
17. The CIT(A) failed to note that even assuming (without admitting) that the Appellant did not defer expenditure, the CIT(A) could have only disallowed the excess expenditure not pertaining to the year and could not have come to the conclusion that the income is to be taxed in the year of receipt.
18. Without prejudice to the above, the CIT(A) failed to note that even assuming (without admitting) that the Appellant did not defer all relevant expenditure, the CIT(A) could have only added that proportion of income which bears to the total expenditure to be incurred during the contract period and could not have come to the conclusion that the entire income is to be taxed in the year of receipt, since there is substantial expenditure which is yet to be incurred.
19. The CIT(A) erred in not giving the deduction in respect of revenue of earlier year enrolments recognized during the year. The CIT(A) ought to have appreciated that its order without considering this aspect results in double taxation of same income, in year of receipt as well as in the year of providing storage service. Deduction on scientific research expenditure: [Tax effect: Rs. 14,47,050] 20. The CIT(A) erred in confirming the order of Ld. AO who limited the expenditure claimed under section 35(2AB) of the Act incurred towards an in house scientific research.
The CIT(A) erred in noting that the Section 35(2AB) of the Act only requires that the inhouse R&D facility to be approved by the prescribed authority and not the expenditure incurred towards an in house scientific research. The CIT(A) failed to appreciate that the inhouse R&D facility of the Appellant has been duly approved by the Department of Scientific and Industrial Research ("DSIR'') in Form 3CM, and the AO is duty bound to allow the deduction u/s 35(2AB) of the Act after due verification of the fact whether such expenditure is incurred for scientific research, and the restriction of the deduction based on Form 3CL is not in accordance with the Act.
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Without prejudice to the Ground no. 21 above, the CIT(A) failed to allow the capital expenditure disallowed under section 35(2AB) under the provisions of Section 35(l)(iv) read with Section 35(2)(ia) of the Act. In connection with computation of tax: 23. The CIT(A) failed to note that the Appellant was entitled to credit of tax paid u/s 115JAA of the Act which was not provided by the AO. 24. The Appellant objects to the levy of interest u/s.234B of the Act. 25. The each of the above grounds of appeal are without prejudice to one another. Prayer: For these grounds and such other grounds that may be urged before or during the hearing of the appeal, it is most humbly prayed that the Hon. ITAT may a. Delete the addition of advance storage receipts amounting to Rs. 89,56,39,966/- b. Delete the disallowance under section 35(2AB) to Rs. 41,81,260/ c. Alternatively, allow the expenditure disallowed under Section 35(1)(iv) of the Act d. Pass such other orders it may deem fit.”
3. The brief facts of the case are that, the appellant M/s. Life Cell International Private Ltd is engaged in the business of processing, preservation and storage of stem cells obtained from umbilical cord, menstrual blood. The appellant company had filed its return of income for the assessment year 2016-17 on 17.10.2016 admitting a total loss of Rs. 54,04,02,098/-.
:-6-: ITA. No:3334/Chny/2019 The assessment has been completed u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) on 19.12.2018 and determined total income of Rs. 38,05,23,481/-, by making addition towards storage fee received in advance amounting to Rs. 89,56,39,966/-, addition towards share premium u/s. 56(2)(viib) of the Act for Rs. 1,99,65,000/- and disallowance of deduction claimed u/s. 35(2AB) of the Act amounting to Rs. 53,20,613/-. The assessee carried the matter in appeal before the first appellant authority and the Ld. CIT(A) for the reasons stated in their appellant order dated 27.09.2019 partly allowed appeal filed by the assessee, where he had deleted addition made towards share premium u/s. 56(2)(viib) of the Act, but confirmed addition made towards storage fees received in advance and partly allowed relief towards addition u/s. 35(2AB) of the Act.
