Tribunal upholds revenue authorities' decision on income addition due to accounting method discrepancy

The Tribunal upheld the revenue authorities' decision to add Rs. 1,50,84,240 to the assessee's total income. It found that the assessee's method of revenue recognition based on AS-9 did not align with the mercantile system of accounting required by Section 145 of the Income Tax Act. The Tribunal clarified that potential double taxation of income would not occur if the assessee could demonstrate that income recognized in a later assessment year was not previously accounted for due to AS-9. The appeal was dismissed on February 8, 2019.

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Issues Involved:
1. Justification of the addition of Rs. 1,50,84,240 to the total income of the assessee.
2. Compliance with Accounting Standard 9 (AS-9) in revenue recognition.
3. Application of mercantile system of accounting as per Section 145 of the Income Tax Act.
4. Potential double taxation of income.

Issue-wise Detailed Analysis:

1. Justification of the Addition of Rs. 1,50,84,240:
The primary issue in this appeal is whether the revenue authorities were justified in adding Rs. 1,50,84,240 to the total income of the assessee. The assessee, a company engaged in counseling and consultation services, had reduced this amount from its total sales of Rs. 3,15,97,038. The assessee argued that this reduction was due to the intangible nature of the services rendered, and revenue should be recognized only when bills are raised. However, the Assessing Officer (AO) did not accept this explanation and deemed the reduction from the sale value as impermissible.

2. Compliance with Accounting Standard 9 (AS-9):
The assessee contended that it followed AS-9 issued by the Institute of Chartered Accountants of India (ICAI), which allows revenue recognition either by the proportionate completion method or by the completed service contract method. The assessee explained that it recorded accrued revenue, which is recognized when services are performed but not yet billed. This method is common in service industries to match revenues with expenses properly. However, the CIT(Appeals) and the Tribunal concluded that while AS-9 might reflect a true and fair view of the business, it does not align with the mercantile system of accounting as per Section 145 of the Income Tax Act.

3. Application of Mercantile System of Accounting:
The Tribunal emphasized that under the mercantile system of accounting, revenue is recognized on an accrual basis when an agreement to render services is entered into, regardless of whether bills are raised. The relevant statutory provisions under Section 145 of the Income Tax Act mandate that income be computed in accordance with either the cash or mercantile system of accounting. The Tribunal noted that AS-9 has not been notified under Section 145 and therefore does not have statutory force. The Tribunal held that the assessee's reduction of Rs. 1,50,84,240 from its sales was not justified under the mercantile system, as the income had already accrued.

4. Potential Double Taxation of Income:
The assessee argued that if the Tribunal did not accept its method of revenue recognition, the income recognized in the subsequent assessment year would suffer double taxation. The Tribunal acknowledged this concern and clarified that the same income cannot be taxed twice. The burden would be on the assessee to demonstrate that the income offered in a later assessment year was not recognized in an earlier year due to the application of AS-9.

Conclusion:
The Tribunal dismissed the appeal, upholding the revenue authorities' addition of Rs. 1,50,84,240 to the assessee's total income. The Tribunal concluded that the assessee's method of revenue recognition, based on AS-9, was not in accordance with the mercantile system of accounting as required by Section 145 of the Income Tax Act. The Tribunal also provided clarity on the issue of potential double taxation, stating that the same income cannot be taxed twice, and the assessee must prove any such claims. The appeal was pronounced dismissed on February 8, 2019.

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