2018 (1) TMI 1028 - AT - Income Tax

Tribunal Allows Pro-Rata Deductions, Rejects Notional Interest: Ensuring Accurate Financial Reporting

Sahara India Ltd. Versus Assistant Commissioner of Income-tax, Central Circle-III, Lucknow

The Tribunal upheld the mercantile system of accounting for the assessee, allowed deductions on a pro-rata basis for prize money, and rejected the ... Receipts of the assessee through their “Golden Key Scheme” - system of accounting - Applicability of section 145 - rejection of boos of accounts - alteration of system of accounting by the Ld. CIT(A) from mercantile system to cash - Held that:- There is hardly any doubt about the power, or rather the duty of the Tribunal, to adjudicate an issue raised before it. The adjudication may go either way. But to say that the Tribunal should not adjudicate an issue raised before it, is not right. Since both the sides raised such an issue in their respective appeals, it was required to be adjudicated by the Bench. As such question no. 1 is answered in positive that the Tribunal could adjudicate the issue of alteration of system of accounting from mercantile system to cash. Whether system of accounting to be adopted by the assessee should be cash or mercantile? - Held that:- It can be seen from the Scheme that the subscribers were required to pay full amount of ₹ 2500 in one go and they were to be given NSC worth ₹ 1000 each simultaneously. Prizes were to be distributed to the subscribers throughout the tenure of Scheme of 12 years. Such subscribers, who could not get any prize, were to receive gifts in the form of articles worth ₹ 2500 at the end of the Scheme. Therefore, it is apparent that under the mercantile system of accounting, the entire amount of ₹ 2500 per subscriber for the subscriptions - whether fully or partly paid during the year - accrues as income at the time of subscribing to the scheme. It also entails liability running throughout the period of 12 years in the form of prizes The position which will follow is that from the second year onwards up to 12th year, there will be deduction for expenses without there being any corresponding income. This divulges that if cash system of accounting is followed, it will result in an artificial higher income in the hands of the assessee in the first year, on which it will be liable to pay tax; and in all succeeding years there will be expenses only which will not get adjusted against any income. Following cash system of accounting in the given facts would give distorted position of the income in the first year which, is not correct. Therefore, agree with learned Judicial Member in approving the application of mercantile system of accounting in the given facts. Apart from the ld. AR, even the ld. DR has also supported the order of the ld. JM to the effect that mercantile system of accounting should have been followed instead of the cash system of accounting. It is therefore, held that the mercantile system of accounting should be adopted. Whether the assessee should be allowed deduction in the first year itself on account of Prize money payable in entire 12 years period? - Held that:- it is crystal clear from the opinions rendered by both the Ld. Members that they agreed that under the mercantile system of accounting the assessee should be entitled to prize money for the entire scheme running over 12 years during the first year itself albeit on pro rata basis. It shows that both the Ld. Members were of the same view and there is no difference of opinion between them as regards the deduction for prize money for the entire scheme during the first year of subscription itself on pro rata basis. If mercantile system of accounting is upheld then the question of discounting and application of pro rata in respect of deduction towards prize liability under the Golden Key Scheme should go back to the regular Bench for its decision as learned Accountant Member did not earlier adjudicate on this aspect - Held that:- As both the Id. Members agreed to the grant of deduction of full prize money for the 12 years period in the first year of subscription itself but on pro rata basis. The learned Judicial Member further held that discounting cannot be done and there is no view of the learned Accountant Member on the aspect of discounting. Therefore, it is patent that none of the ld. Members opined to restore the matter to the regular Bench for its decision on the question of discounting and application of pro rata in respect of deduction towards prize money. Once both the ld. Members upheld the deduction of the prize money on pro rata basis, the question proposing restoration to the Division Bench for fresh adjudication, cannot be said to arise from the views expressed by the Id. Members in their respective opinions. This question is therefore, held to be not arising from the orders proposed by learned Members and hence cannot be answered in the capacity of a Third member. Taxability of notional interest - Sahara India was acting as assessee’s agent for collection of subscriptions under the Scheme - Held that:- We cannot concur with the view taken by learned Judicial Member that the invocation of section 211 of the Contract Act amounted to setting up of a new case by the Revenue and would have the effect of enlarging the controversy. The issue of notional interest was very much before the tribunal. The ld. DR