MATRIMONY.COM LIMITED,CHENNAI vs. DCIT CORPORATE CIRCLE 4(1), CHENNAI

This appeal by the assessee is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-8, Chennai dated 24.08.2017 in for the assessment year 2007-08 passed U/s.250(6) r.w.s. 143(3) of the Act.

The assessee has raised several grounds in its appeal however the cruxes of the issues are that (i) The Ld.CIT(A) has erred by holding that reopening of assessment U/s.147 of the Act is valid. (ii) The Ld.CIT(A) has erred in confirming the order of the Ld.AO who had treated the subscription fees received in advance during the relevant assessment year as the income of the relevant assessment year without considering the fact that the income did not accrue to the assessee during the relevant assessment year.

The brief facts of the case are that the assessee is a private limited company formerly known as M/s. Consim Info Pvt. Ltd., is engaged in the business of rendering matrimonial & other online services, filed its return of income for the assessment year 2007-08 on 31.10.2007 electronically admitting total loss of Rs.26,46,45,521/-. The case was selected for scrutiny under CASS and assessment was completed on 31.12.2009 determining the loss at Rs.26,78,16,064/-. Subsequently it came to the notice of the Ld.AO that during the relevant assessment year the company has changed its accounting policy, as a result, the assessee had disclosed loss in its statement of affairs. Hence notice U/s.148 of the Act dated 28.03.2012 was served on the assessee and the assessment was reopened. Finally assessment U/s.143(3) r.w.s.147 of the Act was completed by the Ld.AO on 11.03.2013 wherein the Ld.AO made addition of Rs.2,68,12,597/- towards the difference between the profile registration fee and subscription fee received by the assessee aggregating to Rs.18,68,84,280/- (17,59,70,486 + 1,09,13,794) and that was disclosed in the statement of affairs amounting to Rs.16,00,71,683/- as the income of the assessee for the relevant assessment year.

The assessee had explained before the Ld.AO that it had followed Mercantile System of Accounting and hence only the income that was accrued during the relevant assessment year was offered as income and the amount of Rs.2,68,12,597/- pertaining to advance receipt of fees for the subsequent period was offered as income in the succeeding assessment year. However the Ld.AO rejected the argument of the assessee by holding that the Act does not recognize the concept of deferred income. Hence the Ld.AO treated the entire amount of profile registration fee, up-gradation fees and subscription fees received during the relevant assessment year as the income of the assessee for the relevant assessment year. The Ld.AO while holding so, relied in the decisions of Sterling Holiday Resorts India Ltd., vs. ACIT reported in 111 ITD 116 and the decision of EID Parry (India) Ltd., vs. CIT reported in 126 taxmann 174.

On appeal, the Ld.CIT(A) confirmed the order of the Ld.AO by observing as follows relying in the decision cited by the Ld.AO in his order:- “9. The assessee has quoted various decisions to claim that the matching principle of revenue and expenditure should apply. In this regard, it is noted that the expenses related to the uploading of the profile of any applicant is incurred at the time of uploading itself. The expenses in the nature of preparation of website and other software requirements, hardware support, marketing the services, receiving of profile by prospective applicants, verification of the profile and uploading of profile is incurred at the time of uploading itself. The only expenditure which can be said to be incurred subsequent to the uploading of profile would be the expenses related to software and hardware maintenance. In the circumstance, it is held that 90% of the expenses already incurred at the time of uploading of the profile of the applicants. Considering the above, it is held that the assessee can at best claim only 10% of the expenses to be incurred in the subsequent assessment year. Correspondingly, 90% of Rs.2,68,12,597/- is held to be liable for taxation in the month/year of initial uploading. The balance 10% could relate to the rest of the months/year during which the profile of the applicant remains on the website of the assessee. Assessee gets relief to the extent of Rs.26,81,259/-. The balance of the disallowance is sustained.”

Before us the Ld.AR submitted that the assessee had received Rs.2,68,12,597/- as advance fee for which service has to be rendered in the subsequent year. It was further submitted that since the assessee was following Mercantile System of Accounting, it had accounted the amount of Rs. 2,68,12,597/- as its income in the subsequent assessment year. Hence it was pleaded that the addition made by the Ld.AO for Rs. 2,68,12,597/- which was further confirmed by the Ld.CIT(A) may be deleted. The Ld.DR on the other hand relied on the orders of the Ld.Revenue Authorities.

We have heard the rival submissions and carefully perused the materials on record. It is not disputed that the amount of Rs.2,68,12,597/- was received in advance for the services to be rendered in the immediate succeeding assessment year. Accordingly the assessee had treated the same as the income in the succeeding assessment year. However the Ld,Revenue Authorities was of the view that there is no concept of deferred income as per the provisions of the Act and therefore treated the amount of Rs.2,68,12,597/- as the income of the assessee for the relevant assessment year though it pertained to the succeeding assessment year. Further the Ld.CIT(A) was of the view that since the assessee had incurred certain expenditure in the relevant assessment year, a portion of which is attributable towards the income earned in the succeeding assessment year, only such proportion of income should be treated as the income in the succeeding assessment year. Accordingly the Ld.CIT(A) was of the view that 90% of the income earned of Rs.2,68,12,597/- is liable for taxation for the relevant assessment year and 10% of Rs.2,68,12,597/- should be treated as the income liable to be taxed for the succeeding assessment year. However we are of the considered view that the views adopted by the Ld.AO as well as the views of the Ld.CIT(A) is erroneous. As per the provisions of the Act, there is no concept with respect to deferred expenditure. Therefore the entire expenditure incurred for earning revenue for the relevant assessment year and the revenue spilled over to the succeeding assessment year is allowable as deduction for the relevant assessment year when the expenditure incurred in the relevant assessment cannot be apportioned towards the income earned in the subsequent assessment year. At this juncture we are reminded of the various decisions of the Higher Judiciary wherein it was held that expenditure incurred towards advertisement is allowable as deduction in the relevant assessment year though certain benefit arising out of the same can be attributable to subsequent years. However, as per Mercantile System of Accounting, only the accrued income for the relevant assessment year can be treated as the income for the relevant assessment year. In the case of the assessee, there is no dispute that the amount of Rs.2,68,12,597/- received by the assessee pertains to the services to be rendered in the immediate succeeding assessment year. Hence the assessee has rightly recognized its revenue of Rs.2,68,12,597/- in the succeeding assessment year. Therefore the addition made by the Ld.AO which is further sustained by the Ld.CIT(A) by treating the fees received in advance for the succeeding assessment year as the income of the assessee for the relevant assessment year is erroneous. Hence we hereby set aside the order of the Ld.CIT(A) and direct the Ld.AO to delete the addition made by him for Rs.2,68,12,597/-.

The ground raised by the assessee with respect to the issue on reopening the assessment was not argued before us hence we have not dealt with the same in this Order. Moreover we have decided the appeal of the assessee on merits hence adjudicating the legal issue on reopening the assessment is infructuous.

In the result, the appeal of the assessee is allowed.