The first issue that came up for our consideration from ground no. 5 to 19 of assessee’s appeal is addition towards storage fee received in advance amounting to Rs. 89,56,39,966/-. The fact with regard to the impugned dispute is that the appellant is in the business of processing :-7-: ITA. No:3334/Chny/2019 preservation and storage of stem cells from umbilical cord and menstrual blood, charges three types of fees from the customers. The appellant receives enrollment fee from a customer which is offered as revenue immediately upon enrollment of the customers. The appellant had also received preservation, extraction and sample collection fee and such fees has been recognized as revenue upon rendition of such services. The assessee receives storage fee being fee charged towards storage of the stem cells for the contracted period and the same is recognized as revenue uniformly over the contracted period of storage. The appellant had entered into storage agreement with the customers either as annual plan or 21 year plan or life time plan. Income pertains to annual plan is accounted based on number of months in a fiscal year. Storage fee received for 21 year plan has been recognized as revenue over the contracted period on straight line basis apportioned based on number of months. Storage fee received for life time plan has been recognized similar to that of 21 years except with the variation of duration of 100 years as against 21 years.
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During the course of assessment proceedings, the AO called upon the assessee to furnish necessary breakup for storage fee received in advance including fee received in the financial year relevant to assessment year 2016-17. The AO on the basis of information furnished by the assessee, opined that the assessee has deferred revenue pertains to storage fee received in advance for the assessment year 2016-17 amounting to Rs. 89,56,39,966/- without deferring corresponding expenditure. Therefore, rejected argument of the assessee and made addition towards storage fee received in advance amounting to Rs. 89,56,39,966/-. The relevant findings of the AO are as under: 3) STORAGE FEE RECEIVED IN ADANCE: During the course of scrutiny assessment proceedings, the assessee was asked to furnish the break-up details of total income which received in advance and which is reflected in various schedules of the notes to the Financial Statements of the Assessee. In this connection, the assessee has submitted as follows:
Amount in S.NO Particulars Millions Storage fees received in advance 1. 274,48,10,000/- as at 31.03.2016 Processing fees received in 2 1,13,00,000/- advance as at 31.03.2016 :-9-: ITA. No:3334/Chny/2019 Total 275,61,10,000/ 3.2) It has been observed from the audited financial statements that the assessee has deferred income of Rs.250,14,20,000!- which has been received from the clients as storage fee under 21 years plan.
3.3) Storage fees received in advance represents the current portion of advance fee received from clients towards storing the stem cells for a period not exceeding 21 years, which is expected to be amortized to income over next 21 years. 3.4) The assessee has not deferred any expenditure in relation to such storage fee received. But the assessee has deferred only income and therefore such accounting treatment of the assessee is against the basic accounting principles. 3.5) As per the terms of agreement with the client, all fee paid by the client to life cell are non-refundable. The issue of refund arises only 'in the event of the specimen being insufficient or unfit for processing'. Only in such a situation, the storage component of the fee would be refunded. "Storage Fee" will also be refunded when the company itself terminates the agreement and refund will not be made in any other case. The amount in question is neither refundable by the assessee nor can be claimed by the clients from the assessee company under any circumstances. 3.6) The facts of the case has been explained in detail and decided in the Assessment Orders passed for the Assessment Year 2014-15 and earlier assessment years since the inception of the assesse company. Further, the assessee's contention that on a similar issue in the assessee's own case for the Assessment Year 2006-07, the ITAT has decided the case in favour of the assesse cannot be accepted as the Department has filled appeal u/s 260A of the Income Tax Act, 1961 before the Hon'ble High court and same is pending before the Hon'ble High Court, Madras. 3.7) Based on the above facts, the claim of the assessee cannot be accepted and thereby added an amount of Rs.89,56,39,966/- to the business income of the assessee and the details as follows:
