2022 (12) TMI 784 - AT - Income Tax

Revenue recognition - Addition on account of operation and maintenance service charges of transmission lines - Charges neither supported by agreement nor even paid by the other party to whom the services were rendered - bill was raised but not accounted for in the books of accounts by the assessee company - why the said amount should not be treated as income of the assessee for the year under consideration particularly when the assessee company is following the mercantile system of accounting drawing drawn reference to the Audit Report submitted by the Statutory Auditor? - HELD THAT - We therefore find that the assessee has suitably demonstrated that there were uncertainties regarding the determination of the amount in absence of any agreement with UT Electricity Department as well as its ultimate collection and once, there was resolution and acceptance thereof at the revised figure after indulgence by Central Electricity Authority, the revenue has been duly recognized in the books of accounts in the subsequent financial year. We find that the assessee has been consistent in following the said policy as can be seen from the audit report where bills raised for F.Y. 2010-11 have been accounted for in the year under consideration and which has infact, formed the basis for the action on part of the AO. AO cannot follow dual approach in taxing the revenues pertaining to earlier financial year and at the same time, disputing the deferment of revenues for the year under consideration on account of similar uncertainties involved. We see no justifiable basis to allow the disturbance of well-accepted accounting policy consistently followed by the assessee where the recognition of revenue is deferred where there are visible uncertainties involved in quantifying and realization of revenues. In the result, the addition on account of operation and maintenance service charges of transmission lines is hereby set-aside and the ground of appeal is allowed.

Summary

Issues Involved:
1. Justification of the addition of Rs. 1,43,06,414/- made on account of operation and maintenance service charges of transmission lines.

Detailed Analysis:

Issue 1: Justification of the addition of Rs. 1,43,06,414/- made on account of operation and maintenance service charges of transmission lines

Facts of the Case:

The assessee company, engaged in the business of power transmission, filed its return of income declaring a loss, which was later revised. The case was selected for complete scrutiny, and during the assessment proceedings, one of the issues raised was the amount of Rs. 1,43,06,414/- for Operation and Maintenance Services. The bill was raised but not accounted for in the books of accounts by the assessee during the financial year relevant to the assessment year 2015-16.

Assessee's Argument:

The assessee argued that there was uncertainty regarding the receipt of the amount as the billing was disputed by UT Chandigarh. Since there was no agreement between the assessee and UT Chandigarh, the amount should be accounted for on a receipt basis as per the significant accounting policy adopted by the company. The assessee referred to Accounting Standard-9, which states that revenue recognition is concerned with the timing of recognition of revenue in the statement of profit and loss. Where uncertainties exist regarding the determination of the amount or its associated costs, revenue recognition may be postponed to the extent of uncertainty involved.

Assessing Officer's (AO) Argument:

The AO did not accept the assessee's submission, stating that under the mercantile system of accounting, income must be accounted for in the books when the expenses attributable to earning such income have already been accounted for and debited to the Profit & Loss Account. Since the assessee had already provided services and raised a bill, the invoice value of Rs. 1,43,06,414/- should be part of the assessee's income.

Commissioner of Income Tax (Appeals) [CIT(A)]'s Decision:

The CIT(A) upheld the AO's decision, stating that the accounting policies of the assessee company cannot supersede the express provisions of the Income Tax Act, which mandate that companies follow the mercantile system of accounting. The revenue is measurable at the time of raising the bill, and the uncertainty arises only subsequent to raising the bills. Therefore, the addition made by the AO was sustained.

Tribunal's Analysis:

The Tribunal noted that the invoice for Rs. 1,43,06,414/- was raised based on a certain percentage of the capital cost of the transmission line, and within a few days, UT Electricity Department contested the invoice and referred the matter to the Central Electricity Authority for clarification. The matter was resolved, and a revised invoice of Rs. 99,11,248/- was raised and accounted for in the financial year 2018-19, which was accepted by the Revenue. The Tribunal found that the assessee demonstrated uncertainties regarding the determination and ultimate collection of the amount in the absence of an agreement with UT Electricity Department. The revenue was recognized in the books in the subsequent financial year after resolution.

Conclusion:

The Tribunal held that the AO cannot follow a dual approach by taxing revenues pertaining to an earlier financial year while disputing the deferment of revenues for the year under consideration due to similar uncertainties. The Tribunal set aside the addition of Rs. 1,43,06,414/- and allowed the appeal of the assessee.

Order:

The appeal of the Assessee was allowed, and the order was pronounced in the open Court on 30/11/2022.