TaxTMI 
TaxTMI 
2024 (11) TMI 96
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.... dated 01.08.2014, the Appellate Tribunal has allowed the appeal filed by the respondent-assessee in I.T.A.No.222/Mds/2013 and dismissed the cross-appeal filed by the Income Tax Department. 4. In this appeal, the dispute is confined to the "Annual Maintenance Charges" (AMC) collected by the respondent-assessee in advance from its customers for maintenance of Lifts installed and commissioned by the respondent-assessee. 5. The respondent-assessee had treated the same in their Books of Accounts as a "current liability" viz., "Income Received in Advance". Therefore, the Respondent-Assessee did not offer the same to tax in the returns filed for A.Y. 2009-10. The Assessing Officer disallowed the same in the assessment order. The said decision was affirmed by the Appellate Commissioner. 6. The Appellate Tribunal has allowed the appeal of the respondent-assessee in the light of Section 41(1) of the Income Tax Act,1961 vide impugned order dated 01.08.2014 in I.T.A.No.222/Mds/2013 with the following observations:- "5. The apprehension of the Revenue that the assessee is not bound to refund the money to the customers, is answered by the provisions of law stated in Section 41....
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....ate". Therefore, when the assessee has assumed the obligation for maintaining the lifts sold by the assessee for a particular period of time and the assessee collects fee for such services in advance, it is incumbent upon the assessee to provide the liability for unexpired period from the total advance collections made from the customers." 8. Although this appeal was filed in the year 2015, it was not admitted and it was adjourned from time to time. As such, no question of law was framed since 2015. 9. The appellant-Income Tax Department has raised the following questions of law as substantial questions of law: i. Whether on the facts and in the circumstances of the case, the Tribunal was right in deleting the addition made by the Assessing Officer (AO) on account of Annual Maintenance Charges (AMC) received in advance and shown by the assessee as liability in the balance sheet especially when the period of Annual Maintenance Charges (AMC) was only one year? ii. Is not the finding of the Tribunal bad especially when the assessee is following mercantile system of accounting and has received the entire Annual Maintenance Charges (AMC) amount in advance without....
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....activity of routine maintenance services of lifts to its customers at periodical intervals". The Authorised Representative is right when he states that the assessee is under obligation to perform maintenance services, in fact that is not in dispute, and that is for what AMC stands for and the assessee gets paid. Hence, part of AMC shown under current liability amounting to Rs. 8,20,45,067/- has to be assessed in this year only. In view of the discussion supra "income received in advance" of Rs. 8,20,45,067/- is assessed to tax." 14. The respondent - assessee preferred an appeal before the Appellate Commissioner/Commissioner of Income Tax (Appeals)-III, Chennai in I.T.A.No.148/2011-2012/A.III. 15. The Appellate Commissioner by an Order dated 07.12.2012, partly dismissed the appeal of the respondent-assessee and distinguished the decision of the Division Bench of this Court in Commissioner of Income Tax Vs. Coral Electronics (P) Limited, 274 ITR 336 (Mad) and the decision of the Income Tax Appellate Tribunal (ITAT) in DCIT Vs. TVS Electronics Limited, [(2012) 22 Taxmann.com 215 (Chennai)] from the case of the Respondent-assessee with the following observations:- "A per....
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....this ground of appeal. This ground is accordingly dismissed." 17. Arguing the case on behalf of the appellant-Income Tax Department, the learned counsel for the appellant-Income Tax Department would submit that since the amount has been received in advance, it is to be taxed in the year in which, it is received irrespective of the fact whether services were to be provided over a period of time which may spill over to the succeeding financial year. 18. That apart, the learned counsel for the appellant/Income Tax Department would submit that as and when the payments are received by the respondent-assessee from its customers, the payments were after deduction of tax under Section 194C of the Income Tax Act, 1961 for that Assessment Year. 19. That apart, the learned counsel for the appellant-Income Tax Department would submit that amount received towards Annual Maintenance Charges was to be treated as total income of the respondent-assessee and was chargeable to tax under Section 4 read with Section 5 of Income Tax Act, 1961. 20. That apart, the learned counsel for the appellant-Income Tax Department would submit that not only the tax was paid under the provisions of the Ta....
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....at the Annual Maintenance Charges (AMC) amount received in advance which are actually the amount received by the respondent-assessee and the same is quantifiable since the period of the Annual Maintenance Charges (AMC) is only one year. The Appellate Tribunal had also failed to note that the nature of contract entered by the respondent-assessee cannot be considered as current liability of the respondent-assessee and the Annual Maintenance Charges (AMC) amount received as income of the respondent-assessee and there is no clause for refund or termination of the contract by the customer. 27. It is submitted that the Appellate Tribunal had wrongly relied upon the decision of the Special Bench of the Tribunal in ACIT Vs. Mahindra Holidays Resorts India Limited, (2010) 131 TTJ (Chennai) (SB), which is distinguishable on facts as the unexpired period of the contract therein was very long and the income was spread over 33/25 years depending on the scheme whereas in the present case, the Annual Maintenance Charges (AMC) period was only one year. 28. It is submitted that the Appellate Tribunal had wrongly applied the Judgment of the Income Tax Appellate Tribunal (ITAT) in TVS Electroni....