:-10-: ITA. No:3334/Chny/2019 LIFECELL INTERNATIONAL PVT LTD ---•---·-- Asst Year: 2016-17 Advance Storage Fee .. FY 15- :16 Value (in Rs) Value (in Rs) Opsering Balance of Adv. Storage Fee 1,98,28,10,000 Add: New Enrolments during the year 90,22,49,409 Less: Revenue Recog-nised durin-sz. A.Y 16-17 1 4,02,49,409 Advance receivt..'"<i up to 31.03.2015 bu.t included in 13,36,39,966 revenue of P/L of A.y 2016-2017 Received in A.Y 16-1.7 and included in P/L of A.Y 66,09,443 1.6-17 <fresh enrolments) Closine: Balance of Adv. Storage Fee 2,74,48,10,000 In Millions 2,744.81 As »er Financial Statexnent-s Storage Fees received in advance Classi:fied under 2501.42 Tote 6-Other Lone: Term LiabU.ities Note IO - Other Current Liabilities 254.69 2,756.11 Processing; fee Advance -11.30 Advance rocessin Fee - FY 15-16 Value in Rs. 8,58,73,577 opening Balance of Adv. Processing Fee Add: Additions during the year 63,19,57,825 Less: Revenue Recognised 70,68,60,852 Closinv Balance of Adv. Processin.2 Fee 11,09,70,550 Difference d.ue to cancellations and rounding of 3,29,450 D'lillions 1,13,00,000 11.30 Millions . Break up for Advance storage fee pertaining to earlier years recognized as income in Assessment year 2016-17 Particulars Value (in Rs.) FY0405 36,531 FYOS06 12,20,306 Y O607 34,65,11.3 FY0708 4-4,86,471 FY0609 59,42,295 FY09l.O 1,18,84,347 FY 1011 1,62,96,945 FY 1112 1,94,64,562 FY1213 2,21,91,030 FY 1314 2,29,65,887 FY 1415 2,56,85,479 Total 13,36,39,966 Income as per Note 21 of P/L:
Processing Fee Stem cell banking 70,68, 35,887 Advance Storage fee recognised as income 14,02,49,409 Storage Fee yearly 13,90,68,433 Processing fee - Baby Shield division 6,87,84,654 Collection Fee 17,15, 76,928 Less: Discounts 3,77,46,237 118,87,69,074 Total Revenue from services as per Note 21 of P/L Storage fees deferred Additions during the year to Advance Storage fees account(fresh 90,22,49,409 enrolment) Less: Revenue Recognized in P/L from Current Year Enrolments 66,09,443 Income deferred to A.Y 17-18 through the tenure of contract 89,56,39,966 :-11-: ITA. No:3334/Chny/2019 Hence, an amount of Rs. 89,56,39,966/- is added to the total income returned. [Addition: Rs.89,56,39,966/-] “
Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the Ld. CIT(A), the assessee has filed a detailed written submission which has been reproduced at para 4 of page 6 to 20 of Ld. CIT(A) order. The sum and substance of arguments of the assessee before the Ld. CIT(A) are that, the appellant is following consistent accounting policy of recognizing revenue from storage fee over the period of agreement on equal proportionate basis. The CIT(A), after considering relevant submissions of the assessee and also by following the decision of ITAT Chennai Benches in assessee’s own case for assessment year 2013-14 & 2014-15 reported in Taxsutra 312-ITAT-2019, rejected arguments of the assessee and sustained addition made towards storage fee received in advance. The relevant findings of the ld. CIT(A) are as under: “6. This issue had been adjudicated before the Hon'ble Tribunal by the assessee. The Madras bench of Hon'ble ITAT has passed a 'detailed order on this issue for both the years upholding the appeal order by the undersigned. The decision summary is quoted from (taxsutra-312-ITAT- 2019-Chny) as under: Decision Summary:
:-12-: ITA. No:3334/Chny/2019 The ruling was delivered by ITAT bench comprising of Shri. George Mathan and Shri. Inturi Rama Rao. CA. T. Banusekar argued on behalf of the assessee, while the Revenue was represented by Mr. Homi Raj Vansh. Lifecell International Pvt. Ltd.(assessee) is a company incorporated under the provisions of the Companies Act, 1956. I is engaged in the business of procession, preservation and storage of bloocl ste111 cells viz cells from umbilical cord, embryonic stem cells and audit stem cells. During subject A Y 2013-14, the AO brought to tax the entire sum of money received towards storage of stern cells for a period of 21 years. Further, taking in to consideration, the terms of agreement with clients that the amount collected is not refundable, he inferred that the entire receipt had accrued to the assessee in the year of receipt itself Thus, the AO brought to tax a sum of Rs.47,26,08,294/- as income pertaining to relevant assessment year. Upon further appeal, CIT(A) upheld the order of the AO. Aggrieved, assessee filed cm appeal before Chennai ITAT. At the outset, !TAT noted that the main issue under consideration in the present case was regarding the recognition of income towards receipts on account of storage of stem cells. Before ITAT, assessee argued that the income had not accrued to the assessee, as the assessee was under cm obligation to render a service for a period of 21 years and therefore the income though received in advance, must be apportioned for a period of 21 years. In this regard, !TAT