2016 (11) TMI 1584 - AT - Income Tax

Freezer deposits not taxable until agreement termination. Revenue appeals dismissed, CIT(A)'s orders upheld.

The Asst Commr of Income Tax Corporate Circle1 (2) Kochi Versus High Range Foods P Ltd, M/s Kreem Foods Pvt Ltd and The Dy Commr of Income Tax Circle1 Alleppy Versus M/s Creampacks P Ltd, M/s Kreem Drinks Pvt Ltd

The Tribunal confirmed that the freezer deposits received by the assessee were not taxable income until the termination of the distributor agreement. ... Accrual of income - Taxability of freezer deposits received by the assessee from its vendors - Held that:- In assessee’s own case, the division bench of the Tribunal have decided the matter in favour of the assessee, by following the earlier orders of the Tribunal. Besides the assessee never treated this as income in the books. The assessee consistently holding it so as the amount attached with a liability to refund. The assessee never admitted this amount as income in the books. Only accrued income arose to the assessee during the relevant previous year also can be brought to tax under the Income-tax provisions which is a settled law. There must be a debt owned to the assessee and until this is created in favour of the assessee as a debt due to the assessee, it cannot be said as income accrued. - Decided against revenue. Issues Involved:Taxability of freezer deposits received by the assessee from its vendors.Issue-wise Detailed Analysis:1. Taxability of Freezer Deposits:The primary issue in these appeals is whether the freezer deposits received by the assessee from its vendors should be treated as taxable income. The assessee, engaged in the business of manufacturing and marketing ice creams, issues freezers to its distributors as part of a trade promotion strategy. These freezers are provided against deposits, which depreciate by 25% annually, becoming non-refundable after four years.2. Assessing Officer's Stand:The Assessing Officer (AO) treated these deposits as taxable income, citing that the liability ceases after four years, and thus, the amount should be considered as income. The AO relied on the Supreme Court's decision in CIT Vs. T.V. Sunderam Iyengar and Sons, where it was held that amounts received in the course of a trading transaction become taxable when they become the assessee's own money due to limitation or contractual right.3. Assessee's Argument:The assessee contended that the income should only be recognized upon the termination of the agreement with the distributors. They argued that the decision in T.V. Sunderam Iyengar and Sons was distinguishable and that their system of accounting should not be disrupted as it was not rejected by the department.4. CIT(A)'s Decision:The CIT(A) ruled in favor of the assessee, following the Tribunal's decision in the assessee’s own case for the assessment year 2010-11. The Tribunal had previously held that such deposits could not be considered as income until the termination of the agreement.5. Tribunal's Analysis:Upon appeal by the revenue, the Tribunal upheld the CIT(A)'s decision. The Tribunal reiterated its earlier stance that the deposits collected for freezers could not be regarded as income as long as the agency agreement continued. They referenced their prior decisions in similar cases, emphasizing that the deposits are attached to a liability and should not be treated as income until the agreement is terminated.6. Pending Adjudication:Both parties acknowledged that the issue is pending adjudication before the Hon'ble Kerala High Court. However, no contrary judgment from the High Court was cited. The Tribunal, therefore, followed its earlier decisions and upheld the CIT(A)'s order.7. Conclusion:The Tribunal confirmed that the freezer deposits collected by the assessee could not be considered as taxable income until the termination of the agreement with the distributors. Consequently, all the appeals filed by the revenue were dismissed.Separate Judgments:As the issue in all the appeals was identical, the Tribunal delivered a consolidated judgment applicable to all cases.Final Order:The appeals filed by the revenue were dismissed, and the orders of the CIT(A) were upheld.Order Pronouncement:The order was pronounced in the open Court on November 16, 2016.