TaxTMI 
TaxTMI 
2016 (12) TMI 1891
X X X X Extracts X X X X
X X X X Extracts X X X X
....pective. The Hon'ble Bombay High Court in CIT vs. M/s. Godrej Agrovet Ltd vide Income Tax Appeal No. 934 of 2011, dated 8.1.2013, has held that percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the assessment year 2008-09. In the above case it upheld the disallowance to the extent to 2% of the total exempt income. Respectfully following the above decision, we direct the AO to restrict the disallowance to 2% of the total exempt income. Thus the first and second ground are partly allowed. 3. The third ground raised by the assessee is that the ld.CIT(A) erred in confirming the action of the AO in treating advance / unearned revenues of Rs. 1,02,33,944/- as the income of the year under consideration without appreciating that no right to receive the said revenues had accrued to the assessee during the year under consideration and also without appreciating that the method of accounting adopted by the assessee in recognizing revenues was in consonance with AS - 1 read with AS-9 issued by ICAI and notified by the Central Government. Also it is stated that the aforesaid advance/unearned revenue of Rs. 1,02,33,944/- had been....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n', the assessee company recognizes income in respect of only those invoices or part of the invoices for which the services have been rendered. The invoice or part of the invoice amount, which is representative of the period for which the services are yet to be rendered is treated by the company as unearned revenue (i.e. the revenue which has not accrued during the subject year ) and the same is shown as a current liability in the balance sheet. The apportionment of the amount for which services have been rendered is based on the following formula : Amount of Invoice X Number of days for which the service is yet to be rendered /Total Number of days for which the service is to be rendered It is also stated that out of unearned income, it may happen that the company has not rendered any service at all, to some of the parties during the subject year, for example where the invoice is raised very close to March 31 of the financial year, even though the invoice for these services was raised during the relevant financial year. It is further stated that as per Schedule N to the Balance Sheet for the year ended March 31 2007, the company had the following accounting policy with regard to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Trib.); Dr. Aman Khera vs. DCIT (2012)138 ITD 443; ACIT vs. Mahindra Holidays and Resorts (India) Ltd. (2010) 39 SOT 438 (Chennai (SB); CIT vs. Dinesh Kumar Goyal (2011) 331 ITR 10 (Del); DCIT vs. TVS Electronics Ltd. (2012) 52 SOT 287 (Chennai); CIT vs. Bank of Rajasthan Ltd. (2010) 326 ITR 526 (Bom); CIT vs. West Coast Paper Mills Ltd. (1992) 193 ITR 349 (Bom). The ld. counsel thus submits that the order of the ld. CIT(A) upholding the addition of unearned income is contrary to the provisions of the Act. 3.4 The case was fixed for clarification on 27.10.2016. We brought to the notice of the ld. counsel of the assessee the decision in the case of CIT vs. Tanjore Permanent Bank Ltd. (1984) 149 ITR 788, 793 (Mad), Madura Coats Ltd. vs. CIT (1986)158 ITR 697 (Mad), CIT vs. H. Krishna Vijoy Arora [2012] 20 taxmann.com 655 (Ker.), CIT vs. Smt. Pushpa Vijoy [2012]206 Taxman 22 (Ker.) and ITO vs. Shri Anupallavi Finance & Investments [2011] 9 taxmann.com 163 (Chennai) wherein it has been held that a tax credit can be given only in cases where the tax is paid on the income in respect of which deduction has been made at source and which is offered for assessment. The issue here is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... (2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made. (3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rule for the purposes of giving credit to a person other than those referred to in such-section (1) and sub-section (2) and also the assessment year for which such credit may be given." 3.7.1 The ld. counsel of the assessee relied on certain decisions to which we shall turn now. In Xerox India Ltd.(supra), till just immediate preceding year, the assessee was recognizing revenue at time of sale of certain equipments which were sold subject to condition of installation at premises of the customers. However, from relevant assessment year, assessee changed its accounting policy and recognized sales of its product/equipment on completion of installment and acceptance of equipments at customer's premises. The AO made certain addition reject....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unting, the assessee had accounted for the receipts in relation to the year in which payment had accrued. The AO made an addition on the ground that the change in the method of accounting resulted in lower profits to that extent. The Hon'ble High Court held that the CIT(A) as well as ITAT arrived at a finding that the change in the method of accounting was not detrimental to the interest of the revenue and therefore it was to be accepted. In West Coast Paper Mills Ltd. (supra) the question was whether assessee could claim deduction on both cash and provision basis. It is held that 'In case the assessee had changed its method from mercantile to cash system, it might have been that in the year of change no deduction could have been claimed or allowed. However, that was no reason for not allowing the claim on the basis of changed method so far as the change was concerned and on the earlier method if the liability in regard thereto had not already been allowed as deduction.' In the above cases, the assessees have not claimed TDS during the concerned assessment year. The implication of section 199 of the Act is absent in the above cases. In the instant appeal, the assessee has c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax in so far as monies due and payable by the parties to whom they are debited [see Keshav Mills Ltd. v. CIT (1953) 23 ITR 230, 239 (SC)]. Therefore, under the Mercantile System of Accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed [expenses]. Under the mercantile system of accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out- flow of cash." The crux of 'mercantile system of accounting' is that revenue is recognized at the time when the invoice is raised to the customer. In the instant case, the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dial measures permissible in law in the A.Y. 2008-09 where it has claimed to have offered the said income. 3.7.7 The Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) has held 'It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1970] 77 ITR 857 (CA), the Income-tax law does not march step by step in the footprints of the accountancy profession.' 3.7.8 In CIT. v Eli Lily & Co. (2009) 312 ITR 225 (SC), the Hon'ble Supreme Court has held that "Consequently, it cannot be said that the TDS provisions which are in the nature of machinery provisions to enable collection and reco....