remarked that, "If income has accrued to the assessee it is certainly earned by him in the sense that he had contributed to its production or the parenthood of the income can be traced lo him. Bui in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but h must have created a debt in his fcwour. A debt must have come into :-13-: ITA. No:3334/Chny/2019 existence and he must have acquired a right to receive the payment." Upon further examination of facts and findings, ITAT noted that it was clear that the agreement was valid for a period of 21 years and the processing fees were payable prior to the birth of the child. The fees paicl were refundable only in the case, if the agreement was terminated by the client at any time prior lo the collection of the umbilical cord or child (on attaining majority) at any time, prior to the retrieval of the specimen where the agreement was terminated by the assessee or by operation of law. in this regard, ITAT stated that, "These would go to show that there is no uncertainty as regards to the vesting of right to receive the payments. These conditions would suggest that there is no uncertainty on the receipt of the income. Thus, it can be safely concluded that debt has been created in favour of the assessee, the contingencies under which income has to be refunded, has no much relevance since the refund has to be given in a short span of period after entering into agreement with the client." Therefore, ITAT ruled that the assessee had acquired the right to receive fees, the moment the assessee entered into an agreement. Further, ITAT held that undoubtedly, the assessee was under an obligation to store the stem cells over a period of 21 years, thereby the income could be apportioned for a period of 21 years. However, ITAT also took note of various judicial precedents which had recognized the principle of matching, which requires matching of expenditure against the corresponding revenue. Relying on a plethora of cases such. as SC ruling in case of Taparia Tools Ltd (TS-134-SC-2015), ITAT held that it was clear that the assessee had not followed the matching principle while apportioning the income over the period of 21 years by not apportioning the expenditure over a period of 21 years. Thereby [TAT remarked, "Undoubtedly, this resulted in the distortion of the profit or loss for the period and therefore the accounting policy of recognition of income adopted by the assessee does not give true picture of profit or loss for the period."
:-14-: ITA. No:3334/Chny/2019 Lastly, regarding assessee's reliance on co-ordinate bench. ruling in its own case, ITAT held that the issue of whether the corresponding expenditure had been deferred over ct period of contract was not discussed nor the Tribunal analyzed the profit and loss account of the assessee and therefore the decision of the Co- ordinate Bench lost it's binding nature. Thus, ITAT upheld CIT(A) order and dismissed Assessee's appeal.for subject AY.
7. As above, the Hon'ble ITAT has held that the storage fee received by the assessee is liable for taxation in the year of receipt itself. The facts and circumstances of the case have remained to be the same for this year. Considering the above, the entire amount of storage fees received by the assessee at Rs.89,56,39,966/- is sustained to be brought to taxation in AY 2016-17 being the year of receipt of storage fees. The grounds of appeal of the assessee on this issue are rejected.”
The Ld. Counsel for the assessee, submitted that addition made by the AO towards storage fees received in advance is recurring issue and the Department has disputed method of accounting followed by the appellant right from the assessment year 2006-07 to assessment year 2014-15. The appellant has challenged the findings of the AO before the tribunal and the ITAT, Chennai Benches for the assessment years 2006-07 to 2012-13 has decided the issue in favour of the assessee. But for the assessment year 2013-14 & 2014- 15, the tribunal took a different view and held the issue against the assessee. The Ld. Counsel for the assessee, :-15-: ITA. No:3334/Chny/2019 further referring to income computation and disclosure standard notified by the Government in terms of section 145 of the Act submitted that although, said standards are applicable from assessment year 2017-18, but as per said standard percentage completion method is one of the prescribed method for recognizing revenue and as per said method, the assessee can recognize the revenue based on stages of completion of service. Since, the assessee is following deferred revenue method to account storage fee and it is in connosence with ICDS standard notified by the Government, the issue can be set aside to the file of the AO to explain the case of the assessee on the issue of storage fee.
