ITAT sets aside relief on surrogacy revenue recognition due to incorrect facts about pending proceedings

ITAT Hyderabad set aside CIT(A)'s order granting relief to assessee on surrogacy revenue recognition, finding the appellate authority relied on incorrect facts about pending SC proceedings. The tribunal noted advances received from foreign nationals for surrogacy services in past years remained liabilities due to government circular debarring foreign nationals from surrogacy. Matter remanded to AO to verify whether assessee refunded amounts to foreign nationals, recognized income from completed procedures, or treated advances as income in subsequent years due to cessation of liability.

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Issues Involved:

1. Recognition of Advances from Surrogacy Clients as Income
2. Addition under Income Computation and Disclosure Standards (ICDS)
3. Disallowance of ROC Expenses

Issue-wise Detailed Analysis:

1. Recognition of Advances from Surrogacy Clients as Income:

The primary issue in this case was whether the advances received from surrogacy clients, particularly foreign nationals, should be recognized as income. The assessee, a company engaged in providing infertility and surrogacy treatment, had received substantial advances from clients, which were shown as liabilities in its books. The Assessing Officer (AO) argued that these advances should be recognized as income since the services could not be carried out due to government guidelines prohibiting surrogacy for foreign nationals. The AO noted that the advances were outstanding for several years and that the assessee had initially recognized them as revenue but later reversed these entries. The assessee contended that the advances remained liabilities as they were subject to potential refund depending on the outcome of pending litigation in the Supreme Court challenging the government guidelines. The CIT (A) initially deleted the additions, reasoning that the matter was subjudice and the advances could not be considered income until the liability ceased. However, the Tribunal found that the CIT (A) based its decision on incorrect assumptions about the pendency of the writ petition, which had been dismissed. The Tribunal restored the issue to the AO for further examination, directing the AO to verify whether the assessee had refunded any advances or recognized them as income in subsequent years.

2. Addition under Income Computation and Disclosure Standards (ICDS):

The second issue involved the addition made by the AO under ICDS. The AO added Rs. 55,46,136/- by estimating income at 15% on certain advances, arguing that the assessee had recognized income under ICDS for some cases but not for others. The CIT (A) partially allowed relief by confirming an addition of Rs. 18,39,200/- while directing that the same be deducted in the subsequent year to avoid double addition. The Tribunal upheld the CIT (A)'s decision, noting that the income recognition under ICDS should be based on actual progress in the treatment cases, and directed the AO to ensure no double addition occurs.

3. Disallowance of ROC Expenses:

The disallowance of ROC expenses amounting to Rs. 1,91,750/- was not disputed by the assessee before the Tribunal, and thus, this issue was not a point of contention in the appeal.

Conclusion:

The Tribunal allowed the appeal filed by the Revenue for statistical purposes, emphasizing the need for the AO to reassess the recognition of advances as income, taking into account any refunds or income recognition in subsequent years. The Tribunal directed the AO to provide the assessee an opportunity to substantiate its claims with evidence and to decide the issues as per the facts and law.

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