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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN, VICE PRESEIDENT & SHRI PADMAVATHY S
Date of hearing : 27.06.2022 Date of Pronouncement : 18.07.2022 O R D E R Per Padmavathy S., Accountant Member These appeals are directed against the separate orders of the CIT(Appeals)-4, Bangalore, all dated 28.02.2018 for the assessment years 2013-14 to 2015-16. They were heard together and disposed of by this common order for the sake of convenience and brevity.
2. The common issue arising in all these three appeals is the addition/disallowance made by the AO towards ‘unearned income’ shown by the assessee as current liability in the balance sheet. In AY 2013-14 there is one more issue in respect of disallowance u/s. 40(a)(ia) of the Income-tax Act, 1961 [the Act].
We will take up the appeal pertaining to AY 2013-14 first for adjudication where the assessee has raised the following grounds:-
“1. That that the order of the Commissioner of Income Tax (Appeals) [`CIT(A)] is contrary to law, facts and circumstances of the case to the extent prejudicial to the interest of the appellant.
That the CIT(A) failed to appreciate that the order of the Assessing Officer is without jurisdiction.
3. That the CIT(A) erred in confirming the disallowance on provision in respect of miscellaneous, distribution and marketing expenses amounting to INR 2,88,870 in aggregate on the ground that the same represents `unascertained liability'. ' 4. The CIT(A) has failed to appreciate the fact that expenses were accrued during the year and incurred for the purpose of business. Hence it satisfy the condition laid down in section 37(1) of the Act.
5. That the CIT(A) erred in confirming the disallowance for claim of deduction of INR 3,35,10,157 under the provisions of section 4o(a)(ia) of the Act.
6. That the CIT(A) erred in confirming the disallowance and thereby enhancing the income of the Appellant by an amount of INR 1,33,53,000 representing unearned revenues.”
Ground Nos.1 & 2 are general in nature and does not warrant separate adjudication. During the course of hearing, the ld. AR did not press for grounds No.3 & 4. These grounds are therefore dismissed as not pressed.
The brief facts of the case are that the assessee is an Indian company engaged in rendering cable television distribution services to direct subscribers and local cable operators. The assessee filed return of income for the AY 2013-14 on 30.9.2013 declaring a loss of Rs.423,80,809. The case was selected for scrutiny and notice u/s. 143(2) of the Act was issued. The AO made several additions including the additions/disallowance contended in this appeal. The assessee preferred appeal before the CIT(Appeals), who confirmed the order of the AO. Aggrieved the assessee is in appeal before us.
Addition of unearned revenue (Ground No.6)
The AO noticed that as per Note 2.6 to the financial statement the assessee has shown a sum of Rs.133,53,500 under the head ‘Other current liabilities’ as ‘unearned revenue’. The assessee explained to the AO that unearned revenue represents subscription amount billed to customers in advance for which the corresponding services are yet to be rendered. The assessee also submitted that the amount shown as ‘unearned revenue’ is offered to tax in the subsequent year in which the services are rendered. The AO did not accept the contentions of the assessee and added the entire amount to the income by stating that the taxability of the receipt s based on the date when the income accrued as per provisions of the Act and not on accounting standards prescribed, unless it is recognized under the Act. The AO noted that the assessee has not furnished any explanation for the claim of unearned revenue as liability.
