2014 (9) TMI 725 - HC - Income Tax

Court affirms deferred income allocation over years, rejects Section 68 addition, upholds future obligations.

Commissioner of Income Tax-X Versus Smt. Paramjeet Luthra

Commissioner of Income Tax-X Versus Smt. Paramjeet Luthra - [2015] 371 ITR 306 (Del) Issues Involved:1. Addition of Rs. 60,70,492 under Section 68 of the Income Tax Act, 1961.2. Treatment of income from annual maintenance contracts for medical equipment.3. Matching of income with expenditure.4. Application of Section 68 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Addition of Rs. 60,70,492 under Section 68 of the Income Tax Act, 1961:The Assessing Officer (AO) had made an addition of Rs. 60,70,492 to the respondent-assessee's income under Section 68 of the Income Tax Act, 1961. The respondent-assessee, a proprietor of M/s International Surgical Agency, had received a commission of Rs. 1,41,33,516 for the sale and maintenance of medical equipment. The AO observed that the respondent-assessee had bifurcated the commission amount, treating 39% (Rs. 55,12,088) as expenditure for maintenance over five years, which was excluded from the returned income for the assessment year in question. The AO did not accept this bifurcation, arguing that the entire amount should be taxed in the year of receipt.2. Treatment of Income from Annual Maintenance Contracts for Medical Equipment:The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO's finding, noting that the respondent-assessee's work involved installation and maintenance of medical equipment, with an obligation to provide maintenance for five years with spares and another five years without spares. The CIT(A) accepted the respondent-assessee's allocation of 39% of the commission as deferred income to be taxed proportionately over five years. The CIT(A) found merit in the respondent-assessee's submission that maintenance costs would increase over time due to wear and tear. The CIT(A) also noted that no maintenance income was allocated for the assessment year 2007-08 as the equipment was installed at the end of the year.3. Matching of Income with Expenditure:The CIT(A) and the Tribunal both affirmed that the matching principle should apply, where income is matched with the corresponding expenditure. The CIT(A) referred to the decision in Mahindra Holidays & Resorts (India) Ltd. and the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. vs CIT, which supported the deferral of income to match future obligations. The Tribunal also noted that the respondent-assessee had provided scientific calculations and that the deferred income was taxed in subsequent years.4. Application of Section 68 of the Income Tax Act, 1961:The Tribunal observed that invoking Section 68 was not warranted as the source and genuineness of the credit entry of Rs. 1,41,33,516 were never in doubt. The Tribunal noted that the addition of Rs. 60,70,492 was not related to unexplained cash credits but to the deferred income from maintenance contracts. The Tribunal and the CIT(A) both concluded that the AO's addition under Section 68 was based on incorrect assumptions and a lack of proper appreciation of the facts.Conclusion:The High Court dismissed the appeal, affirming the findings of the CIT(A) and the Tribunal. The court held that the entire amount received for maintenance contracts could not be taxed in one year as the respondent-assessee had future obligations and corresponding expenditures. The court also noted that the matching principle applied, and the deferred income was correctly allocated over the subsequent years. The addition under Section 68 was found to be unjustified as the source and genuineness of the income were not in question.