2010 (10) TMI 287 - HC - Income Tax

Advance fees for full-course packages treated as deposits, taxable only when services are rendered in the year earned

Commissioner of Income-tax Versus. Dinesh Kumar Goel

HC affirmed Tribunal: under the mercantile system fees taken in advance for full-course packages constitute deposits, not income, until services are ... Income accrues or arises or is deemed to accrue or arise - Mercantile system of accounting - Fees for full course of package received in advance - Service to be rendered in next financial year - income not recognized unless service rendered - expressions 'accrues,' 'arises' and 'is received' - sales of unexecuted packages in the beauty and slimming business - HELD THAT:- We are not in a position to take a view different from what is taken by the Tribunal in the instant case. In the facts of this case, it is apparent that at the time of admission, the students are required to deposit the whole fee of the entire course, but that would only remain a 'deposit' or 'advance' and it cannot be said that this fee had become 'due' at the time of deposit. Fee is charged in advance for the entire course, presumably because of the reason that there should not be any default in making the said fee by the students during the period of course. Interestingly, the Assessing Officer in his assessment order has himself stated that 'students were required to deposit the fee for the whole module of course at the time of registration itself'. The Assessing Officer has used the expression 'deposit'. In the very next breadth, he draws the conclusion that this would mean that the fee had become 'due'. Thus, the Assessing Officer knew the significance of the expression 'deposit' vis-a-vis 'due', though he committed the mistake in treating the said deposit as the fee becoming due. When we apply the principles of law laid down in E.D. Sassoon and Co. Ltd. [1954 (5) TMI 2 - SUPREME COURT] and Calcutta Co. Ltd. [1959 (5) TMI 3 - SUPREME COURT], it becomes apparent that the fee was not due at the time of deposit. The services in respect of the financial year 1997-98, for which also the payment was taken in advance were yet to be rendered. Therefore, applying the principle in the case of Calcutta Co. Ltd., this could only be treated as advance otherwise it would lead to an anomalous situation, highly derogatory to the assessee, which is not intended in law, viz., even when the very amount received, expenses are to be deducted to arrive at the net income and those expenses are yet to be incurred (which may be incurred in the next financial year), the entire receipts become income which would be exigible to much higher tax. We, thus, answer the question in the affirmative and as a consequence, dismiss these appeals. The term 'accrual' relates to revenues earned or cost incurred. Two things follow from this, viz., unless the revenue is earned, it is not accrued. Likewise, the expenses unless are incurred, cost in respect thereof cannot be treated as accrued. Secondly, it recognizes the matching concept, viz., receipts are to be matched income to arrive at the net income, which would then be exigible to tax. In the case of CIT v. Woodward Governor India (P) Ltd.[2009 (4) TMI 4 - SUPREME COURT], the Supreme Court, albeit, in other context, explained this concept. The receipts relate to the unexecuted packages, which are not shown in the instant year would be shown in the succeeding year. Rate of tax in respect of companies remains the same in all these years. Therefore, the Revenue does not lose anything, as it would receive the tax on this income in the succeeding year. Issues Involved:1. Whether the tuition fees received in advance by the assessee should be treated as income for the year of receipt or the year in which services are rendered.2. Whether the sales of unexecuted packages in the beauty and slimming business should be treated as income for the year of receipt or the year in which services are rendered.Detailed Analysis:Tuition Fees Received in Advance:Facts:- The assessee, running a coaching institute, collected the total fee for a course at the time of admission.- For the assessment year 1997-98, the assessee filed a return showing income from tuition fees but later revised it, claiming a deduction for fees related to the next financial year.Assessment Officer's (AO) View:- The AO denied the deduction, arguing that under the mercantile method of accounting, income becomes taxable when it falls due, not when it is received.- The AO concluded that the fees were due during the financial year 1996-97 based on the requirement that students pay the entire fee at registration.Commissioner of Income-tax (Appeals) View:- The Commissioner allowed the deduction, stating that the fees received were advances and not income since services were yet to be rendered.- The Commissioner cited Supreme Court judgments to support the view that income accrues only when services are rendered.Income-tax Appellate Tribunal (ITAT) View:- The ITAT upheld the Commissioner's decision, noting a Consumer Forum decision that mandated the refund of fees for unrendered services, reinforcing that the fees were advances.High Court's Analysis:- The court referred to Section 5 of the Income-tax Act, which includes income that accrues or arises during the year.- It emphasized that income should accrue when there is a right to receive it, which happens upon rendering services.- The court agreed with the ITAT and Commissioner that the fees were advances, not income, as services were yet to be rendered.- The court cited several judgments, including E. D. Sassoon and Co. Ltd. and Calcutta Co. Ltd., to support its conclusion.Conclusion:- The High Court affirmed the ITAT's decision, holding that the fees received in advance were not income for the year of receipt but for the year in which services were rendered.Sales of Unexecuted Packages in Beauty and Slimming Business:Facts:- The assessees, operating under the brand name VLCC, provided beauty and slimming services and collected the entire fee in advance.- The assessee treated part of the sales as 'unexecuted packages' and did not show them as income for the year of receipt.High Court's Analysis:- The court noted that the principle applied in the case of M/s. Fiitjee regarding advance fees also applied here.- It referred to Section 145 of the Income-tax Act and Section 211 of the Companies Act, which mandate adherence to accounting standards.- The court highlighted Accounting Standard (AS) 9, which states that revenue from services is recognized as they are performed.- The court emphasized the matching concept, where revenue should match the expenses incurred to earn it.- It cited the Supreme Court's judgment in CIT v. Bilahari Investment (P) Ltd., which supported the matching concept.Conclusion:- The High Court concluded that the sales of unexecuted packages were not income for the year of receipt but for the year in which services were rendered.- The court dismissed the appeals, noting that the Revenue does not lose anything as the tax rate remains the same in subsequent years.Final Judgment:- The appeals were dismissed with costs, and the court criticized the Revenue for raising issues that do not affect the overall tax liability. The Revenue was directed to pay costs to the library fund of the Delhi High Court Bar Association.