The Ld. DR, on the other hand supporting the order of the Ld. CIT(A) submitted that the issue is no longer res- integra. The co-ordinate bench of ITAT, in assessee’s own case for assessment year 2013-14 had considered an identical issue and after considering its earlier orders in assessee’s own case has decided the issue against the assessee. Therefore, there is no reason to set aside the issue to the file of the AO.
:-16-: ITA. No:3334/Chny/2019 9. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The dispute between the appellant and the Assessing Officer on recognition of revenue from storage fee is recurring in nature and right from assessment year 2006-07 to assessment year 2014-15, the AO has disputed method of accounting followed by the assessee for deferred income from storage fee on the ground that the assessee is deferring income received towards storage fee without deferring corresponding expenditure incurred for rendering service. The assessee challenged addition made towards storage fee received in advance before the tribunal right from the assessment year 2006-07 to assessment year 2014-15. The tribunal, up to assessment year 2012-13 had examined the issue and decided the issue in favour of the appellant. But, for the assessment years 2013-14 & 2014-15 in & 248/Chny/2018, the tribunal after considering relevant facts and also its earlier decision in assessee’s own case for earlier assessment years held the issue in favour of the revenue by holding that the income received towards storage fee is accrued to the appellant for the year in which such fees has :-17-: ITA. No:3334/Chny/2019 been received and thus, the AO is right in making addition towards storage fee received in advance for the year in which such fee has been received. The relevant findings of the tribunal are as under: “15. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to taxability of income deferred in the books of accounts over period of agreement. The issue whether or not particular receipt had accrued to the assessee is to be decided with reference to the terms of agreement assessee had with his clients. It is settled proposition of law that income is said to be accrued to the assessee only when he had created a debt in his favour, a debt could come into existence only when he acquitted a right to receive the payment. This concept was accepted by the Hon’ble Supreme Court in the case of E.D. Sassoon & Company Ltd and Others vs. CIT, 26 ITR 27, wherein it was held that the word "earned" even though it does not appear in section 4 of the Act has been very often used in the course of the judgments bv learned Judges both in the High Courts as well as the Supreme Court, (Vide CIT Bombay v. Ahmedbhai Umarbhai & Co., Bombay [1950] 18 ITR 472, and CIT Madras v. K.R.M.T.T. Thiagaraja Chetty & Co. [1953] 24 ITR 525at 533). It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk [1900] A.C. 588 at 592. The concept, however, cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he had contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in praesenti, solvendum in futuro it cannot be said that any :-18-: ITA. No:3334/Chny/2019 income has accrued to him. The mere expression "earned" in the sense of rendering the services etc. by itself is of no avail."
16. Applying the above principles to the facts of the present case from the perusal of the terms of agreement, it is clear that the agreement is valid for a period of 21 years and the processing fees is payable prior to the birth of the child. The fees paid is refundable only in the case, if the agreement is terminated by the client at any time prior to the collection of Umbilical code or child (on attaining majority) at any time prior to the retrieval of the specimen where agreement is terminated by the assessee or by operation of law. These would go to show that there is no uncertainty as regards to the vesting of right to receive the payments. These conditions would suggest that there is no uncertainty on the receipt of the income. Thus, it can be safely concluded that debt has been created in favour of the assessee, the contingencies under which income has to be refunded, has no much relevance since the refund has to be given in a short span of period after entering into agreement with the client. Therefore it can be safely said that assessee has acquired the right to receive fees, the moment the assessee entered into agreement and received the fees, the movement the assessee entered into agreement with the client and received the payment in order income is said to have accrued, it is also necessary that the assessee had performed his part of the service. But undoubtedly, in the present case, the assessee is under obligation to store the stem cells over a period of 21 years. Therefore, the income can be apportioned for a period of 21 years. The judicial precedents had recognized the principle of matching which requires matching of expenditure against the corresponding revenue. Reference in this regard can be made to the decision of Hon’ble Supreme Court in the case of J.K. Industries Ltd and Another vs. Union of India and Others, 297 ITR 176. The principle enunciated therein as follows:- ‘’82. Matching Concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that "revenues" of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned :-19-: ITA. No:3334/Chny/2019 during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future years which brings in the concept of deferred tax accounting. Therefore, today it cannot be said that the concept of accrual is limited to one year.
