Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH ‘B’ NEW DELHI
Before: SHRI H.S. SIDHU & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
This is an appeal filed by the Revenue against the order of ld. CIT(A)VI, New Delhi dated 20.10.2013 for the assessment year 2010-11 on the following grounds :
“1. The Ld. CIT(A) has erred in law and on facts in ignoring that:
(i) The assessee is following mercantile system of accounting & as such the income received by it can clearly be termed as accrued to/received by it.
(ii) Though the assessee has shown the income as 'advance' & routed it to the balance sheet, however, the corresponding expenses have been booked in the P&L account thereby violating the matching concept of account. The expenses should have also been shown as part of Capital Work in Progress.
2. The observation of the Ld. CIT(A) that collectability of amount was uncertain cannot be accepted in view of the fact that the assessee failed to substantiate its claim with relevant documents like copies of agreement with the vendors.”
The brief facts of the case are that the assessee company is engaged in the business of financial consultancy and purchase and sale of shares. The assessee filed its return of income declaring income of Rs.2,38,45,256/-. The case was taken up for scrutiny and statutory notices were issued to the assessee and the questionnaires u/s. 142(1) were issued. In the assessment proceedings, the Assessing Officer has noted that during the financial year 2009-10, the assessee had received a sum of Rs.2,56,42,450/- as advance against assignments from different parties. The assessee was asked as to why these advances should not be treated as income of the assessee. In response, the assessee, submitted as under :
“As has been submitted earlier the company provides financial consultancy services to its clients which includes preparation of project reports, interaction and interface with lenders/investors syndication of loans and their subsequent disbursement. Thus the nature of the business/assignments which we undertake is such that the time period for the assignments to be completed at time stretches for a long duration.
At the time of awarding of the assignments our clients make advance payments to us normally with the conditions that the payments are linked to successful completion of the assignments and in the event of assignments not being completed successfully and/or in the event of any delay or deviation in the terms of sanction and disbursement, the payments made will be refunded in full. We are thus not absolved of our accountability and liability to make full refund till the successful completion of the assignment and to the satisfaction of the clients. Therefore, all the payments received from the clients are being treated as advance payments till the successful completion of the assignments whereupon the same are recognized as income ad accounted for accordingly. During the financial year 2009-10 we received advance payments of Rs. 61,00,450.00, the details of which are given below in a table.
S.No. AMOUNT Customer Name Remarks (In Rs) 1 10,00,000.00 PLG Power Ltd. Transferred to Income A/C during FY 2010-11 2. 25.00,450.00 Sona Alloys (P) Ltd Refunded on 9.12.2010(FY 2010- 11) 3. 500. 000. 00 Ginni Filament Ltd Transferred to Income A/C during FY 2010-11 4. 15,00,000.00 Concasl Exim Transferred to Income A/C during FY Limited 2010- 11 5. 6,00,000.00 Raj Rayon Ltd Transferred to Income A/C during FY 2010-11 TOTAL 61,00,450.00
You will peruse from the above out of the total advance payments of Rs. 61,00,450.00 received and outstanding as on 31.03.2010 an amount of Rs. 25,00.450.00 was refunded on 09.12.2010 and the remaining amounts were taken to income account in the succeeding financial year and the company paid the necessary income tax on such income.
In view of the reasons explained above, we request that the advance payments received during the year should no! be added In the income of the company for the financial year under assessment.”
The Assessing Officer was not satisfied with the above submissions of the assessee and after relying on various judicial pronouncements, the AO treated the advance received as income of the current year since the assessee has not shown any expenditure in the form of work in progress in the profit and loss account whereas the expenditure is incurred for the assignments from his clients. He, therefore, added Rs.2,56,42,450/- to the income of the assessee.