On appeal before the CIT(Appeals), the assessee submitted that the accounting entries passed with regard to revenue recognition in the books of assessee along with sample invoices. The CIT(Appeals) after going through the details upheld the order of the AO with the following observations:-
“6.3 The AO has made the impugned disallowance on basis of the observations contained in the notes to account at para 2.6, accordingly to which the sum of 1,33,53,000/- has been shown under the head 'Other current liabilities', as unearned-revenue. The AO has recorded a categoric finding that, the assessee did not submit any explanation whatsoever in support of the accounting treatment of the impugned sum of Rs. 1,33,53,000/-. A perusal of the assessee's submissions during the appeal proceedings reveals that, apart from certain general observations, on accounting methodology, no specific party-wise detail or valid justification has been provided for the non-assessability of the aforesaid sum during the current year. The assessee, in its submissions has merely discussed the process of accounting entries to be pursued alongwith some sample invoice copies. However, no specific party-wise breakup / invoice details of the impugned receipts or the reason for its classification under the head 'current-liabilities' in the present case has been adequately explained or justified. It is patently clear that, what is characterized as income cannot be simultaneously treated as unearned, as the concept as such is self-contradictory, in itself. It is obvious that the sum of Rs. 1,33,53,000/- has been billed / received and therefore crystallized as income. Assessee has however failed to substantiate, as to how and why the same is unearned, even if part of the services are to be rendered in future. The assessee has contended that, the unearned income represents the subscription amount billed to the customers in advance, for which corresponding services have to be partly rendered in future. However, the assessee has not explained the disproportionately low amount of receipt offered for income during the year, as against the larger portion shown as unearned revenue. It transpires form the assessee's statement of facts at para-5 that, what has been offered for revenue is the amount of Rs. 82,26,452/- as against the sum of Rs. 1,33,53,000/- which is shown as unearned income. The appellant has not furnished a year-wise chart to clearly establish that, a consistent / systematic and scientific method of accounting was being followed, so as avoid leakage of revenue. In absence of a comparative year-wise analysis, it is difficult to accept the assessee's contention that the amount of Rs. 1,33,53,000/- even though accrued and billed during the year, was not to be offered / considered for taxation, inspite of its accrual, as per books of account. In background of the above discussion and the given facts & circumstances, the AO's action of rejecting the assessee's claim of 'Unearned income' is to be upheld. However, the AO is directed to take appropriate rectificatory action, if the appellant provides plausible evidenciary proof of having offered any part of the impugned sum of Rs. 1,33,53,000/- as income in the subsequent assessment year, so as to avoid double taxation, if any, arising out of the impugned order. The assessee's grounds of appeal are therefore disallowed, subject to above direction.”
8. The assessee is now in appeal before the Tribunal against the order of the CIT(Appeals). The ld. AR reiterated the submissions made before the lower authorities. He also submitted that recognition of revenue is done under Accounting Standards [AS-9] issued by the Institute of Chartered Accountants of India (ICAI) which is consistently followed by the assessee. Though invoices are raised in the year under consideration, the services are not rendered by the assessee during the year and hence income is not recognized. The ld. AR relied on the decision of the Delhi High Court in the case of Ericsson India Pvt. Ltd. v. ACIT, 136 taxmann.com 228 (Delhi).
9. The ld. AR filed additional evidence during the course of hearing with complete party wise details of invoices along with copies of all invoices raised on the customers. He prayed for admission of additional evidence stating that the lower authorities did not insist upon the same.
10. The ld. DR vehemently opposed admission of additional evidence filed before the Tribunal stating that the assessee was given ample opportunity before the AO and the assessee failed to produce the required details before the AO as well as the CIT(A). The ld. DR drew our attention to page 158 of the PB where the details TDS credit claimed is given and submitted that the assessee has claimed credit for TDS in the entire invoice amount, but had offered only a portion as income which is not correct. The ld DR submitted that the assessee has deferred a portion of income by claiming it to be unearned, whereas the expenses incurred have not been deferred but fully claimed which is not in accordance with the matching concept of the accounting practice. In this regard the ld DR relied on the decision of the Mumbai Tribunal in the case of Religare Technova Global Solutions Ltd. v. ACIT in by drawing our attention to the relevant portion of the decision which is extracted as under:-
“3.7.3 It is not in dispute that the assessee company during the previous year 2006-07 relevant to the assessment year 2007-08 had raised invoices on its numerous clients for subscription for data base services and charges for annual maintenance support services. The assessee in the present case follows mercantile system of accounting .The Hon’ble Bombay High Court in the case of Taparia Tools Ltd. v. JCIT [2003] 260 ITR 102 has described the mercantile system of accounting, which reads as follows: "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 in so far 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 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 outflow of cash.” The crux of ‘mercantile system of accounting’ is that revenue is recognized at the time when the invoice is raised to the customer. In the instant case, the assessee has raised invoice to the customer during the previous year 2006-07 relevant to the assessment year 2007-08.”
11. We will first consider the issue of admission of additional evidence. The ld AR submitted the detailed break-up of the unearned revenue along with invoices in the form of additional evidence before us. The additional evidence submitted goes to the root of the issue of whether the entire amount of invoice raised is to be treated as income or whether to be deferred based on the period to which the invoice is raised. Therefore, in the interest of justice, the additional evidence is admitted for the purpose of adjudication.
