Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH C: NEW DELHI
Before: SHRI H.S.SIDHU & SHRI PRASHANT MAHARISHI
ORDER PER PRASHANT MAHARISHI, A. M. 1. This appeal filed by the Department against the order dated 24.01.2011 of learned Commissioner of Income-tax (Appeals)-XJII, New Delhi for the Assessment Year 2006-07. 2. The following grounds of appeal has been raised by the revenue:- "1. On the facts and circumstances of the case and in law, the Cl'I' (A) has erred in deleting the addition of Rs.62,98,8121- made by AO on account of change in the accounting method of the company.
2. On the facts and circumstances of the case and in law, the CiT (A) has erred in deleting the addition of Rs.61,54,2831-on account of provisions for license purchase.
3. On the facts and circumstances of the case and in law, the Cl'I' (A) has erred in deleting the addition of Rs.23,10,6231-on account of provision for commission. "
3. This appeal is filed on 21 st of March 2011 by the Revenue. First time this appeal was fixed for hearing on 30105/2011. Subsequent to that, hearing up to 05/05/2015 matter was adjourned at the request of the assessee. On the next date of hearing on 05/05/2015, it was adjourned at the request of the Learned DR. Subsequently, on 15/12/2015 an adjournment request was moved by Revenue stating that Ld. CIT (A) has admitted additional evidences without allowing opportunity to the assessing officer which is in violation of the provisions of rule 46A of the Income Tax Rules, 1962. Hence revenue would like to take an additional ground of appeal and therefore the matter may be adjourned. Therefore, LD DR submitted ~~ .\ ~ --------------------~--~-=~~~--~- that a reminder letter has been issued to the assessing officer for amending and filing additional ground of appeal before the tribunal therefore adjournment was sought. On the request of learned DR, this case was adjourned to 3rd of March 2016. On 3rd of March 2016 on request of the DR this matter was further adjourned to 7/03/2016. On 7/3/2016, due to paucity of time and prolonged hearing of other matters, this matter was adjourned with the consent of both the parties to next day, i.e. 8/3/2016. However on 8/3/2016, Learned DR submitted an application for adjournment of hearing stating that an additional ground which was required to be filed by the Assessing officer has not so far been filed and therefore the matter may be adjourned. For this the Ld. DR submitted that AO has been requested vide letters dated 30.11.2011 for raising additional ground of appeal. Further reminders were sent to AO by Ld. DR on 13.4.2012, 1.10.2014, 14.12.2015,01.03.2016 and 4.3.2016. We have considered carefully the request of learned DR and also perused his sincere efforts made for raising of the additional grounds of appeal before ITAT. However we have further noted that office of the LD DR has intimated and advised the office of Assessing officer for raising the additional grounds on six times however there is no response from the office of the AO.
Hence we presume reasonably that in his own wisdom, CIT and Assessing officer both are not of the opinion that this ground is required to be raised either in absence of any additional evidence or on the issues involved in the appeal. Any way additional ground is not raised till the date of hearing of the appeal. Further as this matter is pertaining to A Y 2006-07 and issued involved therein are also not complex and on reading of the order of CIT (A) we also could not locate mention about any additional evidence filed by assessee before CIT (A).
Learned AR also informed that no such additional evidences were filed by assessee before CIT (A). Hence we do not accede to the request for adjournment and proceed with the matter with the consent of the parties.
A brief fact of the case, that appellant is a private limited company engaged in the business of development of various software program and providing ERP solutions. The company filed on 15th of December its return of income 2006, declaring total income of Rs. 8328649/-.
Assessment under section 143(3) ofthe Act has been passed by the assessing officer on 24th of November 2008. The 15tground of appeal is against the deletion of addition of Rs. 6298812, made by assessee 5. officer on account of change in the accounting method of the company. Till now the company was recognizing revenue from annual maintenance service contracts on the basis of bills raised to clients. However, from the current year, the assessee decided to change its accounting policy and has recognized revenue from the services on the basis of period involved in the maintenance contract. It was mentioned in the notes on accounts of the balance sheet of the company that due to this change profit before taxation for the year is lower by Rs. 6298812/-. Therefore, AO was of the view that due to this change the profit has reduced substantially and the original accounting policy is consistently followed by the assessee, therefore change in the method of accounting is not bonafide. Hence, he made an addition of Rs. 6298812 to the income of the assessee. Assessee being aggrieved with the order of AO preferred an appeal before CIT (A). Learned CIT (A) deleted the addition because accounting standard 9 on revenue recognition issued by lCAI this change has become essential. It was also observed by CIT (A) that the method now being followed by the assessee is based on accrual method of accounting. Therefore, the change in the method is bonafide and hence he deleted the addition. Therefore revenue is in appeal before us in ground No. 1.
