2008 (1) TMI 447 - AT - Income Tax

Accrual Of Income - scope of total income''- Method of accounting - CIT(A) held that the advance fee recovered from the clients was the income of the assessee - Principle of Consistency - HELD THAT - Assessee received certain amounts for services to be performed over a period of time. The amount relatable to the services rendered in the year under consideration was shown as income, the reason being that the assessee became entitled to receive that amount from the client in respect of the services rendered. In other words, debt to the extent of the amount pertaining to services rendered only got vested in the assessee. The rest of the amount was taken as liability to be adjusted in subsequent year as and when the service was rendered. It is but clear that the excess amount would have to be returned in case the service was not performed in subsequent year and, therefore, in respect of such amount no debt came into existence in favour of the assessee. Therefore, this amount did not become the income. Accordingly, we are of the view that the learned CIT(A) erred in finding that the assessee was following hybrid system of accounting on the ground that the whole of the amount received from the clients as retainership fees was not declared as income in the year of receipt of the amount. Consistency of assessments - cash system of accounting - HELD THAT - In the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT held that their findings should not be taken as a general proposition of law to be followed in every case as it has confined to the facts of that case. We may add that if a manifestly wrong decision has been taken by the AO in one year or in a number of years, it will not bind the AO in assessment of a subsequent year because there cannot be any estoppel against the law. However, in this case, we find the earlier and subsequent assessments were made on correct appreciation of the principle of cash system of accounting. Since the assessee succeeds on merits on this aspect, there is no need for us to give a finding that the Assessing Officer was bound in this year to follow the past or future assessment. In the result, the appeal is allowed.

Issues Involved:
1. Whether the learned CIT(A) erred on facts and in law in holding that the advance fee recovered from the clients was the income of the assessee.
2. Whether the learned CIT(A) erred on facts and in law in not following the principle of consistency in not assessing such advance as income.

Detailed Analysis:

Issue 1: Advance Fee as Income
The assessee, an advocate, followed the cash system of accounting, recognizing income on a receipt basis. The CIT(A) incorrectly held that the assessee was following a hybrid system of accounting. The assessee had consistently followed the cash system from assessment years 1998-99 to 2001-02. The Assessing Officer (AO) examined the audit report, which confirmed the cash basis of accounting. The AO questioned why retainership fees were accounted for on an accrual basis. The assessee explained that advance retainership fees were shown as advances, and only the portion related to services rendered in the year was offered for taxation. The AO did not accept this explanation, citing Section 145, which permits only cash or mercantile systems, and added the entire advance as income, resulting in an addition of Rs. 4,89,397.

Before the CIT(A), the assessee argued that the advance retainership fees were received for the contract period, and only the portion for services rendered was transferred to the fees account, with the balance shown as a liability. The CIT(A) held that under the cash system, the entire amount received, whether arrear or advance, must be shown as income. The CIT(A) also noted that the AO had raised a similar query in the assessment year 2000-01 but did not make any addition. The principle of res judicata does not apply to income-tax proceedings, and the CIT(A) rejected this argument.

Issue 2: Principle of Consistency
The assessee provided additional evidence, including notices under Section 148, replies, and assessment orders, showing that the AO had accepted the books without adjustments for advance retainership fees in previous years. The CIT(A) did not follow the principle of consistency, which the assessee argued should apply based on the decision in Radhasoami Satsang v. CIT and Bharat Sanchar Nigam Ltd. v. Union of India. The Supreme Court in Radhasoami Satsang held that in the absence of material change, the question of exemption should not be reopened. Similarly, in Bharat Sanchar Nigam Ltd., it was held that while res judicata does not apply to tax matters for different years, courts generally adopt earlier pronouncements unless new grounds are urged or there is a material change.

Tribunal's Findings
The Tribunal referred to the charging Section 4 of the Act and Section 145, which deals with the method of accounting. It emphasized that income, not receipt, is the basis for tax. The Tribunal found an infirmity in the CIT(A)'s order, stating that the entire income received, whether arrear or advance, must be shown as income under the cash system. The assessee received amounts for services to be performed over time, and only the portion related to services rendered was shown as income. The remaining amount was a liability to be adjusted in subsequent years. The Tribunal concluded that the CIT(A) erred in finding that the assessee was following a hybrid system.

Regarding consistency, the Tribunal noted that a wrong decision in one year does not bind the AO in subsequent years. However, in this case, the earlier and subsequent assessments were correctly made based on the cash system. Since the assessee succeeded on merits, the Tribunal did not find it necessary to rule on the consistency issue.

Conclusion
The appeal was allowed, with the Tribunal ruling that the CIT(A) erred in treating the advance fee as income and not following the principle of consistency.

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