simply supported his point of view of charging notional interest on the strength of section 211 of the Contract Act as well. No new case, much less the enlargement of the controversy, was set up by this argument, as has been opined by the ld. JM. In fact, this argument was on the same subject matter, which was there before the tribunal for adjudication On merits, it is noticed that the assessee entered into an Agreement with Sahara India for collecting subscriptions from its Members and remitting the same to the assessee at the end of the each month. There is nothing in the Agreement that if the amount collected is retained beyond a period of 30 days, Sahara India would be liable to pay interest on such amount. There is no actual accrual or receipt of income to the assessee by allowing Sahara India to keep funds beyond the prescribed period of one month from the date of collection. It is not the case of the Assessing Officer that the assessee diverted interest bearing funds to Sahara India without interest for a non-business purpose. Thus No notional interest could be charged in the hands of the assessee due to delayed remittance of collection made by its agent, Sahara India. The Registry of the Tribunal is directed to list this matter before the Division bench for passing an order in accordance with the majority view. Issues Involved:1. Whether the Tribunal could adjudicate the issue when both the assessee and the Revenue challenged the alteration of the system of accounting by the CIT(A) from mercantile to cash.2. Whether the system of accounting to be adopted by the assessee should be cash or mercantile.3. Whether the assessee should be entitled to prize money for the entire scheme running over 12 years during the first year itself if mercantile system of accounting is to be adopted.4. Whether the proviso 1 appended to sub-section (1) of section 145 of the IT Act, 1961, could be invoked or not.5. Whether any notional interest could be added in the hands of the assessee due to the delayed remittance of collections made by their agent M/s. Sahara India in respect of the 'Golden Key Scheme'.6. Whether the dissenting Member could refer to certain case laws of different High Courts not cited by either side during the hearing of the appeals.7. Whether the question of discounting and application of pro-rata in respect of deduction towards prize liability under the 'Golden Key Scheme' should go back to the regular Bench for its decision if mercantile system of accounting is upheld.Detailed Analysis:1. Tribunal's Adjudication Authority:The Tribunal has the authority to adjudicate the issue when both the assessee and the Revenue challenged the alteration of the system of accounting by the CIT(A) from mercantile to cash. The Tribunal is empowered to adjudicate all issues raised before it, as per its mandate under section 254(1) of the IT Act, 1961.2. System of Accounting:The system of accounting to be adopted by the assessee should be mercantile. The mercantile system of accounting provides a more accurate reflection of the income and expenses over the period, especially given the nature of the 'Golden Key Scheme,' which involves long-term liabilities and income.3. Prize Money Deduction:Under the mercantile system of accounting, the assessee should not be entitled to deduct the entire prize money for the 12-year scheme in the first year itself. Instead, the deduction should be allowed on a pro-rata basis, proportionate to the collections made during the year. This ensures that the expenses are matched with the income they are intended to generate.4. Invocation of Proviso 1 to Section 145(1):The proviso 1 appended to sub-section (1) of section 145 of the IT Act, 1961, could be invoked. The assessee's method of accounting was such that the income could not be properly deduced therefrom, justifying the rejection of the books of account and the invocation of section 145.5. Notional Interest:No notional interest could be added in the hands of the assessee due to the delayed remittance of collections made by their agent M/s. Sahara India. The Tribunal held that there was no actual accrual or receipt of income to the assessee by allowing Sahara India to keep funds beyond the prescribed period of one month from the date of collection.6. Reference to Case Laws:There was no dispute about the Supreme Court case laws being referred to. However, the dissenting Member referring to certain case laws of different High Courts not cited by either side during the hearing of the appeals is not permissible as it may introduce new arguments not discussed during the hearing.7. Discounting and Pro-rata Application:The question of discounting and application of pro-rata in respect of deduction towards prize liability under the 'Golden Key Scheme' should not go back to the regular Bench for its decision. The Tribunal has already agreed that the deduction should be allowed on a pro-rata basis without discounting, and there is no need for further adjudication on this aspect.Conclusion:The Tribunal, while adjudicating the issues raised, upheld the mercantile system of accounting for the assessee, allowed deductions on a pro-rata basis for prize money, and rejected the addition of notional interest. The Tribunal's decision ensures that the income and expenses are accurately matched, providing a true and fair view of the assessee's financial position.