TaxTMI 
TaxTMI 
TaxTMI 
2019 (1) TMI 1597
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.... appreciating that 'as soon as tlje money is received, revenue should be recognized in P&L Account and taxes should be paid. 3. On the facts and in the circumstances of the case the Ld. CIT(A) has erred in not appreciating that there is no liability on the part of the assessee to return back unutilized talk value to the purchaser/consumer in any case and also that the assessee is claiming commission as expense in the same year whereas income has been made depend on utilization of talk value." 3. The brief facts of the case are that the assessee is a company providing CDMA based telecom services. It filed its return of income on 25/09/2010 declaring a total loss of Rs. 17,22,54,19,768/-. This return was subsequently revised on 16/01/2012 declaring loss of Rs. 17,32,10,33,212/-. The assessment under section 143(3) of the ACT was made vide order dated 01/03/2014 under section 143(3) read with section 144C of the Act determining total loss of Rs. 17,04,86,90,121/-. The only addition was of Rs. 272343091/- on account of un-accrued revenue as on 31/03/2010. The ld AO made the addition vide para number 5 of his order as under:- 5. During the year under review, the assess....
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.... favour of the assessee by the decision of the Hon'ble Delhi High Court in ITA No. 17/2013 dated 15/11/2013in assessee's own case for earlier years. 7. We have carefully considered the rival contentions and also perused the order of the lower authorities as well as the various orders of the coordinate bench which travelled before the Hon'ble Delhi High Court wherein in ITA no 70/2013,73/2013, 1069/2017 for AY 2003-04, 2004-05 and 2009-10 dated 15-11-2018 , whole issue has been discussed and the deletion of the addition is confirmed is as under:- 8. Quantum or revenue earned would be income in one year or the other year. Counsel for the respondent-assessee had drawn our attention to tables/chart filed before us. Rs. 44,42,221/- added to the income of the Assessment Year 2003-04 was required to be reduced from the receipts shown by the respondent-assessee in the Assessment Year 2004-05. Similarly, addition of Rs. 72,64,139/- made in the Assessment Year 2004-05 has to be reduced from the income in the Assessment Year 2005-06. In fact, the income for the Assessment Year 2005-06 would be lower as the carried forward talk time of Rs. 30,74,152/- was lower than the talk time ....
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....provided by an indeterminate number of acts over a specific period of time, revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance. (ii) Completed service contract method-Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable. Paragraph 7 stipulates that revenue from service transaction can be recognized either by proportionate completion method or by the completed service contract method. Revenue is generally recognized when the service is performed. Proportionate completion method is a recognized accounting method, as per which revenue is recognized proportionately by reference to the performance of each act. Und....
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....of the amount is not there, it would be chargeable to tax in the said year. Though the amount may be received later in the succeeding year, the income would be said to accrue or arise if there is a debt owed to the assessee by somebody at that moment. From this, it follows that there must be the "right to receive the income on a particular date, so as to bring about a creditor and debtor relationship on the relevant date". The Court further explained that a right to receive a particular sum under the agreement would not be sufficient unless the right accrued by rendering of services and not by promising for services and where the right to receive is anterior to rendering of service, the income, therefore, would accrue on rendering of services. Following discussion in this judgment would demonstrate the principle which we have highlighted above: "37. Mukerji J. has defined these terms in Rogers Pyatt Shellac & Co. v. Secretary of State for India 1 I.T.C. 363: "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 wor....
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....to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income." 38. The observations of Lord Justice Fry quoted above by Mr. Mukerji J. were made in Colquhoun v. Brooks (1888) 21 Q.B.D. 52 while construing the provisions of 16 and 17 Victoria Chapter 34 section 2 schedule 'D'. The words to be construed there were 'profits or gains, arising or accruing,' and it was observed by Lord Justice Fry at page 59 : "In the first place, I would observe that the tax is in respect of 'profits or gains arising or accruing.' I cannot read those words as meaning 'received by.' If the enactments were limited to profits and gains 'received by' the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this county. The result would be that no Income-tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words 'arising or accruing' are general words descriptive of a rig....
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....o computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom - whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date."" 13. In other words, principle of matching between the revenue receipt and the expenditure to be incurred was applied. Reference was also made to the judgment of the Supreme Court in Commissioner of Income Tax Vs. Bilahari Investment (P) Ltd. [2008] 299 ITR 1 (SC), wherein referring to the concept of matching it was observed:- "82. Matching Concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that "revenues" of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes unde....
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....x is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953¬54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other." 16. In Bilahari Investment (P) Ltd. (supra), the Supreme Court had elucidated that revenue recognition was attainable by several methods of accounting. The same result could be attained by any one of the accounting methods. Completed contract method was one such method. Similarly, percentage of completion method was another such method. Percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recogn....