It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component of accrual basis of accounting. As stated above, the object of AS 22 is to reconcile the matching principle with the fair valuation principles. It may be noted that recognition, measurement and disclosure of various items of income, expenses, assets and liabilities is done only by accounting standards and not by provisions of the Companies Act." (p. 424)’’.
17. Subsequently the Hon’ble Supreme Court reiterated the same principle in the case of CIT vs. Bilahari Investment (P) Ltd, 299 ITR 1. The Hon’ble Bombay High Court in the case of Taparia Tools Ltd vs. JCIT, 260 ITR 102 had explained the concept of matching principle as under:- "The mercantile system of accounting is based on accrual. Basically, it is a double entry system of accounting. Under the mercantile system of accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax insofar as monies due and payable by the parties to whom they are debited [see Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 , 239 (SC)]. Therefore, under the Mercantile System of Accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed [expenses]. Under the mercantile system of :-20-: ITA. No:3334/Chny/2019 accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following mercantile system of accounting. This matching concept is very relevant to compute taxable income particularly in cases involving DRE. It has been recognised by numerous judgments. In the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) the facts were as follows: The assessee bought lands and sold them in plots. When the plots were sold, the purchasers paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee, in turn, agreed to develop the plots within six months. In the relevant accounting year, the assessee actually received only Rs. 29,392 towards sale price of the lands, but, in accordance with the mercantile system of accounting followed by the assessee, it credited in its accounts Rs. 43,692 representing the full sale price of the lands. At the same time, it also debited Rs. 24,809 as expenditure for the development it had undertaken even though, no part of that amount was actually spent. The department, therefore, disallowed the expenditure of Rs. 24,809 on the ground that the amount was not actually spent. The assessee ultimately succeeded in the Supreme Court. It was held by the Supreme Court that the expression "profits or gains" in section 10(1) of the Income-tax Act, 1922 should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purposes of earning the receipts is deducted therefrom. Accordingly, the Supreme Court took the view, that since the assessee was following Mercantile System of Accounting and since the assessee had credited the full sale price of lands in its accounts amounting to Rs. 43,692, the assessee was entitled to estimate the expenditure because, without such estimation of expenditure, it was not possible to compute profits and gains. This concept is also :-21-: ITA. No:3334/Chny/2019 applied by the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. [1997] 225 ITR 802 underfollowing observations (headnote): 'Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.' Therefore, the matching concept, which we have referred to is wellrecognised by various judgments of the Supreme Court. In this case, the issue is whether the entire expenditure distorts the profits of a particular year. . . . ." (p. 116) The judgment of Hon’ble Bombay High Court in the case of Taparia Tools Ltd (supra) was approved by the Hon’ble Supreme Court in the case of Rakesh Shantilal Mardia vs. DCIT, 210 Taxman 565 and affirmed by Supreme Court in the case of CIT vs. Taparia Tools Ltd, 372 ITR 605 by holding as under:- 12. The next question which arises for consideration is as to whether the assessee was estopped from claiming deduction for the entire interest paid in the year in which it was paid merely because it had spread over this interest in its books of account over a period of five years. Here, the submission of learned counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the :-22-: ITA. No:3334/Chny/2019 instant case) in the books of account is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of account. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(1)(iii) of the Act as all the conditions thereof were fulfilled and, thus, it was exercising the statutory right which could not be denied.
