RELIGARE TECHNOVA GLOBAL SOLUTIONS LTD,NEW DELHI vs. ACIT CIR 2(1), MUMBAI

आदेश / O R D E R PER N.K.PRADHAN, A.M.

by the assessee in this appeal are that the ld. CIT(A) erred in confirming the disallowance of expenses made by the AO of Rs. 1,00,554/- u/s 14A of the Act. We find that the AO has worked out the disallowance u/s 14A r.w.r. 8D. The same rule is not retrospective as it was notified on 24/03/2008 and would be applicable only from AY 2008-09. In Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81(Bom), it has been held that Rule

8. D is not retrospective. The Hon’ble Bombay High Court in CIT vs. M/s. Godrej Agrovet Ltd vide Income Tax Appeal No. 934 of 2011, dated 8.1.2013, has held that percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the assessment year 2008-09. In the above case it upheld the disallowance to the extent to 2% of the total exempt income. Respectfully following the above decision, we direct the AO to restrict the disallowance to 2% of the total exempt income. Thus the first and second ground are partly allowed.

3.1 The Assessing Officer (AO), during the course of assessment proceedings, found that the assessee had the following unearned revenues during the financial year 2006-07 relevant to the assessment year 2007-08:

Unearned revenue – Annual Maintenance Rs. 23,14,430/- Unearned Revenue – Subscription Charges Rs. 79,19,514/- Total Rs. 1,02,33,944/-

The assessee argued before the AO that they have not rendered the services and hence, part of the receipts was kept under the head ‘Current Liability’ in the Balance Sheet. Further, it was argued before the AO that out of the total unearned revenue, the company in future AY 2008-09, had reversed such unearned revenues by treating it as income for the said year because the services were then rendered. The AO was not convinced with the above explanation, as the assessee company had raised invoices and claimed the entire credit for TDS in the year under consideration. Thus the AO made an addition of Rs. 1,02,33,944/- under the head ‘Unearned Revenue’ to the business income of the assessee.

3.2 The ld. CIT(A) upheld the addition of Rs. 1,02,33,944/- made by the AO on the reason that the assessee is following mercantile system of accounting and it has raised invoices during the year under consideration. And also the fact that the assessee has claimed the entire credit for TDS during the year under consideration.

3.3 The ld. counsel of the assessee submits that the assessee company is engaged in the business of development, marketing and sale of software products and provides installation and maintenance support services in relation to the same. It is also engaged in providing data base services to its clients. It receives purchase order (PO) from various customers for such services. The assessee company raises invoices for these services at the time of receiving a PO, either for software maintenance and support services or data base subscription services, from its customers and such invoice is for the entire period over which the services are to be rendered. The payment for such services are based upon mutually agreed terms between the company and the customer. It is further submitted that in accordance with the Accounting Standard (AS) – 9 : ‘Revenue recognition’, the assessee company recognizes income in respect of only those invoices or part of the invoices for which the services have been rendered. The invoice or part of the invoice amount, which is representative of the period for which the services are yet to be rendered is treated by the company as unearned revenue (i.e. the revenue which has not accrued during the subject year ) and the same is shown as a current liability in the balance sheet. The apportionment of the amount for which services have been rendered is based on the following formula :

Amount of Invoice X Number of days for which the service is yet to be rendered Total Number of days for which the service is to be rendered It is also stated that out of unearned income, it may happen that the company has not rendered any service at all, to some of the parties during the subject year, for example where the invoice is raised very close to March 31 of the financial year, even though the invoice for these services was raised during the relevant financial year. It is further stated that as per Schedule N to the Balance Sheet for the year ended March 31 2007, the company had the following accounting policy with regard to revenue recognition for the data base service and maintenance support services.

“Revenue Recognition

…. iii) Subscription revenue from data base products is recognized equally over subscription period. iv) In respect of Software Consultancy and Support Services, income is recognized based on proportionate completion method as per specific agreements with the customers.”

It is also submitted that as per AS-II notified by the Central Government a change in accounting policy shall be made only if adoption of a different accounting policy is required by statute or if it is considered that the change would result in a more appropriate preparation or presentation of financial statements by an assessee.

