2018 (6) TMI 1585 - AT - Income Tax

Income recognition - addition in the hands of the assessee for not having recognized the revenue income in accordance with Mercantile System of Accounting - recovering the dues from the clients of the assessee - postponement of revenue recognition - AS-9 - amount uncertain to recover - appellant company has also filed a suit to recover the amount - significant uncertainty in the ultimate collection of the revenue - HELD THAT - The entire amount has to be collected from a foreign government undertaking over which Indian Judicial Authorities does not appears to have direct jurisdiction. It has become a complicated affair to recover the amount through negotiations and International Courts of Justice. In this fluid situation, there is a substantial uncertainty for recovering the amount from the clients of the assessee. Considering these facts, it is evident that Accounting Standard 9 has to be squarely applied in the case of the assessee, while determining the real income of the assessee. Further there is no point in recognizing the income which cannot be recovered and subsequently write it off as bad debts in the subsequent years. Therefore, we find merit in the arguments advanced by the Ld.AR. Considering the Accounting Standard 9 issued by the Institute of Chartered Accountants of India which is duly recognized by the Central Government, we are of the view that in the case of the assessee, revenue need not be recognized for ₹ 18,94,96,500/- for the year ending 31.03.2013 viz., the relevant assessment year 2013-14 as it is substantially uncertain to recover. Accordingly we hereby direct the Ld.AO to delete addition - decided in favour of assessee

Summary

Issues Involved:
Recognition of revenue income under Mercantile System of Accounting.

Detailed Analysis:

Issue 1: Recognition of Revenue Income
- The appellant contested the addition of &8377; 18,94,96,500/- by the Ld.AO for not recognizing revenue income in accordance with the Mercantile System of Accounting.
- The Ld.AO observed that the appellant had not recognized the revenue from a contract due to uncertainty in collection, as per Accounting Standard 9 (AS9).
- The Ld.CIT(A) upheld the Ld.AO's decision, stating that the appellant's claim of uncertainty in collection was not valid as the appellant had filed a suit in South Africa to recover the amount.
- The Ld.CIT(A) also noted that the appellant had previously written off bad debts in a different assessment year, but the circumstances in the current assessment year were different.
- The appellant argued that revenue recognition should be postponed if there is uncertainty in collection, as per AS9.
- The ITAT Chennai, after examining AS9, concluded that revenue need not be recognized when there is substantial uncertainty in collection.
- The ITAT Chennai found merit in the appellant's argument and directed the Ld.AO to delete the addition of &8377; 18,94,96,500/- for the relevant assessment year 2013-14.

This detailed analysis covers the issues involved in the legal judgment regarding the recognition of revenue income under the Mercantile System of Accounting.