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2016 (4) TMI 471 - AT - Income TaxAddition on account of change in the accounting method of the company - Held that - As from an incorrect and flawed accounting Policy Company has now adopted a sound accounting policy. Secondly, when in subsequent years, the revenue itself has accepted the changed accounting policy of the company on period basis. The assessee being company which is required to maintain its books of accounts in accordance with section 209 of The Companies Act, 1956 on accrual basis. The principle of accrual is violated if the revenue is recognized at the time of raising of the bill irrespective of period of rendition of services. Therefore according to us this policy is also in accordance with the Companies Act 1956. Merely because there is down fall in profit of the company due to change in accounting policy cannot lead to a conclusion that it is not bonafide. Regarding additional evidences filed by the assessee as submitted by the learned DR, we are of the view that the assessee has submitted the copies of those bills only to explain the accounting of the Annual maintenance Income. Further the comparative chart was verified by CIT (A) was to know about any leakage of revenue. Hence, we are of the view that the accounting policy followed by the company is bonafide and consistent with the accounting standard 9 of ICAI on Revenue Recognition , Income Tax Act as correct profit would be deduced on following this policy and section 209 of The Companies Act, 1956. Therefore, we confirm the order of CIT (A) in deleting the addition - Decided in favour of assessee Addition on account of provision for license purchases - Held that - On query by the bench, Ld. AR was asked to show how the purchase provision is made. In response to that he submitted a statement which was before lower authorities, wherein details of the provision of ₹ 6154283/- and the details of reversal from that account of ₹ 2310623/- was available which was a wrong accounting entry. Therefore actual provision was of ₹ 38,43,660/- only. This amount tallies with the statement submitted by the assessee. We have perused statement where the details of sales invoice, date of invoice, party wise amount payable and a product wise bifurcation, amount of sales, name of the supplier, date of payment made to supplier was available. In view of this, we are of the opinion that the liability provided by the assessee is quantified, crystallized and not based on estimates. Hence, we do not see any reason for the confirming the disallowance of this amount. - Decided in favour of assessee Addition on account of provision for commission - Held that - Agreement assessee was liable to pay 18% of the license fee earned as a commission to that particular party and this commission expenditure is being paid since assessment year 2003-2004, and there is no change in the circumstances of the case. It was further submitted that the moment the sale price is billed to customer commission accrues to the service provider. Therefore, the commission is based on sales effected by the company. CIT (A) also considered that a sale of ₹ 1,28,36,798/-has been booked and commission at the rate of 18% calculated and is payable in terms of that particular agreement, therefore, there is a crystallized liability and was not a contingent liability and the fact of payment of commission at the rate of 18% on sales is available with the assessing officer and commission expenditure exactly matches with the agreement. We also could not find that what new evidence were available with the CIT (A) and not with AO when the percentage of commission is fixed and the recipient of income is also fixed. The genuineness of the expenditure is not at all doubted and the facts that commission expenditure is paid to the party since AY 2003-04 is not disputed, therefore, we confirm the order of the CIT (A) deleting the disallowance on account of the commission expenditure - Decided in favour of assessee
Issues Involved:
1. Deletion of addition due to change in accounting method. 2. Deletion of addition on account of provisions for license purchase. 3. Deletion of addition on account of provision for commission. Detailed Analysis: 1. Deletion of addition due to change in accounting method: The first issue pertains to the deletion of an addition of Rs. 62,98,812 made by the Assessing Officer (AO) due to a change in the accounting method of the company. The company shifted from recognizing revenue from annual maintenance service contracts based on bills raised to clients to recognizing revenue based on the period involved in the maintenance contract. The AO argued that this change was not bona fide and led to a substantial reduction in profit. The Commissioner of Income-tax (Appeals) [CIT (A)] deleted the addition, stating that the change was necessary as per Accounting Standard 9 on revenue recognition issued by the ICAI and was based on the accrual method of accounting. The Tribunal upheld the CIT (A)'s decision, noting that the new method was more appropriate, in line with Accounting Standard 9, and consistent with the Companies Act, 1956. The Tribunal also observed that the revenue accepted this policy in subsequent years. 2. Deletion of addition on account of provisions for license purchase: The second issue involves the deletion of an addition of Rs. 61,54,283 on account of provisions for license purchase. The AO disallowed this amount, arguing that the provision was made without any basis. The CIT (A) deleted the addition, stating that the provision was a crystallized liability and not based on estimates. The Tribunal upheld the CIT (A)'s decision, noting that the provision was supported by detailed evidence, including sales invoices, party-wise amounts payable, and payment dates. The Tribunal concluded that the liability was quantified and crystallized, not estimated, and therefore should be allowed. 3. Deletion of addition on account of provision for commission: The third issue concerns the deletion of an addition of Rs. 23,10,623 on account of provision for commission. The AO disallowed this amount due to a lack of justification provided during the assessment proceedings. The CIT (A) deleted the disallowance, noting that the commission was based on a commercial agreement with a company, which had been in place since the assessment year 2003-04. The Tribunal upheld the CIT (A)'s decision, stating that the commission was a crystallized liability, not contingent, and was consistently paid in previous years. The Tribunal found no new evidence submitted before the CIT (A) that was not available to the AO and confirmed the deletion of the disallowance. Conclusion: The Tribunal dismissed the revenue's appeal, confirming the CIT (A)'s deletions of the additions for all three issues. The Tribunal found that the changes in accounting methods and provisions were bona fide, supported by evidence, and consistent with accounting standards and legal requirements. The order was pronounced in the open court on 10/03/2016.
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