We find that the High Court has taken into consideration the provisions of Section 36(1)(iii) of the Act and the conditions which are to be fulfilled for allowing the deduction on this account in the following words: ...The term "interest" has been defined under Section 2(28A) of the Act. Briefly, interest payment is an expense under Section 36(1)(iii). Interest on monies borrowed for business purposes is an expenditure in a business [see 35 ITR 339 -Madras]. For claiming deduction under Section 36(1)(iii), the following conditions are required to be satisfied viz. the capital must have been borrowed; it must have been borrowed for business purpose and the interest must be paid. The word "Paid" is defined in Section 43(2). It means payment in accordance with the method followed by the assessee. In the present case, therefore, the word "Paid" in Section 36(1)(iii) should be construed to mean paid in accordance with the method of accounting followed by the assessee i.e. Mercantile System of accounting...' :-23-: ITA. No:3334/Chny/2019 Notwithstanding the aforesaid, the High Court chose to decline the whole deduction in the year of payment, thereby affirming the orders of the authorities below, by invoking the 'Matching Concept'. It is observed by the High Court that under the mercantile system of accounting, book profits are liable to be taxed and in order to determine the net income of an Accounting Year, the revenue and other incomes are to be matched with the cost of resources consumed (expenses). For this reason, in the opinion of the High Court, this matching concept is required to be done on accrual basis. As per the High Court, in this case, payment of Rs. 55 per debenture towards interest was made, which pertained to five years, and, thus, this interest of five years was paid in the first year. We are of the opinion that it is here the High Court has gone wrong and this approach resulted in wrong application of Matching Concept. It is emphasized once again that as per the terms of issue, the interest could be paid in two modes. As per one mode, interest was payable every year and in that case it was to be paid on six monthly basis @ 18% per annum. In such cases, the interest as paid was claimed on yearly basis over a period of five years and allowed as well and there is no dispute about the same. However, in the second mode of payment of interest, which was at the option of the debenture holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. By this, the assessee had benefited by making payment of lesser amount of interest in comparison with the interest which was payable under the first mode over a period of five years. We are, therefore, of the opinion that in order to be entitled to have deduction of this amount, the only aspect which needed examination was as to whether provisions of Section 36(1)(iii) read with Section 43(ii) of the Act were satisfied or not. Once these are satisfied, there is no question of denying the benefit of entire deduction in the year in which such an amount was actually paid or incurred.
The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. where amortization is specifically provided, such as Section 35-D of the Act.
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What is to be borne in mind is that the moment second option was by the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs. 55 per debenture. In Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC), this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. Following passage from the aforesaid judgment is worth a quote: "The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." The present case is even on a stronger footing inasmuch as not only the had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year.
16. Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of :-25-: ITA. No:3334/Chny/2019 issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: "15.. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs.3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.
Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the :-26-: ITA. No:3334/Chny/2019 business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures."
Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.
18. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures.
In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC); Tuticorin :-27-: ITA. No:3334/Chny/2019 Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC).
At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.
From reading of the above judgments, it is clear that the principle of matching postulates that the expenditure corresponding to the income recognized should also be accounted for. But in the present case from the analysis of Profit and Loss account made by the ld. Commissioner of Income Tax (Appeals) vide para 7.4 of the impugned order, it is clear that the appellant had not followed this matching principle while apportioning the income over the period of 21 years by not apportioning the expenditure over a period of 21 years. Undoubtedly, this resulted in the distortion of the profit or loss for the period and therefore the accounting policy of recognization of income adopted by the assessee does not give true picture of profit or loss for the period. The Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs. CIT, 227 ITR 172 had held that accounting policies cannot override the provisions of Income Tax Act. Therefore the ratio of the decision of Jurisdictional High Court in the case of TVS Finance & Services Ltd (supra) wherein while dealing in the issue, whether or not income accrued on discounting of bills by bank, it was held as under:- ‘’15. Therefore, the Tribunal was right in holding that the transaction of discount is complete at the :-28-: ITA. No:3334/Chny/2019 moment, the customer is given 90 per cent. of the value of the bill. The discount is equivalent to the interest. What can be seen from the extracts of Tannan' s Banking is that the accrual of this is certain and arises on the date of discount itself. The Tribunal was right in concluding that the uncertainty regarding the discharge of the bill or rediscounting has no relevance and on that ground the income cannot be postponed or spread over the period of discount, because that is a separate transaction. CIT v. Bank of Tokyo [1993] 71 Taxman 85 (Cal) cannot apply since there the payability of the guarantee commission was a tentative right to receive the commission for the unexpired period and the right became perfected and crystallize only with the expiry of the unexpired period and the date for the entire amount would arise only when the whole guarantee period is made in the complete round. But here, while discussing the advantages of bills discounting it is seen from the above that in the case of bills discounting the yield is at the time of discounting and it is higher than loans or advances. Questions Nos. (i), (iii), (iii), (iii) in T.C. Nos. 107 to 110 of 2002, respectively, are answered against the assessee’’. The ld. Counsel for the assessee had not controverted the findings of the ld. CIT(Appeals) that the profits for the year are distorted by not apportioning the expenditure over a period of contract. The method adopted by the assessee runs counter to the very matching principles emanated by the above judicial precedents. The accounting policy adored by the assessee does not give the true picture of profits. Therefore the claim of the assessee that the income can be apportioned over a period of contract cannot be accepted. Therefore we do not find any fallacy in the reasoning of the ld. Commissioner of Income Tax (Appeals). The decision of Co-ordinate Bench of the Tribunal in assessee’s own case, the issue whether the corresponding expenditure had been deferred over a period of contract was not discussed nor the Tribunal analyzed the profit and loss account of the assessee and therefore the decision of the Co- ordinate Bench loses the binding nature. Accordingly, we uphold the order of the ld. Commissioner of Income Tax (Appeals) and dismiss the appeal filed by the assessee.”
