2012 (7) TMI 955 - AT - Income Tax

Revenue for services on unused prepaid cards - Revenue recognition relating to unused talk time remaining available as at the end of the year - Held that - 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. DR 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 file of AO for the limited purpose of verification whether in the subsequent year the assessee has declared the revenue in respect of expired prepaid cards or not. In case no discrepancy is found in this regard, no adjustment is called for with the assessee s mode of revenue recognition. In terms of aforementioned observation this ground is partly allowed for statistical purposes. Addition on excess commission paid by the assessee - Held that - It is true that AO cannot sit in the judgment of a businessman but at the same time he has to examine that assessee has claimed the expenditure in accordance with commercial considerations and not as per its whims and fancies. The terms of contract fix the reasonableness of amount payable by the assessee and, therefore, any amount paid over and above the same cannot be treated wholly and exclusively for business purposes. However, in the present case, we find that learned CIT(A) had duly referred the addendum for AO s comment and he has only disputed the admission of the said addendum but not the veracity of the addendum per se. We, therefore, do not find any reason to interfere with the order of learned CIT(A). Addition on account of late payment of PF and ESI - Held that - No reason to interfere with the order of learned CIT(A) because admittedly in respect of disallowance deleted by learned CIT(A) the payment was made before the due date of filing the return.

Issues Involved:
1. Revenue recognition on unused prepaid cards.
2. Excess commission paid to dealers.
3. Late payment of Provident Fund (PF) and Employee State Insurance (ESI).

Detailed Analysis:

1. Revenue Recognition on Unused Prepaid Cards:
The primary issue revolves around whether the revenue from unused prepaid cards should be recognized in the year of sale or when the service is actually rendered. The assessee company argued that revenue from telephony services through prepaid cards is recognized based on actual usage by customers, with unutilized amounts treated as advances and recognized in subsequent years. The CIT(A) accepted this method, emphasizing that revenue should be recognized only to the extent services were provided during the year. The Tribunal upheld this view, noting that income is recognized when it accrues, and the assessee's method aligns with this principle. However, the Tribunal directed the AO to verify if the revenue from expired prepaid cards was declared in subsequent years to prevent revenue leakage.

2. Excess Commission Paid to Dealers:
The issue here is the disallowance of excess commission paid to M/s Jaipur Telecom (P) Ltd. The AO disallowed Rs. 21 lakh, arguing that the commission was not paid according to the slab rates in the agreement. The assessee provided an addendum clarifying that once connections exceeded 500 in a month, the commission rate of Rs. 800 per connection applied to all connections. The CIT(A) admitted this addendum as additional evidence and deleted the disallowance, stating that the commission was a contractual liability and the addendum clarified the original agreement terms. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not dispute the addendum's veracity.

3. Late Payment of Provident Fund (PF) and Employee State Insurance (ESI):
The AO disallowed Rs. 51,50,459 for late payments of PF and ESI. The CIT(A) reduced this disallowance, recognizing that payments made before the due date of filing the return should be allowed. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in CIT v. Alom Extrusions Ltd., which allows such payments if made before the return filing due date.

Separate Judgments for Different Assessment Years:
For the assessment years 2004-05 and 2006-07, the Tribunal followed the same reasoning as for 2003-04. The issues and decisions were identical, with the Tribunal directing verification of revenue recognition for prepaid cards and dismissing grounds related to excess commission and late payment of PF and ESI.

Conclusion:
The appeals for assessment years 2003-04, 2004-05, and 2006-07 were partly allowed for statistical purposes, with directions for verification of revenue recognition practices. The Tribunal upheld the CIT(A)'s decisions on excess commission and late payment of statutory dues, emphasizing adherence to contractual terms and judicial precedents.

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