The learned DR relied upon the order of assessing officer and submitted that that the profit has reduced substantially because of change in method of accounting employed by the assessee, further it is not a bonafide change and hence, should be rejected. He further submitted that the CIT (A) has admitted new evidence as per page No.6 of the appeal order of CIT (A) wherein as per reply dated 13/05/2010 certain bills of annual maintenance contracts and comparative statement of revenue was taken on record by CIT (A) without giving an opportunity of hearing to the Assessing officer. Therefore, he stated that the order of the order of the assessing officer may be upheld. Against this Ld. authorized representative of the assessee submitted that that the method of accounting now employed by assessee is a prudent method of accounting and now it does not give any freedom to the assessee to offer income at the time of raising of the bills irrespective of the time when services are rendered, but to offer income now only on the basis of the period of maintenance contract. Therefore, it was submitted that now assessee is following strong accounting policy which is better than the earlier. He further submitted that that method of accounting is also supported by accounting standard issued by Institute of chartered Accountants of India. He submitted that the assessing officer has misunderstood the wall change in accounting policy recorded by the assessee in the balance sheet of the company. He further submitted that the evidence submitted by the assessee before CIT ((A) are not additional evidence but copies of the bills to whose that revenue is recognized on time basis with illustration. The comparative income and expenditure statement was submitted to show how the income has been offered compared to earlier years. Hence, he supported the order ofCIT (A).
We have carefully considered the rival contentions and also the accounting policy mentioned by the assessing officer. It is an accepted fact that till now the company was recognizing revenue as and when bills are raised by the assessee on the client for annual maintenance contract services. N now this practice has been changed and the income is being offered by the company on the basis of time period for which the annual contract is in force. Therefore, now there is a certainty of offering income to the revenue. Otherwise if the income is offered at the time of raising of the bills as it was done till now, it gives lot of discretion to the assessee to offer this income for taxation at its sweet will. We are of the view that that the change in the method of accounting is more appropriate and in is in consonance with the accounting standard 9 issued by the ICAI. It was provided in that accounting standard with respect to sale of services that "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 so some other method better represents the pattern of performance./I On query by the bench about the subsequent years Learned AR submitted that that the revenue has accepted this policy. Learned DR contrarily argued that that there is no downfall in the profit in subsequent years, and therefore it has not been disturbed whereas in this year it is not accepted because of the reason that the profit has gone down substantially. On understanding of both the accounting policies one of recognizing revenue at the time of raising of the bill and 2nd recording of the revenue on the basis of time, we are of the view that policy of recognizing revenue on period basis is sounder. Therefore, we are of the opinion that from an incorrect and flawed accounting Policy Company has now adopted a sound accounting policy. Secondly, when in subsequent years, the revenue itself has accepted the changed accounting policy of the company on period basis. The assessee being company which is required to maintain its books of accounts in accordance with section 209 of The Companies Act, 1956 on accrual basis. The principle of accrual is violated if the revenue is recognized at the time of raising of the bill irrespective of period of rendition of services. Therefore according to us this policy is also in accordance with the Companies Act
1956. Merely because there is down fall in profit of the company due to change in accounting policy cannot lead to a conclusion that it is not bonafide. Regarding additional evidences filed by the assessee as submitted by the learned DR, we are of the view that the assessee has submitted the copies of those bills only to explain the accounting of the Annual maintenance
Income. Further the comparative chart was verified by CIT (A) was to know about any leakage of revenue. Hence, we are of the view that the accounting policy followed by the company is bonafide and consistent with the accounting standard 9 of ICAI on 'Revenue
Recognition', Income Tax Act as correct profit would be deduced on following this policy and section 209 of The Companies Act, 1956. Therefore, we confirm the order of CIT (A) in deleting the addition ofRs. 6298812/-. nd ground of appeal is against the deletion of addition of Rs. on account of provision for 8. The 2 license purchases. The brief facts of the issue is that assessee has debited as some of Rs.
6154283/-being provisions for license purchases during the course of assessment proceedings, AO asked about the detail of these expenses. During hearing copy of Ledger account of license purchase was submitted and it was further submitted by the assessee that out of the aforesaid sum of Rs. 6154283/- a sum of Rs. 2310623/- has been reversed.
However, the assessing officer held that the provision for license purchase are being made without any basis and made an addition of Rs. 6154283/-. Against this, assessee preferred an appeal before CrT (A) who in turn deleted the addition. The CIT appeal was of the view that the provision for license purchase expenses is a crystallized liability and is not based on estimated. Against this order revenue is in appeal.