We have considered the rival submissions and perused the material on record. The assessee is in the business of providing cable television distribution services. It raises invoices on local cable operators towards ‘allotment of frequencies and placement charges’ which is for a period of one year. The assessee considers the period to which the invoice pertains and recognizes the income proportionately to the particular financial year. The recognition of the remaining amount of the invoice is deferred and moved to the balance sheet as ‘unearned revenue’. This method of recognition of revenue is claimed by the assessee to be consistently followed by the assessee.
It is the contention of the ld AR that the assessee is recognizing the revenue as per AS-9 and submitted that below is the scheme of entries in the books accounts of the assessee with regard to the ‘unearned revenue’ which the assessee had submitted before the CIT(Appeals):-
S.No. Financial Particulars Amount Year 1. 2012-13 Debtor A/c XXX To Carriage Revenue A/c XXX To Carriage fee invoice A/c XXX 2. 2012-13 Carriage fee invoice A/c XXX To Carriage fee control A/c (unearned revenue) XXX 3. 2013-14 Carriage fee control A/c XXX To Carriage Revenue A/c XXX
We will first look at the relevant paras i.e. paras 4, 5, 7 & 9 to 12 of the AS-9 issued by the ICAI which the assessee claims to have followed for the purpose of accounting:-
“Definitions 4. The following terms are used in this Statement with the meanings specified: 4.1 Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. 4.2 Completed service contract method is a method of accounting which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed. 4.3 Proportionate completion method is a method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract. Explanation 5. Revenue recognition is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition 7. Rendering of Services 7.1 Revenue from service transactions is usually recognised as the service is performed, either by the proportionate completion method or by the completed service contract method.
(i) Proportionate completion method—Performance consists of the execution of more than one act. Revenue is recognised proportionately by reference to the performance of each act. The revenue recognised under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance. (ii) Completed service contract method—Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable.
Effect of Uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection. 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments. 9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. 9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised.
Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.
In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been 135 fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.
12. In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.”
Under mercantile system of accounting, revenue is recognized on accrual basis when the agreement to render services is entered into with the parties for the whole value of services. In the event of cancellation/modification due to which income already recognized undergoes a change, then only the reversal can happen. The scheme of entries by the assessee, reproduced above, may be in accordance with AS-9 which is more concerned with true and fair view of state of business affairs of the assessee; but it is not in tune with the mercantile system of accounting, unless there is an uncertainty of the income recognized as per the agreement with the customers of the assessee.
The relevant statutory provisions regarding method of accounting under the Act, also have to be seen. Sec.145 of the Act (prior to its amendment by the Finance Act, 2014 w.e.f. 1.4.2015 applicable in the present case) deals with Method of accounting and it reads thus:
“Sec.145: Method of Accounting: (1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time Accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or Accounting Standards as notified under sub-section (2) have not been regularly followed by the Assessee, the Assessing Officer may make an assessment in the manner provided in section 144.
Vide Notification No. 9949, dated 25-1-1996 [(1996) 130 CTR (St) 33], Accounting Standard I relating to disclosure of accounting policies and Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies had alone been notified as Accounting Standards to be followed by an Assessee and no other accounting standard has been notified.
In the present case, the CIT(Appeals) has recorded a finding that the reconciliation substantiating the recognition of revenue in subsequent years was not produced by the assessee. Further, we agree with the argument of the ld. DR that the claim of the assessee requires to be factually verified in terms of the matching concept. We also notice that in the decision relied on by the ld. AR in the case of Ericsson India Pvt. Ltd. (supra), the decision was rendered in favour of the assessee by the Hon’ble High Court after factual verification of the details pertaining to the advance payments.
From the above discussion, it is clear that the following facts are to be verified before coming to the conclusion on the treatment of ‘unearned income’ in the hands of the assessee.
(i) The financials of the assessee is to be verified to substantiate that the accounting practice is consistently followed. (ii) Revenue neutrality in terms of income deferred is offered to tax subsequently needs to be examined (iii) Whether the revenue earned is contingent upon the assessee performing its obligations and rendering services to the pre-paid customers.
Further the additional evidence in the form of invoices and the party wise breakup of the ‘unearned income’ that is produced before us requires verification by the lower authorities to decide the case on merits. In view of the above, we remit the issue back to the AO for de novo consideration of the issue afresh in accordance with law, after giving reasonable opportunity of being heard to the assessee. The assessee is directed to produce all the required documents in support of its claim and cooperate in the remand proceedings. This ground of the assessee is allowed for statistical purposes.
