TaxTMI 
TaxTMI 
2012 (7) TMI 955
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....823, inter alia, after making following disallowances : Provident fund under s. 43B (para 4) Rs. 51,50,459 Service revenue (para 5) Rs. 44,42,221 Dealers commission (para 6) Rs. 21,00,000 4. The assessee preferred appeal before the learned CIT(A) who while partly allowing the assessee's appeal, deleted the aforementioned disallowances. 5. Being aggrieved with the order of learned CIT(A) the Department is in appeal before us and has taken following grounds of appeal: "1. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 44,42,221 made by the AO on account of revenue for services on unused prepaid cards without appreciating the fact that the income of one year cannot be shifted to subsequent years. 2. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 21 lac made by the AO on account of excess commission paid by the assessee without appreciating the fact that the assessee did not produce the addendum on the basis of which the commission was paid. 3. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of R....
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....d for immediately when the phone was activated. How-ever, talk time charges were recognized on the basis of actual use which is normal practice followed in this field as per the terms with DOT. The amount in respect of which the customer had not used the prepaid card, was treated as advance in the balance sheet and recognized in the subsequent year when the talk time was actually used. It was further clarified by assessee's counsel that once the validity period for the prepaid card was over, entire amount was recognized as revenue, whether used or not. It was pointed out that since the services in respect of unused cards were still to be rendered by the assessee, this could not be recognized as revenue during the year. The assessee referred to AS-DC, issued by the ICAI on revenue recognition. Further, with reference to AO's observations that payment of commission was on entire value of sale of prepaid card, it was clarified that the same had nothing to do with revenue recognition. The commission was paid to the dealer for sale of cards. Once card was sold the company receives entire amount of card value and the services of dealer (in selling the card) stood received. Theref....
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....he end of the year on a particular prepaid card, the amount in respect thereof is treated as advance with the company. He further pointed out that in case of lapsed cards entire revenue is recognized on expiry of period and this can be duly demonstrated before AO, if so required. 11. Learned counsel referred to the decision in E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) at p. 50 to submit that income is to be recognized only when right to receive the same accrues. He submitted that right accrues only after providing services and, therefore, the income is recognized accordingly. Learned counsel relied on following decisions in support of his proposition that revenue is to be recognized only when right to receive the same accrues : (1) CITv. TN.K. Govindarajulu Chetty [l9S7] 165 ITR 231 (SC). In this case, the assessee was granted compensation of Rs. 5 lac for property acquired by the Government in 1949. The Government paid Rs. 2,54,885 in the asst. yr. 1955-56 and Rs. 3,73,831 in the asst. yr. 1956-57. The excess of Rs. 1,28,716 over the compensation of Rs. 5 lac was treated as interest and the Tribunal held that the amount had to be allocated between those two years. On ....
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....that the view taken by the AO was correct. The Hon'ble Punjab & Haryana High Court held as under : "Held, that the assessee had made adjustment of the amount received, from the PWS advances account to the workshop income account during the quarter in which the work of repairs and servicing was done. The amount, received one year earlier, was thus not relevant to theassessee's incomeandwas dependent upon the services rendered by the assessee. The assessee did not become the owner of the amount and could not appropriate it tillservice was rendered in lieu of which it was received in advance. The assessee could legally claim the amount after rendering the services. Part of the amount could be treated as income in the year under assessment on the basis of the accrual of the right to appropriate the money. Since the receipt was relatable to a particular period in future, it would fructify and mature into income during that period and not earlier. The assessee was also bound to refund the deposit to a member of the scheme if that member so desired. The assessee was regularly following the system of adjustment. The money received from the buyers could not be treated to be income ....
