Advance is taxable in year of receipt

[Vivek Jalan]

Incase of a works contractor or a AMC provider or another service provider, collection of the entire year’s charges is done at one go in advance. The amount is many a times recorded as "current liability" in the balance sheet as "income received in advance."

The question for income tax purpose is whether it is to be treated for Income Tax purpose that the entire amount is taxable income in the year of receipt, or on grounds of "matching principle" and AS-9 guidelines it is taxable under mercantile accounting and deferred. In the case of THE COMMISSIONER OF INCOME TAX, CHENNAI VERSUS M/S. JOHNSON LIFTS PVT. LTD. [2024 (11) TMI 96 - MADRAS HIGH COURT] it was held that Advance AMC receipts constitute income in the year of receipt as –

1. There was no clause for refund, and the amounts were non-refundable.

2. The provisions under Section 5 of the Income Tax Act mandate the inclusion of amounts received in total income when received, irrespective of when the service obligation is fulfilled

3. The reliance on the "matching principle" under AS-9 is misplaced, especially where the consideration is received upfront and the service obligation spans a short duration (one year say).

4. The principle is not absolute and must yield to specific tax laws

5. Invocation of Section 41(1) of Income tax Act to substantiate the deferred liability treatment was erroneous as the section pertains to remission or cessation of a liability, not recognition of revenue for services to be rendered.

It is pertinent to note that the Point of Taxation Rules under Service tax and the VAT Rules were also deliberated in as much as incase income is chargeable to tax there, then why should it not be taxed in income tax. However, the main difference there and here is the fact that such rule for payment of tax on advance basis is specially carved out in such Laws. In income tax Act Section 145 allows acceptance of accrual basis of accounting.