The ld. counsel of the assessee drew our attention to p.13 of the Paper Book(PB) which mentions Rs. 1,02,33,944/- as unearned revenue as ‘Current Liabilities’. He also referred to p. 15 of PB which mentions ‘Revenue Recognition’ as narrated here-in-above. He then referred to ‘Change in Accounting Policy’ at p. 17 of the PB which reads as under :

“ During the year, the Company changed its revenue recognition policy in respect of subscription to database products so as to comply with the requirements of Accounting Standard 9 – ‘Revenue Recognition’ issued by the Institute of Chartered Accountants of India. Hitherto, the Company would recognize subscription revenue in accordance with the payment terms agreed with customers, rather than recognizing equally over the subscription period . Had the Company not made such a change in its revenue recognition policy, the subscription/ data content feed revenue and the profit before tax for the year would have been higher by Rs. 7,919,514/.”

The ld. counsel submits that ‘proportionate complete method’ has been followed in respect of accounting policy of recognizing revenue from “AMC” contracts by the assessee-company in A.Y. 2006-07, 2007-08, 2008-09 & 2009-10. In respect of accounting policy of recognizing revenue from data subscription contracts ‘as per terms with client’ has been followed in A.Y. 2006-07, whereas ‘proportionate complete method’ has been followed in A.Y. 2007-08, 2008-09 & 2009-10. It is also stated that it has been accepted by the Department in the above assessment years.

Reliance was placed by him on the decision in the case of Xerox India Ltd. vs. DCIT (2015) 55 taxmann.com 29 (Delhi-Trib.); Dr. Aman Khera vs. DCIT (2012)138 ITD 443; ACIT vs. Mahindra Holidays and Resorts (India) Ltd. (2010) 39 SOT 438 (Chennai (SB); CIT vs. Dinesh Kumar Goyal (2011) 331 ITR 10 (Del); DCIT vs. TVS Electronics Ltd. (2012) 52 SOT 287 (Chennai); CIT vs. Bank of Rajasthan Ltd. (2010) 326 ITR 526 (Bom); CIT vs. West Coast Paper Mills Ltd. (1992) 193 ITR 349 (Bom).

The ld. counsel thus submits that the order of the ld. CIT(A) upholding the addition of unearned income is contrary to the provisions of the Act.

3.4 The case was fixed for clarification on 27.10.2016. We brought to the notice of the ld. counsel of the assessee the decision in the case of CIT vs. Tanjore Permanent Bank Ltd. (1984) 149 ITR 788, 793 (Mad), Madura Coats Ltd. vs. CIT (1986)158 ITR 697 (Mad), CIT vs. H. Krishna Vijoy Arora [2012] 20 taxmann.com 655 (Ker.), CIT vs. Smt. Pushpa Vijoy [2012]206 Taxman 22 (Ker.) and ITO vs. Shri Anupallavi Finance & Investments [2011] 9 taxmann.com 163 (Chennai) wherein it has been held that a tax credit can be given only in cases where the tax is paid on the income in respect of which deduction has been made at source and which is offered for assessment. The issue here is the taxability of Rs. 1,02,33,944/- in A.Y. 2007-08 or A.Y. 2008-09. The assessee has claimed TDS on the above amount in A.Y. 2007-08. The AO wants to bring the above income to tax in A.Y. 2007-08. The ld. counsel of the assessee submits that the said income be taxed in A.Y.2008-09. We also brought to the notice of the ld. counsel of the assessee the implication of section 199 of the Act. At the request of the ld. counsel the case was fixed for hearing on 25.11.2016. Besides the decisions mentioned at para 3.3 here-in-above, the ld. counsel relied on the decision in the case of DCIT vs. Rajeev G. Kalathil (2014) 51 taxmann.com 514 (Mumbai-Trib.).

3.5 The ld. counsel of the assessee submitted that he would not like to press for the admission of additional evidence as submitted on 18/12/2015. Therefore, the application of the assessee to file additional evidence u/r 29 of the Appellate Tribunal Rules, 1963 is dismissed as not pressed.

3.6 The ld. DR supports the order of the ld. CIT(A) upholding the addition of Rs. 1,02,33,944/- made by the AO on the reason that the assessee is following mercantile system of accounting and it has raised invoices during the year under consideration. And also the fact that the assessee has claimed the entire credit for TDS during the year under consideration.

