2022 (4) TMI 894 - AT - Income Tax

Accrual of income - subscription monies received in advance - Addition on account of deferred income - CIT-A deleted the addition - whether CIT(A) erred holding that the monies received are shown as deferred revenue by the assessee in the year of receipt and are offered as income in the year when programme is aired when the fact remains that the assessee is following Mercantile System of accounting and the impugned revenue has to be offered only in the current year? - HELD THAT - Undisputed fact that emerges are that the assessee provide DTH services to various subscribers. The assessee receives subscription amount on quarterly / half-yearly / annual basis and credit the same to deferred income account . From this account, the revenue earned, for each day, are transferred to subscription account which is offered to tax by way of credit to Profit Loss Account. This method of accounting has consistently been followed by the assessee since commencement of business in AY 2008-09. The said method is also in line with the requirement of AS-9 issued by ICAI. The assessee follows the same treatment to input costs. The cardinal principal of taxing the income under mercantile basis of accounting is that the income should have accrued to the assessee. Mere advances could not be brought to tax. The amount lying in deferred income account , in assessee s case, is nothing but advances received for rendering services in future period. Unless these receipts are held to be taxable under the statute, the same could not be brought to tax since only those incomes could be taxed which has accrued to the assessee during the year. In assessee s case, these are unearned revenue and mere advances. The income would accrue to the assessee in future. To clothed the same as the income of the assessee during this year, is bereft of any merits. The argument that the money is never refunded to the subscribers, is not much germane to the issue since the subscription money paid by the subscribers is governed by the contractual terms between the assessee and the subscribers. Nevertheless, the said fact would not alter the position that this income was nothing but mere advances for rendering of services in future. Therefore, the impugned order could not be faulted with. The monies received were shown as deferred revenue in the year of receipt and offered as income in the year when the program is aired. Therefore no illegality or irregularity could be found in the methodology adopted by the assessee in registering the revenue in the year of telecast of programme. We find that the facts in the case of present assessee are quite similar. The subscription monies received in advance are treated as deferred income and offered to tax on day to day basis which is correct methodology of revenue recognition under mercantile system of accounting. Therefore, the submissions that this case law would not apply to the case of the assessee, could not be accepted. - Decided against revenue.

Summary

Issues Involved:
1. Whether the deferred income of ?135,86,11,615/- should be recognized in the year of receipt or when the program is aired.
2. The correctness of the methodology adopted by the assessee for revenue recognition under the mercantile system of accounting.

Issue-wise Detailed Analysis:

1. Deferred Income Recognition:
The primary issue revolves around the period of revenue recognition. The assessee, a DTH service provider, received subscription income in advance and recorded it as deferred income. The revenue was recognized daily over the subscription period and transferred from the deferred income account to the subscription income account, aligning with the requirements of Accounting Standard-9 (AS-9) on 'Revenue Recognition'. The Assessing Officer (AO) added the deferred income to the assessee's income for the year, arguing that there was no obligation to refund the subscription money, thus it should be taxed upon receipt. However, the assessee contended that the income should only be recognized when the service is provided, adhering to the consistent accounting method since AY 2008-09.

2. Methodology of Revenue Recognition:
The assessee's method of revenue recognition was challenged by the AO, who argued that the subscription receipts should be taxed in the year of receipt under the mercantile system of accounting. The assessee, however, argued that the deferred income represented unearned revenue and should only be recognized when the service is rendered. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the assessee's method, referencing a similar case involving M/s Sun TV Network Ltd., where the Tribunal ruled in favor of recognizing revenue when the program is aired, not when the money is received.

Appellate Proceedings:
During the appellate proceedings, the CIT(A) relied on the Tribunal's decision in the case of M/s Sun TV Network Ltd., which had a similar factual matrix. The Tribunal had previously ruled that there was no illegality in the methodology adopted by the assessee in recognizing revenue in the year of telecast. Consequently, the CIT(A) directed the AO to delete the additions made towards deferred revenue for all the assessment years in question.

Our Findings and Adjudication:
The Tribunal found that the assessee consistently followed a method of accounting that complied with AS-9 and was in line with the mercantile system of accounting. The deferred income was considered mere advances for future services, and thus, could not be taxed until the services were rendered. The Tribunal referenced previous rulings, including the case of M/s Sun TV Network Ltd., where similar practices were upheld, and found no illegality or irregularity in the assessee's methodology. The Tribunal dismissed the revenue's appeal, affirming that the deferred income should be recognized when the service is provided, not upon receipt.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the deferred income should be recognized in the year the service is rendered, in accordance with the mercantile system of accounting and AS-9. The revenue's appeal was dismissed for all the assessment years, and the order was pronounced on 01st April 2022.