The next issue for consideration vide ground No.5 is with respect to disallowance u/s. 40(a)(ia) of the Act. The assessee in the computation of total income has deducted a sum of Rs.3,35,10,157 on the reason that this amount was disallowed in the preceding previous year as TDS was not done and in the current year the expenses were reversed. The AO called for evidence in this regard and disallowed the same due to non-furnishing of supporting documents and ledger accounts by the assessee to show that TDS is deducted and paid. The CIT(Appeals) confirmed the disallowance on the same ground.
Before us, the ld. AR submitted that the impugned deduction is claimed not on the basis of subsequent tax deduction, but on the basis that entries are reversed in the current year and taxing the same would amount to double disallowance. The ld. AR therefore submitted that the amount claimed needs to be allowed as a deduction for tax computation purposes.
The ld. DR supported the orders of the lower authorities and submitted that the assessee has not furnished any supporting evidence to substantiate the claim of deduction.
We heard the rival submission and perused the materials on record. According to the ld AR the accounting practice of the assessee is to make the provision for expenses 31st March of the financial year and reverse the same on the 1st day of April of subsequent financial year. The assessee disallowed the provision made on 31st March of 2012 in the computation of income for the assessment year 2012-13. The same amount is claimed as a deduction in the subsequent in the computation of income as the year end provisions are reversed on 1st April 2012. The contention of the assessee that the deduction claimed if not allowed will result in double disallowance has merits. The expenses disallowed is eligible for deduction u/s.40(a) of the Act as and when the tax is deducted at source on such expenses. The reversal of provisions done on 1st April 2012, would go to nullify the impact of the expenses claimed by way of debit to the profit and loss account on which is tax is deducted at the time of the payment. Therefore the reversal of provisions disallowed in the computation of assessment year 2012-13 is to claimed as a deduction in the assessment year 2013-14 so that the expenses eligible for deduction u/s.40(a) is rightly claimed in the computation. However the most important fact that needs to be verified in this regard is whether the provision made on 31st March 2012 to the tune of Rs.3,35,10,157 is reversed on 1st April 2012 and that the same is reflected correctly in the provision for expenses ledger of the assessee. This needs to be verified to justify the claim of deduction of the said amount in the computation of assessment 2013-14 basis the disallowance done in the year 2012-13. The assessee has erroneously submitted before the CIT(A) / AO that the deduction is claimed u/s.40(a)(i) and hence the authorities disallowed the claim as the assessee did not produce the details of tax deducted. However the deduction as per the ld AR is done based on the fact that the provisions which are already disallowed in the previous assessment year is reversed and to avoid double disallowance the same is claimed as deduction in the computation. This fact has not been properly presented before the lower authorities. The lower authorities have to examine whether the year-end provision made on 31st March 2012 is fully reversed on 1st April 2012 and the expenses against which the provision was created is debited to the profit and loss account on payment after deducting TDS. This verification need to be carried out based on the journal entries and ledger copies produced by the assessee for the year under consideration. If the accounting practice of the assessee to reverse the expenses on the 1st day of April of the year under consideration is substantiated by the evidences submitted by the assessee whereby it is demonstrated that there is no doubt allowance expenditure then the assessee would be entitled to claim the amount disallowed in the previous assessment year as otherwise it would amount to double disallowance. We therefore remit the issue back to the AO to verify the ledger and general entries of the assessee for the year under consideration and allow the expenditure in accordance with law. The assessee may be given a reasonable opportunity of being heard in this matter. The appeal is allowed in favour of the assessee for the statistical purposes.
The grounds raised for assessment year 2014-15 and 2015-16 pertain to the issue pertaining to treatment of ‘unearned revenue’. The ld AR submitted the additional evidence of partywise breakup and the invoice details for these years also before us. Considering our decision in para 11 above we admit the additional evidence and remit the issue to the AO with similar directions as given for assessment 2013-14 in para 20 above. Further for the assessment year 2015-16 the AO is directed to take into consideration the amendment made with effect from 1/4/2015 to section 145(2) while deciding the issue. It is ordered accordingly.
In the result, the appeals of the assessee are allowed for statistical purposes.
Pronounced in the open court on this 18th day of July, 2022.