3.7 We have heard the rival submission and perused the relevant material on record. We find that in its letter dated 2.2.2010 the ld. AR of the assessee had written to the AO stating that in the assessment order passed u/s 143(3) dated 29.12.2009 tax demand of Rs. 85,33,617/- (including interest) has been raised on the assessee on account of additions of Rs. 1,03,34,498/- made in the returned income. Also it has been stated by the ld. AR before the AO that the assessee-company has claimed TDS of Rs. 40,26,876/- in the return of income. It is not in dispute that the assessee has claimed the credit for TDS in the year under consideration. Let us look into section 199 of the Act. It reads as under :

“(1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of property or of the unit-holder, or of the shareholder, as the case may be.

(2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made.

(3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rule for the purposes of giving credit to a person other than those referred to in such-section (1) and sub-section (2) and also the assessment year for which such credit may be given.”

3.7.1 The ld. counsel of the assessee relied on certain decisions to which we shall turn now.

In Xerox India Ltd.(supra), till just immediate preceding year, the assessee was recognizing revenue at time of sale of certain equipments which were sold subject to condition of installation at premises of the customers. However, from relevant assessment year, assessee changed its accounting policy and recognized sales of its product/equipment on completion of installment and acceptance of equipments at customer’s premises. The AO made certain addition rejecting such change. It was held by the Tribunal that since changed accounting policy was as per AS-9 and it had been consistently followed thereafter, addition made by the AO was to be deleted.

In Dr. Aman Khera(supra), the issue was whether since the assessee had not rendered services for period of five years, entire amount could not be considered as income in year of receipt and, hence, assessee correctly declared his income in proportion to period for which services were rendered.

In Mahindra Holidays and Resorts (India) Ltd. (supra), the issue was whether where assessee was engaged in business of selling timeshare units in its various resorts, entire amount of timeshare membership fee receivable by it at time of enrolment of member was not income chargeable to tax in initial year on account of contractual obligation that was fastened to receipt.

In Dinesh Kumar Goyal (supra), the fact is that the assessee , who was running a coaching institute, took total fee of entire course, which might have been of two years duration from students at the time of their admission. It claimed that said fee taken in advance, did not belong to the relevant assessment year alone as it was related to next assessment year as well and, therefore, fee, to that extent, would not be taxable in relevant assessment year but would be shown as receipt in next year. The assessee’s contention was upheld by the appellate authorities.

In TVS Electronics Ltd. (supra) the fact is that in respect of AMCs, the assessee had offered for taxation pro rata income relating only to the relevant assessment year. The issue was whether the amount received by the assessee while entering into AMCs was nothing but advance, which on progress of each day got converted into revenue. It was held by the Tribunal that the assessee was justified in its claim that income relatable to unexpired period of AMCs could be considered only in subsequent year.

In Bank of Rajasthan Ltd.(supra), the issue related to the accounting system followed by the assessee in respect of income received in advance. This income consisted of commission, exchange and discount, including locker rent . During the course of the previous year, income from these sources was accounted for on a receipt basis. As a result of change in the method of accounting followed by the assessee, while continuing with the mercantile system of accounting, the assessee had accounted for the receipts in relation to the year in which payment had accrued. The AO made an addition on the ground that the change in the method of accounting resulted in lower profits to that extent. The Hon’ble High Court held that the CIT(A) as well as ITAT arrived at a finding that the change in the method of accounting was not detrimental to the interest of the revenue and therefore it was to be accepted.

In West Coast Paper Mills Ltd. (supra) the question was whether assessee could claim deduction on both cash and provision basis. It is held that ‘In case the assessee had changed its method from mercantile to cash system, it might have been that in the year of change no deduction could have been claimed or allowed. However, that was no reason for not allowing the claim on the basis of changed method so far as the change was concerned and on the earlier method if the liability in regard thereto had not already been allowed as deduction.’

In the above cases, the assessees have not claimed TDS during the concerned assessment year. The implication of section 199 of the Act is absent in the above cases. In the instant appeal, the assessee has claimed the credit for TDS in the year under consideration. There is definite application of section 199 of the Act in the instant appeal. Therefore, the case of the assessee is distinguishable from the decisions mentioned here-in-above relied on by the ld. counsel.

In DCIT vs. Rajeev G. Kalathil (supra) relied on by the ld. counsel , the Tribunal has held that “It is a fact that deduction of tax for the payment is one of the deciding facts for recognize the revenue of a particular year. But TDS in itself does not mean that the whole amount mentioned in it should be taxed in a particular year deduction of tax and completion of assessment are two different things while finalizing the tax liability of the assessee and AO is required to take all the facts and circumstances of the case not only the TDS certificate. Considering the peculiar facts and circumstances, we are of the opinion that order of the FAA with regard to the TDS does not suffer from legal infirmity.” The Tribunal has clarified that its order in this case is based on the peculiar facts and circumstances. Also the Tribunal has held that deduction of tax for the payment is one of the deciding facts for recognizing the revenue of a particular year.

