2019 (5) TMI 1394 - HC - Income Tax

Accrual of income - recognition of revenue - change in method of accounting - linked the commission income to the payment of premium by the policy holder - change enabled the reduction of tax liability of the assessee on income earned by way of insurance agency commission - AS-9 - ITAT held that the commission which is to be accrued and due and payable in the next financial years only cannot be taxed in the year under assessment - HELD THAT - It is pointed out by learned counsel appearing for the assessee on advance notice, that the change adopted by the Assessee in the method of accounting, has been accepted by the Revenue for the four subsequent AYs, which were all scrutiny assessments. The Court is not persuaded that any substantial question of law arises for consideration of the Court. - Decided against revenue

Summary

Issues:
1. Condonation of delay in re-filing the appeal.
2. Addition of income on account of change in method of accounting.
3. Interpretation of revenue recognition policy and Accounting Standard-9.
4. Consistency in accounting method over multiple assessment years.

Analysis:
1. The judgment begins with the condonation of delay in re-filing the appeal, allowing the application for the same.
2. The main issue in the appeal is the addition of income due to a change in the method of accounting by the Assessee, specifically related to insurance agency commission. The AO added ?4,49,14,054 on the grounds of non-disclosure of the change in accounting method, emphasizing the accrual basis of income.
3. The Assessee's revenue recognition policy linked commission income to payment of premium by policyholders, contrary to Accounting Standard-9 which suggests recognizing insurance agency commissions on policy commencement or renewal dates. The CIT (A) sided with the Assessee, directing the AO to verify premium payments for policies related to the disputed amount.
4. The ITAT upheld the CIT (A)'s decision, noting the Assessee's consistent use of the mercantile accounting system in subsequent years, accepted by the Revenue. The ITAT ruled that unearned commission cannot be taxed in the assessment year, leading to the dismissal of the Revenue's appeal.
5. The Assessee's change in accounting method was accepted by the Revenue in subsequent assessment years, strengthening the argument against taxing unearned commission.
6. Ultimately, the Court found no substantial legal question for consideration, resulting in the dismissal of the appeal without costs.