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.... order dated 01.08.2014 passed by the Income Tax Appellate Tribunal (ITAT). 35. We have also considered the provisions of the Income Tax Act, 1961 and Companies Act, 1956 as in force during the period in dispute and the rules made thereunder. We have also considered the Accounting Standard (AS) 9 issued by the Institute of Chartered Accountant of India. 36. The respondent-assessee being a company was required to maintain its accounts, the Balance Sheet and the Profit and Loss Account strictly in accordance with the provisions of the Companies Act, 1956, as it stood during the period in dispute. 37. As per Section 211 of the Companies Act, 1956 (since repealed and substituted with Companies Act, 2013), every Balance Sheet of a company should give a "true and fair" view of the state of affairs of the company at the end of the financial year. 38. Similarly, Profit and Loss Account is also expected to be prepared to give a true and fair view of the profit or loss of the company for the financial year. The Profit & Loss Account is prepared to summarize the revenue and expenditure incurred by the Company. Information therein would have been based on accounts maintained by the....
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....able thereto: Provided that nothing contained in this sub-section shall apply to any insurance or banking company [or any company engaged in the generation or supply of electricity], or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company. 42. The returns that were filed by the respondent-assessee under Section 139(1) of the Income Tax Act, 1961 for the period in dispute would have been based on the Profit and Loss Accounts of the respondent-assessee which should have satisfied the requirement of Section 211(2) of the Companies Act,1956. 43. For preparing Balance Sheet and Profit and Loss Accounts, an assessee has to maintain its/her/his or their accounts either under the "cash system" of accounting or "mercantile system" of accounting" as per Section 145(1) of the Income Tax Act,1961, which prescribes the "Method of Accounting", statutorily recognizes these two methods of accounting. 44. As per Section 145(1) of the Income Tax Act, 1961, income chargeable to tax under the head "Profits and gains of business or profession" (under Section 28 of the Income Tax Act, 1961) or "Income....
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....nting", it is intended to facilitate an assessee to prepare its financial documents namely the Balance Sheet and the Profit and Loss Accounts/Cash Flow Statement etc including its returns under Section 139 of the Income Act, 1961. In this case, the Respondent-Assessee is stated to be following the "mercantile system of accounting". 49. In CIT vs. Bilahari Enterprises (P) LTD. (2008) 299 ITR 1 (SC), the Hon'ble Supreme Court held that every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. This is in line with Section 145 of the Income Tax Act, 1961. 50. It further held that only in those cases, where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. 51. Relevant portion from the decision of the Hon'ble Supreme Court in CIT vs. Bilahari Enterprises (P) LTD. (2008) 299 ITR 1 (SC) is extracted below:- 20......... In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee's, in these cases, have followed the same m....
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....nd that their financial statements are true, fair and transparent. 55. The Court further added that the adoption of "Accounting Standards" for the "accounting income" as "taxable income" would avoid distortion of accounting income. It also observed that "Accounting Standards" are based on a number of accounting principles, namely, matching principle and fair value principle. 56. The Court further stressed that the object of "Accounting Standards" is to see that "accounting income" is adopted as the "taxable income" and not merely as the basis from which "taxable income" is to be computed. Thus, it observed that if "Accounting Standards" are properly applied, "accounting income" is to be the adopted as the "taxable income" of an assessee. 57. The expression "income" is defined in Section 2(24) of the Income Tax Act, 1961. The definition of "income" in Section 2(24) of the Income Tax Act, 1961 is an inclusive definition. It includes "profits and gains". There is no definition for the expression "profits and gains" in the Income Tax Act, 1961. In fact, there is also no such definition in the Companies Act, 1956. 58. Thus, it is the total income after expenditure which is t....
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.... situation covered by Section 5(1)(b) of the Income Tax Act, 19961 as in the transaction in question, the consideration for the Annual maintenance Charges(AMC) were received in advance by the respondent-assessee. We are also not concerned with the situation contemplated in Section 5(1)( c) of the Income Tax Act, 1961. 62. The Hon'ble Supreme Court in J.K. Industries Ltd. vs. Union of India (2007) 13 SCC 673 further observed that, if the rules by which inventories are to be valued are laid down in the Accounting Standards and are followed in the determination of "accounting income", then tax laws do not need to lay down the rules and the tax authorities do not need to examine the computation of the value of inventories and its effect on computation of income. 63. There, the Hon'ble Supreme Court also underscored the point that the adoption of Accounting Standards and of accounting income as taxable income would avoid distortion of accounting income which is the real income. Relevant portion from the above decision is extracted below:- "4. In its origin, Accounting Standard is a policy statement or document framed by Institute. Accounting Standards establishes rules re....
