2023 (7) TMI 1525 - HC - Income Tax

Addition on account of unearned revenue - HELD THAT - Tribunal has returned a finding of fact that these very amounts were offered to tax in the subsequent year, as and when services were offered. Two findings of fact emerge that the money received by the respondent/assessee was offered for imposition of tax only when services were rendered. Second, this was an accounting practice followed consistently for several years. Lastly, since the tax rate remained the same, no loss was caused to the revenue by the respondent/assessee offering the aforementioned amount for the tax in the subsequent period. This position of law appears to have been, in a sense, recognized by the coordinate bench of this court in a judgment rendered in Commissioner of Income Tax-III vs Shyam Telelink Ltd. 2018 (12) TMI 585 - DELHI HIGH COURT . Thus the proposed question no. (i) in our opinion does not require consideration. Addition on account of provision for liquidated damages - We have in another appeal of the revenue 2023 (8) TMI 591 - DELHI HIGH COURT , remanded the matter to the Tribunal for reconsideration. Tribunal, in the instant case, has followed decision rendered by it in AY 2004-05, which is the AY that is involved in the matter we have remanded for reconsideration. Therefore, the impugned order is set aside on the issue concerning liquidated damages. Directions contained in our order passed today supra will apply mutatis mutandis in this matter as well, as regards the issue concerning liquidated damages. Counsel for the parties will appear before the Tribunal on 28.08.2023.

Summary

Issues:
1. Assessment of unearned revenue
2. Assessment of provision for liquidated damages

Analysis:

Assessment of Unearned Revenue:
The appellant/revenue challenged the ITAT order deleting the addition of Rs. 1,02,88,91,000 made by the Assessing officer on account of unearned revenue. The Tribunal found that the amounts were offered for tax in subsequent years when services were rendered. This consistent practice did not cause any revenue loss as the tax rate remained the same. The court referred to a similar case and emphasized that revenue recognition is based on accounting principles, and the Revenue does not lose anything if tax is received in the succeeding year. The court found that the addition of unearned revenue was unjustified and deserved to be deleted based on the contractual terms and consistent accounting practices.

Assessment of Provision for Liquidated Damages:
Regarding the provision for liquidated damages, the court set aside the impugned order and remanded the matter to the Tribunal for reconsideration. The court noted that a similar issue in a previous appeal had been remanded for reconsideration, and the same approach would be taken in this case. The court directed that the decision in the previous appeal would apply mutatis mutandis in this matter as well. The parties were instructed to appear before the Tribunal on a specified date for further proceedings. The appeal was disposed of accordingly.

In conclusion, the High Court upheld the deletion of the addition of unearned revenue based on consistent accounting practices and remanded the matter concerning the provision for liquidated damages for further reconsideration by the Tribunal. The judgment highlighted the importance of adhering to accounting principles in revenue recognition and ensuring that tax implications are aligned with the actual provision of services.