3.7.2 In Padmasundra Rao v. State of TN 255 ITR 147 (SC), it has been held that reliance should not be placed on a decision without discussing how the factual situation fits in with the factual situation of the decision on which reliance is placed. Also it was held in the above decision that circumstantial flexibility, e.g. one additional or different fact, may make a world of difference between conclusions in two cases.

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 out- flow 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.

3.7.4 The heart of AS 9 “ Revenue Recognition” 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.

3.7.5 In Tanjore Permanent Bank Ltd. (supra), it has been held that a tax credit can be given only in cases where the tax is paid on the income in respect of which deduction has been made at source and which is offered for assessment. In the case of Madura Coats Ltd. (supra), it has been held that an assessee, in whose hands a particular income is not taxed, is not entitled to get the credit in respect of tax deducted at source in respect of such income.

In H. Krishna Vijoy Arora(supra), it has been held that credit of tax based on TDS certificates issued by bank in respect of interest income, which has not been assessed in assessment of assessee, should be allowed in year in which subject matter of deduction of tax is assessed .

In Smt. Pushpa Vijoy (supra) , it has been held that the assessee is entitled to credit of tax based on TDS certificate only in assessment year in which income from which tax is deducted is assessed .

In Shri Anupallavi Finance & Investments (supra), it has been held that credit for TDS u/s 199 is to be allowed in year in which corresponding income is assessable to tax.

3.7.6 The Hon'ble Supreme Court in Sir Kikabhai Prem Chand v. CIT [1953] 24 ITR 506 has held that : 'For income-tax purposes, each year is a self-contained accounting period and one can only take into consideration income, profits and gains made in that year and not potential profits which may be made in another year.' Also the Hon'ble Supreme Court in P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 has held that : 'Under the IT Act for the purpose of assessment each year is a self- contained unit and in the case of a trading adventure the profits have to be computed in the manner provided by the statute.' Therefore, there is no merit in the contention of the ld. counsel that the aforesaid advance/unearned revenue of Rs. 1,02,33,944/- has been duly disclosed and offered to tax in the subsequent year. The assessee is free to take remedial measures permissible in law in the A.Y. 2008-09 where it has claimed to have offered the said income.

3.7.7 The Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) has held 'It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1970] 77 ITR 857 (CA), the Income-tax law does not march step by step in the footprints of the accountancy profession.' 3.7.8 In CIT. v Eli Lily & Co. (2009) 312 ITR 225 (SC), the Hon’ble Supreme Court has held that “Consequently, it cannot be said that the TDS provisions which are in the nature of machinery provisions to enable collection and recovery of tax are independent of the charging provisions which determine the assessibility in the hands of the employee.” Also it has been held therein that “Sec. 4 is the charging section. Under s. 4(1), total income for the previous year is chargeable to tax. Section 4(2) inter alia provides that in respect of income chargeable under sub-s (1), income tax shall be deducted at source where it is so deductible under any provision of the 1961 Act, which inter alia brings in the TDS provisions contained in Chapter XVII-B. In fact, if a particular income falls outside s. 4(1) then TDS provisions cannot come in.” In CIT v. B.C.Srinivasa Setty (1981) 128 ITR 294(SC), the Hon’ble Supreme Court has held that the charging section and the computation provisions together constitute an integrated code.

3.7.9 The present factual matrix is to be tested on the anvil of the above enunciation of law. In the light of the decisions referred here-in-above, the order of the ld. CIT(A) upholding the addition of Rs. 1,02,33,944/- made by the AO is confirmed. Therefore, the third ground of appeal filed by the assessee is dismissed.

During the course of hearing, the ld. counsel of the assessee submitted that the AO has not yet acted upon the rectification application filed by the assessee on 2.2.2010. We direct the AO to give TDS credit after proper verification and as per the provisions of the Act. The assessee is directed to furnish the details before the AO and the assessee shall be given a reasonable opportunity of being heard on this point. Thus ground number 5.1 is allowed for statistical purpose.

The levy of interest is mandatory though consequential. We order accordingly.

Order pronounced in the open court on 09 /12/2016.