The assessee carried the matter before the first appellate authority in appeal and submitted the details of advances received before the CIT(A) as under :
S. No. NAME YEAR OF RECEIPT AMONT(RS.) 1 M/S Simplex Concrete & Pipes Limited Total (A) 2007-08 1,00,00,000.00 Total (A) 1,00,00,000.00 1 M/S Kesar Hospital Limited 2008-09 5,00,000.00 2 M/S Rathi Udyog Limited 2008-09 10,00,000.00 3 M/S Indian Vidhut & Ispat Limited 2008-09 25,00,000 00 4 M/S Alok Industries Limited 2008-09 32,25,000.00 5 M/S Dolphin Devlopers Limited 2008-09 5,00,000.00 Total (B) 77,25,000.00 1 M/S Chirpal Industries Limited 2009-10 4,20,000.00 2 2009-10 8,97,000.00 M/S Landcraft Limited 3 2009-10 5,00,000.00 M/S Himalya International Limited 18,17,000.00 Total (C)
1 M/S PLG Power Limited 2010-11 10,00,000.00 2 M/S Sona Alloys Limited 2010-11 25,00,450.00 3 M/s. Ginni Filament Limited 2010-11 5,00,000.00 4 M/s. Concast Exim Limited 2010-11 15,00,000.00 5 M/s. Raj Rayon Limited 2010-11 6,00,000.00 Total (D) 2,56,42,450 During the appeal proceedings, an application for rectification u/s. 154 was filed before the Assessing Officer on 03.10.2013 to rectify the order of the AO for treating the current year’s additions limited to receipt of the current year only. The Assessing Officer passed his order on 28.03.2013 u/s. 154/143(3) and restricted the addition to the receipt of current year only, i.e., Rs.61,00,450/-. The ld. CIT(A) after being satisfied with the submissions of the assessee, allowed the appeal of the assessee. Aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before the Tribunal.
The learned DR relied on the order of the Assessing Officer. He submitted that the appellant was unable to show the agreement before the Assessing Officer to establish that the amount was received in advance and refunded to his clients. The assessee incurs expenditure and expenditure is debited to the profit and loss account whereas the Revenue is not recognized till the assignment is completed. It was further submitted that the assessee has been maintaining mercantile system of accounting, but has not followed the norms of this method of accounting. In case, the assessee does not credit the advance in the profit and loss account during the year till the completion of assignments, he should have shown the expenditure in the form of work in progress with respect to assignments received.
On the other hand, the ld. AR relied on the order of the ld. CIT(A) and submitted that in assessee’s own case, the ITAT, Delhi Bench ‘B’ in ITA No. 2732/Del./2013 for the assessment year 2008-09 has dismissed the appeal of the Revenue in the identical facts and circumstances of the case. He relied on para 12 & 13 of the above order.
We have heard both the sides and have perused the material available on record. The ld. CIT(A) has discussed in detail on the issue as under :
“I have carefully considered the submission of the appellant. I have also gone through the assessment order passed in this case.
5.1 So far the first ground of appeal is concerned, the AO in the assessment order passed u/s 143(3) of the Act dated 28.11.2012 made an addition of Rs.2,56,42.450/- on account of Advance received from the Customers, as the assessee had not booked income but treated them as advance in the Balance Sheet also debited expenses pertaining to them in its P&L A/c. The AO noted that there was no formal agreement with the parties concerned of the fact that the assessee transfers the amount to the Income (credit side) in P&L A/c when work gets executed to the satisfaction of the clients/customers of the assessee company and in case the work does not get executed to the satisfaction of client/customers, then often the amount gets refunded. Therefore, the AO came to the conclusion that the advance received from the customers are nothing but the trading receipts. However, subsequently, the AO has passed an order u/s 154 r.w.s. 143(3) of the Act dated 28.03.2013 wherein, the disallowance was reduced to only Rs.61,00,450/- on the ground that out of the said initial disallowance of Rs.2,56,42,450;- for the relevant A.Y. 2010-11, the income already assessed in A.Y. 2008-09 was Rs.1,77,25,000/- and the income already assessed in A.Y. 2009-10 was Rs.18.17,000/-. The AO also clarified that even for A.Y. 2010-11, the contention of the appellant was found to be correct but failed to elaborate the same, in the said rectification order.
5.1.1 Even otherwise, for the A.Y. 2008-09 and A.Y. 2009-10 respectively, the CIT(A)-VI, New Delhi in Appeal No.129/10-11 dated 26.02.2013, vide Para 6 of Page No.10 and in Appeal No. 157/11-12 dated 02.05.2013, vide Para 3, Page No.2 has given relief to the appellant on the similar ground of appeal as he held that under the Mercantile or accrual system of accounting, income is recognized when the services for which fees are received, are rendered. Further as per AS-9 also, income are not recognized unless services are rendered. Therefore, income cannot be assessed in the year of receipt. He further held that the appellant company had been consistently following the mercantile system of accounting and as per AS-9 following principle of "Completed Service Contract Method". Moreover, the appellant company has been providing financial consultancy services and takes security/ advance against the assignments/contracts, till the loans etc are sanctioned or work is completed. Therefore, the customers/clients-of the appellant company have a binding obligation to pay consultancy charges arising at the point of completion of services, otherwise the appellant company has uncertainly to recognize revenue and may be required to refund security/advance money to the client. Therefore, the CIT(A) for A.Y. 2008-09 and A.Y. 2009-10 (Supra) held that the accounting policy of the appellant company seems to be aligned with AS-9 (Revenue Recognition) & further there is no inconsistency in maintaining books of account. This is more so as the appellant company has recognized the said advances in subsequent financial years or refunded the money on non completion of the desired assignment/contract. Moreover, there is no loss of revenue to the exchequer in this process as the tax rates have been same over the years & the appellant gets nothing by deferring its income from one year to another. Therefore, the CIT(A) deleted the similar addition in the A.Y, 2008- 09 & 2009-10 respectively.
