2017 (5) TMI 1642 - AT - Income Tax

Revenue recognition - Addition on account of unaccrued revenue from the sale of prepaid cards and recognized in the books of account - Held that - Assessee s source of income is from the sale of pre-paid and post-paid cards/ connections and the method followed for recognition of the same is accrual and at par with that of the telecom industry in this year as well. In the earlier Assessment Years i.e. 2004-05 and 2006-07, in assessee s own case the ITAT held the assessee company cannot appropriate the charges relating to available talk time to the exclusion of subscriber as long as it is under obligation to provide the said services. Therefore, the ITAT was of the opinion that CIT(A) in principle has rightly accepted the mode of revenue recognition by the assessee in those Assessment Year. - Decided against revenue.

Summary

Issues:
Appeal against deletion of addition of unaccrued revenue from sale of prepaid cards.

Analysis:
The appeal was filed by the Revenue against the order passed by CIT(A)-XI, New Delhi, deleting the addition of unaccrued revenue from the sale of prepaid cards. The Assessee provided telephony services and filed its return of income for AY 2009-10, declaring a total loss. The Assessing Officer added unaccrued revenue earned from the sale of prepaid cards, but the CIT(A) deleted this addition based on the ITAT order from the assessee's previous case. The Revenue argued that the CIT(A) erred in deleting the addition, while the Assessee's representative explained the revenue recognition method followed by the Assessee, which was consistent with industry practices. The revenue recognition was based on actual usage within the year, including unaccrued revenue. The Terms and Conditions of the prepaid cards implied the Assessee's obligation to provide services beyond the year for certain vouchers sold towards the end of the year. The Assessee also cited Accounting Standard - 9 on Revenue Recognition and previous ITAT orders in their favor for similar issues.

The Tribunal considered the arguments and previous ITAT orders in the Assessee's favor for the Assessment Years 2004-05 and 2006-07. The Tribunal highlighted that revenue recognition should align with the obligation to provide services, especially in cases where the Assessee is under obligation to provide services beyond the sale period of prepaid cards. The Tribunal emphasized the distinction between income recognition and liabilities, stating that income should be recognized when it accrues to the Assessee. The Tribunal upheld the CIT(A)'s decision based on consistency with previous orders and industry practices. Therefore, the appeal of the Revenue was dismissed, and the CIT(A)'s order was upheld.

In conclusion, the Tribunal's decision favored the Assessee by upholding the deletion of the addition of unaccrued revenue from the sale of prepaid cards, based on industry practices, previous ITAT orders, and the obligation to provide services beyond the sale period as highlighted in the Terms and Conditions of the prepaid cards.