2019 (1) TMI 1597 - AT - Income Tax

Tribunal affirms revenue recognition method, dismisses appeal on un-accrued revenue addition.

DCIT, Circle-23 (2), New Delhi Versus Sistema Shyam Teleservices ltd.

The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 27,23,43,091/- on un-accrued revenue from prepaid card sales. It affirmed the ... Accrual of income - Addition on account of un-accrued revenue from the sale of prepaid cards - HELD THAT:- As decided in SHYAM TELELINK LTD. [2018 (12) TMI 585 - DELHI HIGH COURT] a right to receive a particular sum under the agreement would not be sufficient unless the right accrued by rendering of services and not by promising for services and where the right to receive is anterior to rendering of service, the income, therefore, would accrue on rendering of services. The appropriation of prepaid amount was contingent upon the assessee performing its obligation and rendering services to the prepaid customers as per the terms. If the assessee had failed to perform the services as promised, it would be liable and under an obligation to refund the advance payment received under the ordinary law of contract or special enactments, like the Consumer Protection Act. The aforesaid legal position would meet the argument of the Revenue that the prepaid amount received was not liable to be refunded or repaid, whether or not any services were rendered. - Decided in favour of assessee. Issues Involved:1. Deletion of addition of Rs. 27,23,43,091/- on account of un-accrued revenue from the sale of prepaid cards.2. Revenue recognition and the timing of tax liability on prepaid revenue.3. Liability of the assessee to refund unutilized talk value.Issue-Wise Detailed Analysis:1. Deletion of Addition of Rs. 27,23,43,091/- on Account of Un-Accrued RevenueThe core issue in this case was the addition of Rs. 27,23,43,091/- made by the Assessing Officer (AO) on account of un-accrued revenue from the sale of prepaid cards. The AO argued that this amount should be recognized as revenue in the books of accounts and taxed accordingly. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, following earlier orders of the co-ordinate bench and the decision of the Hon’ble jurisdictional High Court in the case of BTA Telecom Ltd.2. Revenue Recognition and Timing of Tax LiabilityThe AO contended that revenue should be recognized in the Profit & Loss (P&L) Account and taxes should be paid as soon as money is received. The CIT(A), however, followed the principle that revenue from service transactions is usually recognized as the service is performed, either by the proportionate completion method or by the completed service contract method, in accordance with Accounting Standards. The Tribunal confirmed that the assessee's method of accounting, which recognizes revenue proportionately as services are rendered, was appropriate and consistent with the principles of revenue recognition.3. Liability of the Assessee to Refund Unutilized Talk ValueThe AO argued that there was no liability on the part of the assessee to return unutilized talk value to the purchaser/consumer, and thus, the revenue should be recognized immediately. However, the Tribunal noted that the payment was an advance subject to the assessee providing telecom services as promised. If the services were not rendered, the unutilized amount would need to be refunded, aligning with the principle that every receipt is not income unless the assessee is legally entitled to it.Tribunal's Conclusion:The Tribunal, after considering the rival contentions and various judicial precedents, upheld the decision of the CIT(A) to delete the addition of Rs. 27,23,43,091/-. It emphasized that the method of accounting followed by the assessee, which is based on recognized accounting standards and principles, was appropriate. The Tribunal also highlighted that the revenue recognition should match the period in which the services are rendered, ensuring that the income is recognized proportionately over the period of service.Final Judgment:The appeal filed by the revenue was dismissed. The Tribunal confirmed that the issue was squarely covered by the decision of the Hon'ble Delhi High Court in the assessee's own case for earlier years, and thus, there was no merit in the grounds raised by the revenue. The order was pronounced in the open court on 25/01/2019.