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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI A.MOHAN ALANKAMONY & SHRI DUVVURU RL REDDY
आदेश / O R D E R
Per A. Mohan Alankamony, AM:- This appeal by the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals)-15, Chennai dated 31.08.2017 in for the assessment year 2013-14 passed U/s.250(6) r.w.s. 143(3) of the Act.
The assessee has raised several grounds in its appeal however the crux of the issue is that the Ld.CIT(A) has erred in confirming the order of the Ld.AO who had made addition of Rs.18,94,96,500/- in the hands of the assessee for not having
2 /2017 recognized the revenue income in accordance with Mercantile System of Accounting though the accounting standard AS9 specifically states that revenue need not be recognized if there is uncertainty in realizing the income.
The brief facts of the case are that the assessee is a private limited company engaged in the business of software development, filed its return of income for the assessment year 2013-14 on 29.11.2013 admitting loss of Rs.87,94,316/-. The case was selected for scrutiny under CASS and notice U/s.143(2) of the Act was issue on 03.09.2014. Finally assessment order was passed U/s.143(3) of the Act on 30.03.2016 wherein the Ld.AO amongst certain other additions also made an addition of Rs.18,94,96,500/- for not having recognized the revenue in accordance with Mercantile System of Accounting.
During the course of scrutiny assessment proceedings, it was observed by the Ld.AO that the assessee had stated in the note forming part of the financial statement item No.18 (iv) for the year ended 31.03.2013 as follows:- “An amount of ZAR 28,500,000 equivalent to Rs.189,496,500 accrued on a contract with the Department of Education, Limpopo province, South Africa
The Company has continued to meet its performance obligations of the Contract with the customer by providing uninterrupted service delivery during the current financial year 2012-2013 and has raised invoices for the annual licence fees amounting to ZAR 28,500,000 (equivalent INR 189,496,500) on the customer.
However in view of the on-going investigation relating to the Customer which commenced prior to April 2012 and in the absence of confirmation from the customer, ultimate collection of this revenue is not considered reasonably certain from the beginning of the year itself and hence revenue recognition is postponed to be compliant with the Accounting Standard (AS 9) Revenue Recognition.
Management fully intends to take all necessary steps leading to the recovery of these amounts, which aggregates to ZAR 57,000,000 equivalent Rs.372,376,500 for services delivered during the financial years: 2011-12 and 2012-13. Also Refer Note 23(b).”
4.1 Further in the note item No.23(b) it was stated as follows:- “23. (b) Trade Receivables from Department of Education-Limpopo Province During the previous year, the company entered into a contract with Department of Education – Limpopo Province, for supply of Hey! Math solution (supply of hardware and license fee for use of Hey! Math software included in this hardware) to various schools in Limpopo Province over a period of three years. The Company recognized a revenue of ZAR 10,220.00 (equivalent INR 67,758.600) for sale of hardware and ZAR 28,500.000 (equivalent INR 182,880,000) towards annual license fee during the previous year during April and May 2011.
This Department of Education was brought under the financial administration of the South African Government in terms of the local constitution during December 2011 and has been subjected to investigation, for certain financial irregularities, by the forensic section of the South African Government. The Administrator of the Department of Education, appointed by the South African Government, has expressed his inability to the Company to release payments to the Company, pending completion of the investigation. The management is confident of recovering at the minimum the payment of hardware units in full amounting to ZAR
4 /2017 10,220,000 (equivalent INR 67,758,600) as sufficient documentary evidence to substantiate the delivery of the hardware units to schools in Limpopo Province, South Africa has already been provided and accepted by the customer.
The license fee and related logistics costs of servicing and training are not tangible items and since the administrator would require considerable amount of time to understand the concept, the management expected delays in collecting the receivables and in the absence of certainty in collection, the management considered it prudent to write off the receivables. Hence the entire amount of license fee of ZAR 28,500,00 recognized during the financial year 2011-2012 was written-off by the Company in the previous year Reserve Bank of India approval in this regard is awaited.”
4.2 Based on the above notes, the Ld.AO queried as to why the amount of Rs.18,94,96,500/- was not recognized as revenue income for the year ended 31.03.2013, against which the assessee has replied in its letter dated 24.03.2016 as follows:- “b. The Department of Limpopo province was declared bankrupt during fag end of the year 2011. The Limpopo Province was brought under intervention and financial administration of the South African National Treasury under Section 100(1)(b) of the constitution of South Africa in December 2011. We signed a contract with Department of Education Limpopo Province (Limpopo DOE) during 2011 for a period of 3 years, with a revenue of ZAR 28,50,000 each year for FY 2011-12, 2012-13 and 2013-14. Due to the above fact the Limpopo DOE did not pay us our dues from the first year itself. i.e., for FY 2011-12 till date. We have already filed a case with High Court of South Africa – Gauteng Division Pretoria and the matter is now sub-judice. The related documents are enclosed for your reference.”
4.3 However the Ld.AO was of the opinion that since the assessee had rendered services to its clients against which the assessee is liable to receive an amount of Rs.18,94,96,500/-, in 5 /2017 accordance with Mercantile System of Accounting, the amount receivable towards service rendered should be recognized as revenue income for the year ended 31.03.2013. He was also of the view that cash system or hybrid system of accounting is not permissible according to the provisions of the Act.