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....agreement. However, it cannot be said that the assessee has fully contributed to its accruing by rendering services. The assessee is bound to provide accommodation to the members for one week every year till the currency of the membership. Till the assessee fulfils its promise, the parenthood cannot be traced to it. In this connection, certain clauses in the membership rules need to be examined. The reservation for holiday can be done 90 days to 1 day before the commencement of holiday but the same is subject to availability. In other words, if the resort requested for is not available, the member would be deprived of the holiday. If the assessee confirms the reservation but is not able to provide the allotted or the alternate accommodation, assessee is liable to pay liquidated damages to the member. It is worth noting that the assessee is liable to pay liquidated confirmed reservation. But it is not liable to pay any damages if it is not able to provide an accommodation on account of non-availability. Under such circumstances, the only recourse for the member is to approach the Consumer Forum which will term it as deficiency in services and direct the assessee to pay damages. The ....
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....iz., in order to be chargeable, the income should accrue or arise to the assessee during the previous year. There must be a 'right to receive the income on a particular date, so as to bring about a creditor and debtor relationship on the relevant date'. A right to receive a particular sum under agreement would not be sufficient unless the right accrued by rendering of services and not by a promise for services where the right to receive is anterior to the rendering of services, the income would accrue on the rendering of the services. Sec. 145 of the Act states that business income is to be computed in accordance with the cash or mercantile system of accounting. Sub-s. (2) thereof authorizes the Central Government to notify in the Official Gazette from time to time Accounting Standards to be followed by any class of assessees or in respect of any class of income. Sub-s. (2) casts a duty on a company to give true and fair view of a profit and loss of a company for the financial year in its P&L a/c. Subs. (3A) adheres to the Accounting Standards for preparing P&L a/c and balance sheet. Sub-s. (3C) defines 'Accounting Standards'. A conjoint reading of these provisions....
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....he Tribunal allowed the assessee's appeal, inter alia, observing that assessee had finally recognized the unref unded advances as income of the assessee in the later year. 12. Learned counsel referred to the decision of Tribunal, Delhi in the case of BTA Cellcom Ltd v. ITO[ITA No. 133/Del/2009] delivered on 30th June, 2011, and pointed out that under identical circumstances the assessee's claim has been accepted. Learned counsel further submitted that assessee is following this system of recognizing revenue since inception. In this regard he relied on the following decisions : (a) CITv. Woodward Governor India (P.) Ltd.[2009]3l2YTR254/l79 Taxman 326 (SC). In this case it was, inter alia held that the accounting method followed by assessee continuously for a given period of time has to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. He also relied on following Tribunal decisions : (b) K.K. Khullarv, Dy. CIT [2009] 116 ITD 301 (Delhi) (c) Treasure Island Resorts (P.) Ltd. v. Dy. CIT [2004] 90 ITD 814 (Hyd.). (d) T.K. International Ltd. v. Asstt CIT [2004] 91 ITD 481 (Cuttack....
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.... can be legally appropriated by the receiver in his own right to the exclusion of its giver. As long as the payer has some right over the amount it has paid to the payee, it cannot be said that income has accrued to the payee. A legal right to appropriate the amount should have accrued in favour of the payee for recognizing the sum as income. Unless debt has accrued in favour of payee, it cannot be said that income has accrued to the payee. We have extensively considered the various decisions relied upon by the learned counsel for the assessee in order to demonstrate that this principle has been applied in all the decisions which has its root in the decision of Hon'ble Supreme Court in the case of E.D. Sassoon & Co. {supra). In this case, the Hon'ble Supreme Court noticed the observations of Hon'ble Mukherji, J. in Rogers Pyatt Shellac & Co. v. Secretary of State for India [1924] 1 ITC 363 (Cal.) which are reproduced hereunder : "Now what is income ? The term is nowhere defined in the Act In the absence of a statutory definition we must take its ordinary dictionary meaning 'that which comes in as the periodical produce of one's work, business, lands or investme....
