2018 (10) TMI 1973 - AT - Income Tax

Accrual of income - Recognition of income - Choice of assessment year - AO who had treated the subscription fees received in advance during the relevant assessment year as the income of the relevant assessment year - HELD THAT - As per the provisions of the Act, there is no concept with respect to deferred expenditure. Therefore the entire expenditure incurred for earning revenue for the relevant assessment year and the revenue spilled over to the succeeding assessment year is allowable as deduction for the relevant assessment year when the expenditure incurred in the relevant assessment cannot be apportioned towards the income earned in the subsequent assessment year. At this juncture we are reminded of the various decisions of the Higher Judiciary wherein it was held that expenditure incurred towards advertisement is allowable as deduction in the relevant assessment year though certain benefit arising out of the same can be attributable to subsequent years. As per Mercantile System of Accounting, only the accrued income for the relevant assessment year can be treated as the income for the relevant assessment year. In the case of the assessee, there is no dispute that the amount received by the assessee pertains to the services to be rendered in the immediate succeeding assessment year. Hence the assessee has rightly recognized its revenue in the succeeding assessment year. Therefore the addition made by the Ld.AO which is further sustained by the Ld.CIT(A) by treating the fees received in advance for the succeeding assessment year as the income of the assessee for the relevant assessment year is erroneous. Hence we hereby set aside the order of the Ld.CIT(A) and direct the Ld.AO to delete the addition made by him Further it is pertinent to mention that the facts in the case of the assessee are not identical to the facts of the cases relied by the Ld.Revenue Authorities. Appeal of the assessee is allowed.

Summary

Issues:
1. Validity of reopening assessment under Section 147 of the Income Tax Act.
2. Treatment of subscription fees received in advance as income for the relevant assessment year.

Analysis:

Issue 1: Validity of Reopening Assessment
The case involved a private limited company engaged in online services, which filed its return for the assessment year 2007-08. The assessment was completed, but later, the Assessing Officer (AO) noticed a change in the accounting policy of the company. Consequently, the assessment was reopened under Section 147 of the Act. The appellant contested the validity of the reopening, arguing that the income did not accrue during the relevant assessment year. However, both the AO and the Commissioner of Income Tax (Appeals) upheld the reopening. The Appellate Tribunal, after detailed consideration, did not address this issue as the appeal was decided on merits.

Issue 2: Treatment of Subscription Fees
The main contention was regarding the treatment of subscription fees received in advance as income for the relevant assessment year. The appellant followed the Mercantile System of Accounting and recognized the advance fees as income in the succeeding assessment year. The AO, however, treated the entire amount as income for the relevant year, citing the absence of deferred income recognition under the Act. The Commissioner of Income Tax (Appeals) upheld this decision, considering a portion of expenses incurred in the relevant year. The Appellate Tribunal disagreed with this approach, emphasizing that under the Act, there is no provision for deferred expenditure. It noted that only accrued income for the relevant year should be treated as income. Therefore, the Tribunal directed the AO to delete the addition made for the subscription fees received in advance, as it pertained to the succeeding assessment year. The Tribunal also highlighted that the facts of this case were distinct from the cases relied upon by the Revenue Authorities.

In conclusion, the appeal was allowed, and the Tribunal set aside the Commissioner's order, directing the AO to delete the addition made for the subscription fees received in advance. The judgment was pronounced on October 17, 2018, in Chennai.