On appeal, the Ld.CIT(A) upheld the order of the Ld.AO by observing as under:- “4.3 I have carefully gone through the observation of the AO as mentioned above under para 4.1 and the contention of the appellant as mentioned above under para 4.2.
4.3.1 The appellant company had entered into a service contract for providing software to a South African Government Undertaking called “Province” for three years. Subsequent to an investigation conducted by the South African Government, the Government undertaking became bankrupt. As the South African Government undertaking did not pay the appellant company, the appellant company filed a suit in South Africa on 23/4/2014. The appellant company did not recognize the corresponding income from the said contract, although it raised a bill. The AO has observed that the appellant company was following mercantile system of accounting and it could not change the method of accounting only for one assessment year. With this observation, the AO assessed the income from the said contract as per the bill raised by the appellant company.
4.3.2 Before the CIT(A), the appellant's AR has contended t.hat. the AO has refused to accept the Accounting Standard-9 as per which income which is not likely to arise to an assessee need not be recognized as per AS-9.
4.3.3 I have considered both the points of view. I have perused the appellant company's statutory audit report wherein it is clearly mentioned that the aforesaid income is not recognized in the relevant return of income. I have also perused the Boards notification No.32/2014 with effect from 1.4.2015. It is clear from the decision of the appellant's note that: the said decision was applicable from A Y 2016--17. It is pertinent to note that the 6 /2017 appellant company has filed a suit in South Africa which is still pending. Therefore, the appellant cannot come to a conclusion that the appellant company is not likely to get the payment from the South African Government undertaking as the appellant company still has claim over it legally. Under similar circumstances, the appellant company had written off as bad debt u/s.36(1)(vii) in earlier assessment year 2012-13 whereas, in the relevant assessment year 2013-14, the facts and circumstances are different. As per law, the appellant is entitled to claim write off of bad debt as and when it fulfills the conditions specified u/s.36(1)(vii) r.w.s.37(2) of the Act.. It is further pertinent to note that the appellant company filed a suit to recover the payment only in April 2014 and therefore for relevant assessment year 2013-14, the appellant cannot take a stand that the said payment was unlikely to be realized. The decisions relied on by the appellant company are not applicable to the appellant company's facts and circumstances of the case, Needless to say that the res judicata is not applicable in tax matters as held in several courts decisions and therefore, the appellant cannot rely on the decision taken in the earlier assessment year.
4.3.4 In view of the above remarks, I concur with the AO in assessment of the income of Rs.18.94 crore which was not recognized by the appellant although it was following mercantile system of accounting. For these reasons, the appellant’s ground on this issue is dismissed.”
Before us the Ld.AR relying on the Accounting Standard 9, vehemently argued stating that if there is a significant uncertainty in the ultimate collection of the revenue, then revenue recognition has to be postponed and has to be recognized only when it becomes reasonably certain that the ultimate collection could be realized. Accordingly it was pleaded that the addition made by the Ld.AO by recognizing the revenue income in the relevant assessment year which is not certain to be realized is erroneous. Hence it was pleaded that the addition made by the Ld.AO may be deleted. The
We have heard the rival submissions and carefully perused the materials on record. On examining the Accounting Standard 9, recommended by the Institute of Chartered Accountants of India and duly notified by the Central Government, specifically states that:- “Revenue from sale of rendering services should be recognized at the time of the sale or rendering of services. However, if at the time of rendering of services or sale there is significant uncertainty in ultimate collection of the revenue, then the revenue recognition is postponed and in such cases revenue should be recognized only when it becomes reasonably certain that ultimate collection will be made. IT also applies to the revenue arising out of escalation of price; export incentive, interest, etc.” From the above it is clear that revenue need not be recognized when there is an uncertainty in the ultimate collection of the revenue. In the case of the assessee, it is evident from the facts, that there is a dispute in recovering the dues from the clients of the assessee. The appellant company has also filed a suit to recover the amount. Moreover the entire amount has to be collected from a foreign government undertaking over which Indian Judicial Authorities does not appears to have direct jurisdiction. It has become a complicated affair to recover the amount through negotiations and International Courts of Justice. In this fluid
8 /2017 situation, there is a substantial uncertainty for recovering the amount from the clients of the assessee. Considering these facts, it is evident that Accounting Standard 9 has to be squarely applied in the case of the assessee, while determining the real income of the assessee. Further there is no point in recognizing the income which cannot be recovered and subsequently write it off as bad debts in the subsequent years. Therefore, we find merit in the arguments advanced by the Ld.AR. Considering the Accounting Standard 9 issued by the Institute of Chartered Accountants of India which is duly recognized by the Central Government, we are of the view that in the case of the assessee, revenue need not be recognized for Rs.18,94,96,500/- for the year ending 31.03.2013 viz., the relevant assessment year 2013-14 as it is substantially uncertain to recover. Accordingly we hereby direct the Ld.AO to delete addition made for Rs.18,94,96,500/- in the relevant assessment year 2013-14.
In the result the appeal of the assessee is allowed.
Order pronounced on the 13th June, 2018 at Chennai.