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....d by the assessee as provided in Sub-Section (1); or iii) where an Assessing Officer finds that the accounting standards as notified under Sub- Section (2), have not been regularly followed by an assessee. 66. Section 145 of the Income Tax Act, 1961 as it stood during the period in dispute read as follows:- "145. Method of Accounting: (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of Sub-Section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessee's or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in Sub-Section (1) or accounting standards as notified under Sub- Section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner pr....
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...., from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. 73. Accounting Standard (AS) 9 provides a literature for "Revenue Recognition" for the following, namely:- (i) The sale of goods; (ii)The rendering of services; (iii)The use by others of enterprise resources yielding interest, royalties and dividends. 74. In para 2 of the Accounting Standard (AS) 9, it has been specifically stated that the Accounting Standard does not deal with the following aspects:- (i) Revenue arising from construction contracts; (ii) Revenue arising from hire-purchase, lease agreements; (iii) Revenue arising from Government grants and other similar subsidies; (iv) Revenue of insurance companies arising from insurance contracts." 75. Para 3 of Acc....
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....d 7.1(ii) of the Accounting Standards (AS) 9. Paragraphs 4.3 and Paragraphs 7.1(i) of the Accounting Standards (AS) 9 dealing with Proportionate Completion Method of the Accounting Standards (AS) 9 are reproduced in the ensuing paragraphs:- Definition Services Proportionate Completion Method Proportionate Completion Method 4.3 Proportionate Completion Method is a method of accounting which recognizes revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract. 7.1 (i)Performance consists of the execution of more than one act. Revenue is recognised proportionately by reference to the performance of each act. The revenue recognized under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are 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. 81. Under the "Proportionate Completion Method" of accounting, the rev....
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....aving accrued even if no amount is received for service provided. If the amount is received, the assessee cannot stagger the recognition of income to a future date merely because service is to be provided in future during the ensuing Financial Year. 85. In Annual Maintenance Contracts (AMC), whether:- (i) Comprehensive Maintenance (ii) Routine Maintenance. an assessee, will be bound to recognize the amounts received in its books of income as income. It cannot treat the same as a "current liability" in the books of accounts by resorting to accounting jugglery to distort the accounting income to postpone the imminent tax liability under the Income Tax Act, 1961. 86. Para 12 of the Accounting Standards (AS) 9 also underscores the point that "performance of services" should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service. If amounts are received in advance, there is no uncertainty and therefore there was "performance of service" immediately after payments were received in advance, even if "mercantile system of accounting" was followed. 87. Paragra....
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....tenance Contract is concerned, it leaves no scope for uncertainties as far as income for provision service under its AMC model is concerned. 92. The decision of the Court in Commissioner of Income Tax Vs. Coral Electronics (P) Limited 274 ITR 336 (Mad) cannot be followed. The Division Bench of this Court did not advert to the Accounting Standards issued by the Institute of Chartered Accountants of India. In fact, the Court also did not refer to Section 145 of the Income Tax Act, 1961. It merely held as under after referring to the decisions of this Court though it had given contra views :- "8. In the instant case, the amount that was received was only as charges for the services to be rendered in future. The services may be rendered or may not be rendered depending upon withdrawal of the money as and when the customer required. So, it is highly uncertain as to whether it would at all remain as income of the assessee. Only when the service is done, the assessee has a right over the amount that was deposited. Till then, he has no right over the same. It is in that sense till then, it cannot be considered as an income of the assessee and is not exigible to tax. Therefore, ....
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....tained a clause that part of the amount so handed over was to be adjusted annually towards rental over a period of five years. Relevant portion of the decision is extracted as under:- "12. So far as the second question for the assessment year 1986-87 is concerned, as already noticed, the amounts received by the assessee were under an agreement. The amount received was the whole of the amount payable under the agreement although the agreement also contains a clause that part of the amount so handed over was to be adjusted annually towards rental over a period of five years. The provision for such time of the agreement and the assessee being under no obligation to return all or any part of it under any circumstances whatsoever at any point of time in the future. The Assessing Officer was right in including the whole of the amount received under this agreement in the assessment and treating the same as income of the assessee in this year. This question is answered against the assessee and in favour of the Revenue." 98. Though in Paragraph 5.3 to the Assessment Order dated 12.12.2011 has not expressly held that the Respondent-Assessee's accounts distorted the income, th....
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....y the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the busi....