2018 (5) TMI 1082 - AT - Income Tax

Addition on account of income not offered to tax - revenue recognition - AS -9 issued by ICAI - Held that - The relevant clause relied upon by the ld. AO from AS-9 on revenue recognition pertains to the sale of goods where the risk and reward incidental to the ownership of the product has been transferred by the seller to the buyer. But in the instant case, the assessee has not made any sale of goods instead it only received a consideration in the form of royalty for enabling the usage of its trade mark Vibes . Hence as per the revenue recognition prescribed under AS-9 of ICAI in respect of royalties, the same has to be recognized only over the validity of tenure of the agreement which has been rightly done by the assessee. Hence we have no hesitation to direct the AO to delete the addition - Decided in favour of assessee.

Summary

Issues: Whether the addition of ?20,08,334 on account of income not offered to tax was justified.

Analysis:
1. The appeal arose from the order of the Commissioner of Income Tax(Appeals) against the order passed by the Income Tax Officer under section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2007-08.

2. The main issue was whether the Commissioner was right in confirming the addition of ?20,08,334 on account of income not offered to tax. The assessee, a private limited company running a beauty parlour, received ?22,00,000 from two parties for using its trademark "Vibes" at their centres. The assessee recognized ?1,91,666 as income for the year and treated the remaining ?20,08,334 as goodwill in the balance sheet.

3. The Income Tax Officer observed that the entire risk was shifted to the other party, making the consideration non-refundable, and thus, the income should not be deferred over the agreement period. The Commissioner upheld this decision.

4. The Appellate Tribunal found that the agreement was valid for five years, and the assessee had ongoing responsibilities throughout this period. Citing a Special Bench decision, the Tribunal supported the deferment of revenue recognition over the agreement term. Referring to Accounting Standard-9, the Tribunal concluded that the income should be recognized over the agreement period, not immediately.

5. Relying on the principles of revenue recognition for royalties, the Tribunal directed the Income Tax Officer to delete the addition of ?20,08,334. Consequently, the appeal of the assessee was allowed, and the judgment was pronounced on 15.05.2018.