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2016 (9) TMI 807 - AT - Income TaxNature of income - receipt basis OR accrual basis - amounts received by assessee in respective assessment years - Held that - The amount can not be brought to tax on receipt basis unless the same has accrued to assessee as income. In view of the facts of the case as well as law on the subject, we are in agreement with the order of the CIT(A) in AY. 2006-07, wherein he has correctly analysed the legal and factual position and deleted the amount in that year. Further, as seen from the order of the CIT(A) in AY. 2010-11, it is very clear that Ld. CIT(A) misunderstood the entire scheme. First of all, the fee was not collected from gullible students by assessee, as the admission was taken in the ICFAI in the distinct learning programme. As a part of the curriculum services of placement were also offered, which is optional. Therefore, there is no compulsion on the part of the student to avail the placement services. Secondly, the mechanism to collect fee from gullible students at the time of admission does not arise, as the student were given an option which they may or may not avail. There is also no false hope of providing employment, as the services for employment were rendered with a minimum guarantee of salary, which the students may avail or may not avail. Terms of agreement are very clear as most of the options are given to the student itself and the obligation to render services ends at the end of fourth year or accepting the placement by the student. CIT(A) in AY. 2010-11 did not even make any comment why it has to be deferred from the earlier order and why a different stand is taken on the same set of facts. Further, there is also a factual error in the finding of the CIT(A) that no services were rendered and no refund was ever given by assessee . These two findings were also not correct as assessee was rendering services from AY. 2008-09 to 2012-13 and there was refund in AY. 2013-14, since these facts even though placed before the Ld. CIT(A), were not correctly appreciated, we are not in a position to approve the order of CIT(A) in AY. 2010-11. We are of the firm opinion that assessee has correctly accounted the incomes in the third and fourth years on accrual basis and as seen from the table of amounts received and amounts offered for tax in respective years, it is the department which is not consistent in its assessment procedure. As can be seen, Revenue has accepted higher amounts offered than the receipts (advances) in the interregnum period without disturbing in AYs 2007-08, 2008-09 and 2009-10 and also accepting offered incomes in AY. 2011-12 and 2012-13. Assessee s method of accounting is according to the prescribed method of accounting of ICAI and method of accounting even though not notified, is binding following the principles laid down by the Hon ble AP High Court in the case of CIT Vs. Pact Securities & Financial Services Ltd., & Others 2015 (8) TMI 471 - ANDHRA PRADESH HIGH COURT . In view of the facts stated above and the law on the subject, we are of the opinion that assessee has correctly accounted the incomes in third and fourth year on accrual basis and the amounts cannot be brought to tax on receipt basis, as these are only advances without any obligation to service in the year of receipt. Accordingly, the Revenue s appeal in AY. 2006-07 is dismissed upholding the order of CIT(A) and assessee s appeal in AY. 2010-11 is allowed setting aside the order of CIT(A) in that year on the issue. Addition made towards excess provision of gratuity and EL encashment - Held that - As seen from the assessment order, there is no discussion while making these additions, whether assessee has added them in the computation suo motto is also not clear. Before the Ld. CIT(A), assessee submitted that there is no such debit to P&L A/c and no details were called for by the AO in the course of assessment proceedings. It was also further submitted that there is no indication as to the reasons why the additions were made. In spite of that, the Ld. CIT(A) dismissed the grounds stating that no submissions were made. We are also unable to verify on what basis these two additions were made by the AO. In the computation statement, assessee itself has added an amount of ₹ 4,02,029/- and returned income at ₹ 59,36,876/- was taken as basis for making the addition. Therefore, further addition of ₹ 1,56,231/- seems to be without any basis. Likewise, EL encashment of ₹ 1,41,271/-. We are not sure whether any audit report has quantified the above amounts. Since the AO s order is silent and CIT(A) order is also cryptic, we have no option than to set aside these two additions to the file of AO to examine and decided the issue afresh. If these amounts were brought to tax by mistake, AO is directed to delete the same. With these directions, the grounds pertaining to these additions are restored to the file of AO for examination of record and deciding afresh. Grounds are allowed for statistical purposes.
Issues Involved:
1. Taxability of special placement fees on receipt basis vs. accrual basis. 2. Addition towards excess provision of gratuity and EL encashment. Issue-wise Detailed Analysis: 1. Taxability of Special Placement Fees on Receipt Basis vs. Accrual Basis: The primary issue in these appeals pertains to whether the amounts received by the assessee in the respective assessment years should be assessed on a receipt basis or on an accrual basis in the later years. Facts and Arguments: - The assessee provides placement services to students of MBA programs conducted by ICFAI through a Special Placement Scheme (SPS). The fees for these services are collected by ICFAI at the beginning of the course and remitted to the assessee. - For AY 2006-07, the assessee received ?3,80,85,000 but did not offer it for tax in that year, arguing that the income should be recognized in the third and fourth years when the obligation to provide services arises. - The Assessing Officer (AO) brought the entire amount to tax in AY 2006-07 on the basis that the assessee received the amount during the year. - The CIT(A), however, accepted the assessee’s contentions and deleted the addition, stating that the special placement fee represents only an advance and becomes income only when the service obligation is fully discharged. Legal Principles and Precedents: - The CIT(A) referenced several clauses from the Memorandum of Understanding (MOU) and the Alchemist (Special Placement Scheme) Regulations, 2005, which clarified that the obligation to provide placement services arises only after the completion of the course. - The CIT(A) cited the Supreme Court’s decision in E.D. Sassoon & Co. Ltd. v. CIT, which holds that income accrues when the assessee acquires a right to receive it. - The CIT(A) also referenced the Punjab Tractors Co-operative Multipurpose Society Ltd. case, where it was held that advances are not income until the right to appropriate them arises. - The Chennai Special Bench of the Tribunal in Asstt. CIT v. Mahindra Holiday Resorts (India) Ltd. held that amounts received upfront for services to be rendered over a period are not chargeable to tax in the initial year. Conclusion: - The Tribunal upheld the CIT(A)’s order for AY 2006-07, agreeing that the amounts received represent advances and should be taxed on an accrual basis when the obligation to provide services arises. - For AY 2010-11, the CIT(A) confirmed the addition, misunderstanding the scheme and incorrectly concluding that no services were rendered. The Tribunal set aside this order, noting that the assessee’s method of accounting was consistent and in accordance with ICAI guidelines. 2. Addition Towards Excess Provision of Gratuity and EL Encashment: - In AY 2010-11, the AO made additions towards excess provision of gratuity and EL encashment without any discussion or clear basis in the assessment order. - The CIT(A) dismissed the grounds, stating no submissions were made by the assessee. - The Tribunal noted the lack of clarity and details in the AO’s and CIT(A)’s orders and set aside these additions to the AO for fresh examination, directing the AO to delete the amounts if they were brought to tax by mistake. Final Order: - The Tribunal dismissed the Revenue’s appeal for AY 2006-07 and allowed the assessee’s appeal for AY 2010-11 for statistical purposes, setting aside the additions towards gratuity and EL encashment for fresh examination by the AO.
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