5.1.2 As per para 7.1(ii) of AS-9 issued by the I.C.A.I, "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 recognized when the sole or final act takes place and the service becomes chargeable.
5.1.3 In the case of judgement of Commissioner of Income-tax Vs. Western India Engineering Co. delivered on 11 September, 1970, it has been held that :-
"10. Mercantile system of accounting has been explained in many cases. This system brings into credit what is due, immediately it becomes legally due, and before it is actually received, and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. Therefore, the central idea which is involved in this system is that, if a certain amount has actually accrued due to the assessee, then it does not matter that it is not actually received. The accrual of the amount would justify the assessee in crediting the same in his account books. If he does so, then the evidence of that credit entry would, in ordinary circumstances, be considered as sufficient evidence to show that the assessee concerned has earned that amount. However mere posting of an entry in the account books of the assessee would not always a conclusive nature of evidence on the question whether the disputed amount has accrued to the assessee or not. If there are other facts going to throw light on the question, whether the amount has really accrued to the assessee or not, then the posting of a credit entry in the account books of the assessee should be appreciated in the light of that evidence. If that is so, the mere fact that a mercantile system of accounting is adopted by an assessee would not conclude the matter. Each case should be decided on its own peculiar facts and, if these facts reveal that even though the amount in question is credited in the account books of the assessee, the amount had in fact not accrued to him, then it would be open to the assessing authorities to come to the conclusion that, in spite of the adoption of the mercantile system of accounting, the amount has not accrued to the assessee. Mercantile system of account would undoubtedly furnish prima facie evidence to show whether the amount has accrued or not. But that evidence cannot be treated as conclusive if there are other facts and circumstances going to show what income has really accrued or arisen to the assessee. To take an instance, if the assessee had intentionally under-estimated the value of the construction work done by it and had accordingly prepared the bills and posted account entries in his account books, and if there was definite evidence to show that such an under- estimate was made by the assessee with a view to evade tax liability, it would have been ' open to the department not to be guided merely by the account entries posted by the assessee following the mercantile system of accounting. In such a case, the department could have legitimately taken a stand that the entries posted by the assessee do not represent the real income accrued to it. The reason is that under section 5 of the Indian Income-tax Act. what is to be included in the total income of an assessee is the income which really and actually "accrues or arises" to him. Therefore, if an account entry posted in accordance with the mercantile system of accounting is found to be not representing the real income of the concerned assessee, that entry cannot supply conclusive evidence about the income in question. Therefore, if it is found that the assessee has, for some valid reasons, pitched its claim higher while preferring its bills and has accordingly put the account entries in its books, then, even though the said account entries are found to have been posted on the mercantile system of accounting, they cannot supply conclusive evidence as regards the real income of the assessee. The High Court of Bombay has observed in Commissioner of Income-tax v. Shoorji Vallabhdas and Co. that the question whether the income has accrued or not is not a mere matter of cogency of the entries made in the account books of the assessee, but is essentially one of substance and of the real nature of what happened because a book entry is not conclusive proof of the question whether the assessee had become entitled to the sums or not. In that case the said High Court was dealing with an assessee who followed the mercantile system of accounting. This decision is affirmed by the Supreme Court in Commissioner of Income-tax v. Shoorji Valiabhdas and Co. holding that, if income does not result at all, there cannot be a tax, though in book- keeping an entry is made about a "hypothetical income", which does not materialise. Their Lordships have in this case further observed that, when the income can be said not to have resulted at all, there is obviously neither accrual not receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. Similar view is also taken in the Bombay case of H. M. Kashiparekh & Co. Ltd v. Commissioner of Income-tax.