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....ived at a stage when it can be called 'income'." 16. In the present case, the main dispute is regarding revenue recognition relating to unused talk time remaining available as at the end of the year. As noted earlier, there is no "dispute that company had to provide talk time to its subscriber till the expiry of the period of card or till complete utilization of talk time, whichever is earlier. As long as assessee company is under obligation to provide talk time, it cannot be said that a debt has accrued in favour of assessee * company against the subscriber. The assessee company cannot appropriate the charges relating to available talk time to the exclusion of subscribe as long as it is under obligation to provide said services. Therefore, we are of the opinion that learned CIT(A) in principle has rightly accepted the mode of revenue recognition by assessee. Learned Departmental Representative has submitted that from the system followed by the assessee, there is every likelihood of revenue leakage. In this regard learned counsel has submitted that the matter can be restored to the file of AO for verification of this aspect only. We, therefore, restore the matter to the fi....
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.... was some confusion about the mode of calculation of commission as per the specified slab rates an addendum to the said agreement was made on 10th May, 2002 in which the impugned computation of income was further clarified as follows : Number of connections per month Commission per connection In case total connections activated in a particular month is 250 or less 350 In case total connections activated in a particular month is more than 250 but less than 500 connections 550 In case total connections activated in a particular month is more than 500 connections 800 22. Thus, it was clarified and agreed upon by the two parties that in case the total connections activated in a particular month were more than 500, the rate of commission per connection would be Rs. 800 for all connections. Since the number of connections activated of all the months of the year were more than 500, the commission was computed @ Rs. 800 per connection. It was further submitted that since the AO did not grant specific opportunity to explain the matter during the assessment proceedings, the addendum to the agreement could not be produced before him. Therefore, the terms of agreement were mis....
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...., the disallowance of Rs. 21 lac out of commission is deleted." 23. Learned Departmental Representative submitted that addendum had not been produced in course of assessment proceedings and was filed as additional evidence before learned CIT(A). She submitted that as per original agreement the commission had to be calculated on the basis of slab rates prescribed in Annex. A of the agreement and not in the manner the assessee computed. Learned counsel for the assessee submitted that commission had been paid to channel partner viz. Jaipur Telecom (P.) Ltd. He submitted that this company is not related to assessee. He referred to the table as per which on the basis of slab rates ? commission was payable. He pointed out that once the number of connections exceeded 500, the commission was payable @ Rs. 800 in respect of all the connections. He submitted that AO misread the agreement and, there-fore, the disallowance was not called for. He further submitted that, in any view of the matter, since the addendum had been executed prior to assessment proceedings the commission should have been computed as per the addendum which only clarified the original terms of agreement. In this regard l....
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....ression "commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business". Learned counsel further submitted that even assuming assessee was imprudent but since it is not disputed that the payment of commission was for business purposes, therefore, no part of the same could be disallowed. He pointed out that it is not the case of Department that any part of the commission came back to the assessee and, therefore, the commission had not been paid for extra commercial consider-ation. Learned counsel further pointed out that liability for payment of commis-sion crystallized the moment connection was activated. Learned counsel relied on the decision, ofPioneer Consolidated Co. of India Ltd. v. CIT [1972] 85 ITR 410 (Afl.) 25. We have considered the submissions of both the parties and have perused the record of the case. There is no dispute that commission was payable to the channel partners as per agreement. Therefore, it was the agreement which governed the payment of commission and the commission had to be computed as per the agreement. If the computation had not been made as per the agreement then excess amount p....
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....g the return. This issue is now covered by the decision of Hon'ble Supreme Court in the case of CITv. Alom Extrusions Ltd. [2009] 319 ITR 306/ 185 Taxman 416 (SC). 31. In the result, this ground is dismissed. ITA No. 178 for asst yr. 2004-05: 32. The Department has raised the following grounds of appeal: "1. Learned CIT(A) has erred in the facts and under the circumstances of the case' in deleting the addition of Rs. 72,64,139 made by the AO on account of revenue for services on unused prepaid cards without appreciating the fact that the income of one year cannot be shifted to subsequent years. 2. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 21 lacs made by the AO on account of excess commission paid by the assessee without appreciating the fact that the assessee did not produce the addendum on the basis of which the commission was paid. 3. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 28,15,974 made by the AO on account of late payment of PF and ESI without appreciating the fact that the grace period under PF Act and the ESI Act has no relat....