ITAT decision: Income accrual, royalty deduction allowed. Un-reconciled entries for fresh adjudication. Appeal grounds dismissed.

The ITAT partially allowed the appeal, upholding the addition on account of advance billings as income must accrue based on the mercantile system of accounting. The deduction for royalties related to advance billing was allowed following a precedent. The addition on account of un-reconciled entries in the Annual Information Report was set aside for fresh adjudication at the AO's level. The grounds of appeal deemed infructuous were dismissed. The order was pronounced on 22/07/2019.

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Issues Involved:
1. Addition on account of advance billings.
2. Deduction for royalties related to advance billing.
3. Addition on account of un-reconciled entries in the Annual Information Report (AIR).
4. Infructuous grounds of appeal.

Issue-wise Detailed Analysis:

1. Addition on Account of Advance Billings:
The assessee challenged the addition of Rs. 6,09,38,321 made by the Assessing Officer (AO) on account of advance billings, arguing that the amount had not accrued as income during the year under consideration. The AO, referencing Schedule 8 (current liabilities) of the balance sheet as on 31.03.2007, noted an advance billing sum of Rs. 34,70,15,359. He reduced Rs. 28,60,77,038 from this amount and taxed the net amount of Rs. 6,09,38,321. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this addition. The ITAT referred to its previous decision in the assessee’s case for AY 2004-05, emphasizing that income accrual must be real and based on the mercantile system of accounting. The Tribunal found that the receipt and accrual of income occurred when the sale proceeds of software were received, not when the software's lifespan ended. Consequently, the method adopted by the assessee, which deferred more than 75% of its revenue to future periods, was not justified and was considered to distort the taxable income. Thus, the ITAT dismissed the ground of appeal No. 1.1 and 1.2.

2. Deduction for Royalties Related to Advance Billing:
The assessee contended that if the revenue from advance billing was recognized in the current year, the corresponding royalty expenses amounting to Rs. 1,82,81,496 should also be allowed as a deduction. The ITAT referred to its decision for AY 2006-07, where it was held that if the entire billing amount was recognized as revenue in the current year, the assessee would be entitled to a 30% deduction for royalty. Following this precedent, the ITAT directed the AO to allow the deduction for royalty in accordance with the law. Thus, ground of appeal No. 1.3 was allowed for statistical purposes.

3. Addition on Account of Un-reconciled Entries in the Annual Information Report (AIR):
The AO added Rs. 14,31,988 due to the assessee's failure to reconcile certain entries in the AIR. The assessee argued that this amount had already been considered as income and offered to tax, resulting in double taxation. The ITAT noted that the AO had provided the assessee with AIR details and requested reconciliation of transactions amounting to Rs. 1,10,07,792. While most entries were reconciled, Rs. 14,31,988 remained un-reconciled. The ITAT referred to CBDT Instruction No. 05/2013, which mandates verification of TDS mismatches. The Tribunal found that the factual matter needed verification at the AO's level to ascertain whether the amount was duly accounted for and offered to tax. Therefore, the ITAT set aside the CIT(A)'s order on this issue and restored the matter to the AO for fresh adjudication, following the CBDT instruction. Thus, the 2nd ground of appeal was allowed for statistical purposes.

4. Infructuous Grounds of Appeal:
The assessee's counsel submitted that the 3rd and 4th grounds of appeal were infructuous as the AO had already provided relief while giving effect to the CIT(A)'s order. The ITAT agreed with this submission and dismissed these grounds as infructuous.

Conclusion:
The appeal was partly allowed, with specific directions for fresh adjudication on certain issues and dismissal of others as infructuous. The order was pronounced in the open Court on 22/07/2019.

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