Now, so far as the facts of this case are concerned, it is undoubtedly true that the assessee has credited the whole amount of bills preferred by it in the works account. But the assessee is found to be following the practice of estimating the amounts which it can reasonably expect to receive from its customers at the time of settlement of the bills. This estimate the assessee is found to be carrying to the profit and loss account. It is not the case of the department that such estimates are unreasonable or mala fide so far as the accounting year in question is concerned. If that is so, the system of accounting which the assessee is found to be following since years together, and which is found acceptable by the department ever since the assessment year 1957-58, should be given due consideration. This system clearly shows that the assessee does not treat the amounts which are credited to the works account as representing the real income which it has earned. As a matter of fact, it is found that the assessee is pitching its claim in the bills a little higher in order to enable it to arrive at a reasonable settlement of these bills with its customers. Once this fact is admitted, then it follows that the amounts of bills which are pitched high do not reflect the real amount which the assessee can be said to have earned for the non-tender work done by it for its customers. In that view of the matter, a mere existence of an entry regarding a particular account in the works account, would not reflect the actual amount which has accrued due to the assessee. The system of carrying the estimated amount to the profit and loss account supports this view. The question as to what income has accrued or arisen to the assessee during a particular year is essentially a question of fact. This question of fact should be decided with reference to the peculiar facts and circumstances of each case. Considering the peculiar circumstances of the present case, we have no hesitation in coming to the conclusion that the amounts which have been credited by the assessee during the accounting period in the works account do not present the real income which had accrued or had arisen to the assessee during the accounting period.
5.1.4 It was further held in judgement of [CIT Vs. Ciba of India Ltd.. (1968) 69 ITR 692 (SC) & Empire Jute Co. Ltd. Vs CIT (Supra)] that the nature of a receipt as capital or revenue is not always determinative of the nature of the outgoing in the hands of the person who pays for it. It is said, and truly said, that whether payment is a revenue payment or a capital payment, may depend upon the angle from which one looks at it-the payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa.
5.1.5 In CIT Vs. Madho Pd Jatia (105 I.T.R. 179; SC), it was held that there could be not consideration of equity if the language of the provision was plain and clear, but where it was not, and two interpretations were possible, the one is consonance with equity and fairness should be preferred. When there will be ambiguity in taxing provision, it will be resolved in favour of the assessee.
5.1.6 The assessee received certain amounts from its clients and credited their respective accounts. On completion of the work or finalization on the case, the assessee raised a bill charging fees and then credited the fees account and debited to the account of respective client. It was held that the accounting system followed by the assessee was not defective and advance money will not be treated as trading receipt. (C.C. Gandhi & CO. Vs. ITO (1991) 36 ITD 527 (Ahmedabad Tribunal).
5.1.7 In CIT Vs. Annamalai Finance Ltd. (2009) 319 ITR 196 (Mad), it has been held that the recognition of revenue on accrual basis presupposes the satisfaction of two conditions viz the revenue is measurable and that the revenue is collectable, without any uncertainty. Therefore, either to apply the accrual system or cash system, recognition of income is a paramount factor. 5.18 In CIT Vs. Coral Electronics (P) Ltd (2005) 274 ITR 336 (Mad), it was held that service,' charges received in advance for the services to be rendered in the future years are not liable to tax in the year of receipt. Only upon completion of the service, the assessee had a right over the amount that was deposited. Till then, it remains uncertain as to whether it would at all remain income of the assessee.
5.1.9 Similarly, retention money not received by the contractor •& the entitlement to receive the same accrues only after successful completion of the work and hence, it is taxable only when, it has accrued or is received by the assessee as held in CIT Vs. P&C Construction (P) Ltd (2009) 318 ITR 113, CIT Vs. Ignifluid Borders (I) Ltd. (2006) 283 ITR 295 (Mad) & CIT Vs. East Coast Constructions & Ind. Ltd (2006) 283 ITR 297 (Mad).
5.1.10 As is seen in Accounting Standard 9 of ICAL which lays down that when uncertainties exist regarding determination of the amount or its collectability, the revenue should not be treated as accrued and hence shall not be recognized until collection.
5.1.11 Therefore by following the rule of consistency, the appellant succeeds on this ground of appeal and the AO is hereby directed to delete the addition, on account of Income on Advance from Customers.”
6. We agree with the above order of the ld. CIT(A) and we think that it does not require any interference. The Revenue has also not disputed that the similar method has been accepted by the Revenue in the preceding years. In view of the totality of the facts, following the rule of consistency, the appeal of the Revenue is dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 06.02.2017.