Learned DR relied on the order of assessing officer and submitted that that the details of the purchases provisions is on estimated basis and is not a crystallized liability as held by CIT
(A). Against this Ld. AR relied on the order of CrT appeals and submitted that the liability provided for in the books is ascertained, crystallized and not contingent and therefore it should be allowed.
\
we have carefully considered the rival contentions and we are of the view that if the purchase
provisions made by the assessee for the purpose of license fees is on sound basis supported by evidences then it is to be allowed to the assessee. On query by the bench, Ld. AR was asked to show how the purchase provision is made. In response to that he submitted a statement which was before lower authorities, wherein details of the provision of Rs.
6154283/- and the details of reversal from that account of Rs. 2310623/- was available which was a wrong accounting entry. Therefore actual provision was of Rs 38,43,660/- only. This amount tallies with the statement submitted by the assessee. We have perused statement where the details of sales invoice, date of invoice, party wise amount payable and a product wise bifurcation, amount of sales, name of the supplier, date of payment made to supplier was available. In view of this, we are of the opinion that the liability provided by the assessee is quantified, crystallized and not based on estimates. Hence, we do not see any reason for the confirming the disallowance of this amount. In the result we confirm the finding of the CIT (A) while deleting the addition of Rs. 6154283/- being provision for license purchases in the result ground No.2 of the appeal is dismissed. 3rdground 11. The of appeal is against deletion of addition of Rs 2310623/- on account of provision for commission. The brief facts about this ground of appeal are that assessee has made a provision of RS. 2310623/- on account of commission. During the course of assessment proceedings assessee was asked to justify the claim for provision of commission expenses. However, before the assessing officer no such details were provided hence disallowance was made of Rs. 2310623/-. On appeal before the CIT (A) he deleted the disallowance. Therefore revenue is in appeal before us.
Ld. DR submitted that before AO no detail of justification of commission was furnished
therefore disallowance is made by AO. He relied on the order of AO. He submitted that the CIT (A) has admitted additional evidence without giving an opportunity to the assessing officer to verify those details and therefore the order is invalid.
Ld. AR submitted that that to procure Business Company entered into an agreement with one company and as per the terms of memorandum of understanding with that company assessee company was liable to pay 18% of the software sales as commission. This commercial transaction is followed by the company since assessment year 2003 - 2004 onwards and In the past there is no change in the terms of agreement in assessment year 2006 - 2007. these expenditure have been allowed and therefore, this may also be allowed in this year. It was submitted that copy of the working of the purchase provision submitted before AO was also submitted before CIT (A). Before AO it was contended that copy of the commission account and the working of purchase provision was already submitted and regarding justification it was submitted that commission was payable as per the existing agreement with the party. Learned AR relied on the order ofCIT (A) stated that after verification of the all the details disallowance is deleted which is on the same facts and circumstances and the evidences furnished before the AO. He contended that there is no evidence which has been submitted by the assessee before CIT (A) which was not available before the assessing officer. He further submitted that the detail of the commission was already there. The amount of commission expenditure was already allowed to the assessee in past several years, therefore, it cannot be said that this information was not available before the assessing officer. In view of this is submitted that the order ofthe CIT (A) may be confirmed.
We have carefully considered the rival contentions and we are of the view that the CIT (A) has deleted this addition which is based on the agreement of the assessee with BAehal Software Ltd since 2003 According to that agreement assessee was liable to pay 18% of the license fee earned as a commission to that particular party and this commission expenditure is being paid since assessment year 2003-2004, and there is no change in the circumstances of the case. It was further submitted that the moment the sale price is billed to customer commission accrues to the service provider. Therefore, the commission is based on sales effected by the company. CIT (A) also considered that a sale of Rs. 1,28,36,798/-has been booked and commission at the rate of 18% calculated and is payable in terms of that particular agreement, therefore, there is a crystallized liability and was not a contingent liability and the fact of payment of commission at the rate of 18% on sales is available with the assessing officer and commission expenditure exactly matches with the agreement. We with the CIT (A) and not with AO also could not find that what new evidence were available when the percentage of commission is fixed and the recipient of income is also fixed. The genuineness of the expenditure is not at all doubted and the facts that commission is paid to the party since AY 2003-04 expenditure is not disputed, therefore, we confirm the order of the CIT (A) deleting the disallowance of Rs. 23106231- on account of the commission expenditure.
15. In the result appeal of the revenue is dismissed.
In the result appeal of the revenue is dismissed.