2024 (11) TMI 96 - HC - Income Tax

Taxation of receipts - Accrual of Income Vs. Deferred Revenue - Annual Maintenance Charges (AMC) collected by assessee in advance from its customers for maintenance of Lifts installed and commissioned by the respondent-assessee - assessee is following mercantile system of accounting - Assessee had treated the same in their Books of Accounts as a current liability viz., Income Received in Advance - Tribunal deleting the addition made by the Assessing Officer (AO) on account of Annual Maintenance Charges (AMC) received in advance and shown by the assessee as liability in the balance sheet especially when the period of Annual Maintenance Charges (AMC) was only one year HELD THAT - As from the nature of service provided and the monopoly exercised by reputed lift companies like respondent-assessee company, the customers have no choice. They have no choice to opt for services of other lift service providers for the lifts installed by companies like the respondent-assessee. The software which is used for operating the lifts is not freely available and never shared by the lift companies with the customers. If the contract for Annual Maintenance Service is not renewed, the cost of maintenance and running of the lifts will high and usurious as the respondent-assessee has the monopoly over not only the software but also the spares as they are not available in the open market. Even if the customer opts to terminate the contract, the respondent-assessee is not bound to refund the amount. If the customer opts to terminate the contract, the customer will still be at the mercy of the respondent-assessee should the lift malfunction. The business model which the respondent-assessee follows in so far as service under the Annual Maintenance Contract is concerned, it leaves no scope for uncertainties as far as income for provision service under its AMC model is concerned. Assessee would have been liable to pay tax under Section 65(64) r/w Section 65(105)(zzg) of the Finance Act, 1994 in the same quarter of it's receipt. Similarly, the same activity could also have been liable to tax under Section 5 of the TNVAT Act, 2006 and liable to tax under succeeding months. This is also confirmed in Schedule 11 to the Balance Sheet of the Respondent-Assessee. In fact with effect from 1st of April 2011 for the purpose of determination of tax liability, The Point of Taxation Rules, 2011 was also framed by the Central Government vide Notification No.18/2011 ST dated 01.03.2011. As per Rule 3 of the Point of taxation Rules, 2011, the point of taxation is at the time when invoice for service provided or agreed to be provided is issued. As per Rule 6 (b) of the Point of Taxation Rules, 2011 (as it stood then and since omitted), in a case where the persons providing service receives payment before the time of issuance of invoice, the time when he receives such payment to the extent of such payment shall be point of taxation. Thus the authorities, who are responsible for collecting indirect tax for the service provided would have treated the amount received towards that liability, the moment payment are received. There is also no dispute that the amount was collected by the appellant in advance towards Annual Maintenance Charges (AMC). The advance is a revenue in its hands at the time of its receipt. It is taxable in the year of its collection, as is contended by the Appellant/Income Tax Department. Further, there is no uncertainty in the amount of consideration derived for rendering of service and the amount is nonrefundable. Thus, we answer the substantial questions of law in favour of the Revenue and against the respondent-assessee.

Summary

Issues Involved:
1. Whether the Annual Maintenance Charges (AMC) received in advance by the respondent-assessee should be taxed in the year of receipt.
2. Whether the accounting treatment of AMC as a "current liability" by the respondent-assessee was appropriate.
3. Applicability of Section 41(1) of the Income Tax Act, 1961 to the AMC received by the respondent-assessee.
4. The relevance of Accounting Standards in determining the taxable income from AMC.

Issue-wise Analysis:

1. Taxation of AMC in the Year of Receipt:
The primary issue in this case was whether the AMC received in advance by the respondent-assessee should be taxed in the year it was received. The Income Tax Department argued that the AMC should be taxed in the year of receipt, irrespective of the period over which the services were to be rendered. The Tribunal had allowed the appeal of the respondent-assessee, stating that the AMC should not be taxed in the year of receipt as it was treated as a "current liability" in the books of accounts. However, the court concluded that the AMC received in advance is a revenue in the hands of the respondent-assessee at the time of its receipt and is taxable in the year of its collection. The court emphasized that there was no uncertainty regarding the consideration derived for rendering the service, and the amount was non-refundable.

2. Accounting Treatment of AMC as "Current Liability":
The respondent-assessee treated the AMC received in advance as a "current liability" in its books of accounts, arguing that it was bound to follow the "matching principle" of revenue and expenditure. The Tribunal had accepted this treatment. However, the court found this treatment inappropriate, stating that the AMC should be recognized as income in the year of receipt. The court highlighted that the "matching principle" is not an absolute principle and is not invariably applicable to every case. The court also noted that the accounting treatment should not result in a distortion of profits.

3. Applicability of Section 41(1) of the Income Tax Act, 1961:
The Tribunal had referred to Section 41(1) of the Income Tax Act, 1961, which deals with the taxability of amounts received in respect of loss, expenditure, or trading liability previously allowed as a deduction. The court found this reference misplaced, as Section 41(1) applies to situations where an allowance or deduction has been made in respect of a loss, expenditure, or trading liability, which was not the case here. The court clarified that the AMC received in advance did not fall under the purview of Section 41(1).

4. Relevance of Accounting Standards:
The court considered the relevance of Accounting Standards, particularly Accounting Standard (AS) 9, which deals with "Revenue Recognition." The court noted that the adoption of Accounting Standards ensures that financial statements are true, fair, and transparent. It emphasized that if Accounting Standards are properly applied, accounting income should be adopted as taxable income. The court observed that the respondent-assessee, following the mercantile system of accounting, should have recognized the AMC as income in the year of receipt, as there was no significant uncertainty regarding the amount of consideration derived from rendering the service.

In conclusion, the court set aside the order of the Appellate Tribunal, holding that the AMC received in advance by the respondent-assessee should be taxed in the year of receipt. The court allowed the appeal filed by the Income Tax Department, answering the substantial questions of law in favor of the Revenue.