2019 (9) TMI 495 - AT - Income Tax

Accrual of income - Addition on account of advance billings - whether the said amount has not accrued as income during the year under consideration? - Appellant prays that the change in the method of accounting adopted by the Appellant since AY 2004-05 is a bonafide change - HELD THAT - We find that the above issue is decided against the assessee by the order in assessee s own case for AY 2004-05 2015 (11) TMI 995 - ITAT MUMBAI as held there was tenure of license/product but there was no certainty that in every subsequent year some determinate service had to be provided by it, that there was no determined/committed expenditure which the assessee was required to incur in the future years towards the corresponding share of revenue, that the indeterminate event of providing of updates and services as and when the they were developed which had been in keeping with the industrial norm. The assessee had no right to postpone the revenue. Inspite of adequate opportunitie, the assessee had not filed any facts before the FAA or us, as stated earlier, in that regard. - Decided against assessee. Deduction for royalties - HELD THAT - As in assessee s own case for AY 2004-05 2015 (11) TMI 995 - ITAT MUMBAI assessee s contention that revenue on account of advance billing should be spread over for a period of time has been rejected by the AO which has been confirmed by the Tribunal also. Once that is so, then contention of the assessee that royalty which is payable on such advance billing in accordance with the agreement, should also consequently be allowed in this year only. The DRP has acknowledged this fact and has directed that if the assessee finally accepts the assessability of entire billing amount as revenue in the current year, then the assessee would be entitled for 30% deduction on account of royalty. Thus, AO is directed to allow the claim of deduction of royalty in this year in accordance with law Addition on account of alleged un-reconciled entries of Annual Information Report - AO finds that the assessee has not duly accounted for the above sum and offered it to tax whereas the assessee argues that it has been duly accounted for and offered to tax - HELD THAT - The above factual matter needs verification at the level of the AO for ascertaining the facts. Therefore, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to make an order afresh following the above Instruction of CBDT, after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO. Thus the 2nd ground of appeal is allowed for statistical purposes. As the matter has been restored to the file of the AO, we are not adverting to the case-laws relied on by the Ld. counsel.

Summary

Issues Involved:
1. Addition on account of advance billings.
2. Deduction for royalties related to advance billing.
3. Addition on account of un-reconciled entries in the Annual Information Report (AIR).
4. Infructuous grounds of appeal.

Issue-wise Detailed Analysis:

1. Addition on Account of Advance Billings:
The assessee challenged the addition of ?6,09,38,321 made by the Assessing Officer (AO) on account of advance billings, arguing that the amount had not accrued as income during the year under consideration. The AO, referencing Schedule 8 (current liabilities) of the balance sheet as on 31.03.2007, noted an advance billing sum of ?34,70,15,359. He reduced ?28,60,77,038 from this amount and taxed the net amount of ?6,09,38,321. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this addition. The ITAT referred to its previous decision in the assessee’s case for AY 2004-05, emphasizing that income accrual must be real and based on the mercantile system of accounting. The Tribunal found that the receipt and accrual of income occurred when the sale proceeds of software were received, not when the software's lifespan ended. Consequently, the method adopted by the assessee, which deferred more than 75% of its revenue to future periods, was not justified and was considered to distort the taxable income. Thus, the ITAT dismissed the ground of appeal No. 1.1 and 1.2.

2. Deduction for Royalties Related to Advance Billing:
The assessee contended that if the revenue from advance billing was recognized in the current year, the corresponding royalty expenses amounting to ?1,82,81,496 should also be allowed as a deduction. The ITAT referred to its decision for AY 2006-07, where it was held that if the entire billing amount was recognized as revenue in the current year, the assessee would be entitled to a 30% deduction for royalty. Following this precedent, the ITAT directed the AO to allow the deduction for royalty in accordance with the law. Thus, ground of appeal No. 1.3 was allowed for statistical purposes.

3. Addition on Account of Un-reconciled Entries in the Annual Information Report (AIR):
The AO added ?14,31,988 due to the assessee's failure to reconcile certain entries in the AIR. The assessee argued that this amount had already been considered as income and offered to tax, resulting in double taxation. The ITAT noted that the AO had provided the assessee with AIR details and requested reconciliation of transactions amounting to ?1,10,07,792. While most entries were reconciled, ?14,31,988 remained un-reconciled. The ITAT referred to CBDT Instruction No. 05/2013, which mandates verification of TDS mismatches. The Tribunal found that the factual matter needed verification at the AO's level to ascertain whether the amount was duly accounted for and offered to tax. Therefore, the ITAT set aside the CIT(A)'s order on this issue and restored the matter to the AO for fresh adjudication, following the CBDT instruction. Thus, the 2nd ground of appeal was allowed for statistical purposes.

4. Infructuous Grounds of Appeal:
The assessee's counsel submitted that the 3rd and 4th grounds of appeal were infructuous as the AO had already provided relief while giving effect to the CIT(A)'s order. The ITAT agreed with this submission and dismissed these grounds as infructuous.

Conclusion:
The appeal was partly allowed, with specific directions for fresh adjudication on certain issues and dismissal of others as infructuous. The order was pronounced in the open Court on 22/07/2019.