:-29-: ITA. No:3334/Chny/2019 10. In this view of the matter and by following the latest decision of the coordinate bench in assessee’s own case for assessment year 2013-14 & 2014-15, we are of the considered view that there is no error in the reasons given by the Ld. CIT(A) to sustain addition made towards storage fee received in advance and thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the assessee.
The next issue that came up for our consideration from ground no 20 to 22 of assessee’s appeal is disallowance of deduction claimed u/s. 35(2AB) of the Act amounting to Rs. 53,20,613/-. The AO has disallowed excess deduction claimed u/s. 35(2AB) of the Act over and above the amount of expenditure certified by the competent authority i.e., DSIR amounting to Rs. 53,20,613/-. The Ld. CIT(A) has partly allowed relief to the appellant, where he has directed the AO to allow deduction towards revenue expenditure incurred at Rs. 11,39,353/- @ 100% u/s. 37(1) of the Act. But, in respect of capital expenditure incurred amounting to Rs. 15,20,324/-, he had confirmed disallowance of expenditure, however, :-30-: ITA. No:3334/Chny/2019 directed the AO to allow depreciation after verifying necessary facts.
The Ld. Counsel for the assessee, submitted that once R&D facility of the appellant has been duly approved by the competent authority, i.e., Department of Scientific & Industrial Research in Form 3CM, then the AO is bound to allow deduction.
13. The Ld. DR, on the other hand submitted that the ld. CIT(A) has allowed relief to the appellant and directed the AO to verify the facts with regard to the capital expenditure. Therefore, there is no reason for the appellant to raise the issue before the tribunal.
14. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. There is no dispute with regard to the fact that the R&D facility of the appellant has been duly approved by the competent authority i.e, DSIR. It is also not in dispute that the competent authority has certified expenditure incurred for :-31-: ITA. No:3334/Chny/2019 in house R&D purpose in Form no. 3CL at Rs. 2,99,62,000/- as against total deduction claimed by the assessee at Rs. 3,52,82,613/-. The balance amount of Rs. 53,20,613/- is not certified by the competent authority in Form no. 3CL. In our considered view, the assessee needs to submit details of expenditure incurred for scientific research purpose before the competent authority and the competent authority is a statutory authority to certify the expenditure incurred for R&D purpose. Once competent authority has certified the amount incurred for R&D purpose, then the question of allowing deduction u/s. 35(2AB) of the Act over and above what was certified by the competent authority does not arise. Therefore, we are of the considered view that there is no error in the reasons given by the AO to disallow excess expenditure u/s. 35(2AB). We further noted that, the Ld. CIT(A) had also allowed relief to the assessee in respect of revenue expenditure and directed the AO to allow 100% deduction u/s. 37(1) of the Act. As regards capital expenditure, the Ld. CIT(A) directed the AO to allow depreciation as per law. In our considered view, the reasons given by the CIT(A) to reject arguments of the assessee and also to direct the AO to allow :-32-: ITA. No:3334/Chny/2019 expenditure in accordance with law and thus, we are inclined to uphold with the findings of the Ld. CIT(A) and reject the ground taken by the assessee.