2012 (7) TMI 149 - AT - Income Tax

Income recognition - income accrued - assessee received consultancy fees from UG Hospitals Pvt. Ltd.for the term of five years - lower authorities treated the entire fee receipt in the year of appeal - Held that - In service contract the income has to be recognized in proportion to the services rendered in a particular year. In the present case, admittedly the assessee has not rendered services for the period of 5 years, thus there is no point of recognizing the entire amount as income of the assessee in the year of receipt. It cannot be said that assessee has created such a debt or right against the M/s UG Hospital that the income for the entire 5 years had accrued to the assessee - as decided in CIT Versus. Dinesh Kumar Goel 2010 (10) TMI 287 (HC) that though fees for full course of package is received in advance and service is to be rendered in next financial year income will not be not recognized unless service rendered - assessee s reliance of AS-9 issued by the ICAI is also relevant which states that revenue from service transactions is usually recognized as the service is performed, either by proportionate completion method or by the completed service contract method - in favour of assessee.

Summary

Issues Involved:
1. Assessment of consultancy fees received for a five-year term in a single year.
2. Disallowance and enhancement of expenses claimed.
3. Applicability of interest under sections 234B and 234C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Assessment of Consultancy Fees:
The primary issue was whether the entire consultancy fees of Rs. 1,21,83,494/- received from UG Hospitals Pvt. Ltd. for a five-year term should be assessed in the year of receipt (2006-07) or proportionately over the five-year period. The assessee argued that only the fees pertaining to the relevant year (three months) should be taxed, while the rest should be considered as advance for future services.

The Assessing Officer (AO) rejected the assessee's claim, stating that the entire amount was taxable in the year of receipt due to the lack of a formal written agreement and the unlikelihood of a business entity paying such a large sum in advance without any enforceable contract. The AO also noted that similar payments were made to the assessee's family members, raising doubts about the legitimacy of the consultancy arrangement.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that the payments were irrevocable and there was no obligation for the assessee to refund the amount. The CIT(A) concluded that the entire receipt should be taxed in the year of receipt.

However, the Income Tax Appellate Tribunal (ITAT) ruled in favor of the assessee, citing precedents such as E.D. Sasoon & Co. Ltd. vs. CIT and CIT vs. Dinesh Kumar Goel, which support the principle that income should be recognized proportionately as services are rendered. The ITAT concluded that the assessee's method of recognizing income proportionately over the five-year period was correct.

2. Disallowance and Enhancement of Expenses:
The AO allowed an estimated 35% of the total receipts as possible expenses, amounting to Rs. 42,65,000/-, and added the remaining Rs. 79,18,494/- to the assessee's income. The CIT(A) disagreed with this allowance, stating that expenses more than what were incurred/claimed in the relevant year could not be allowed. The CIT(A) enhanced the income by Rs. 42,65,000/- but provided relief by deleting the double taxation of Rs. 6,09,175/-.

The ITAT found that the CIT(A)'s enhancement was unjustified, as the assessee had correctly declared the proportionate income and expenses for the relevant year. Therefore, the ITAT set aside the orders of the lower authorities, deciding the issue in favor of the assessee.

3. Applicability of Interest under Sections 234B and 234C:
The assessee denied liability to pay interest under sections 234B and 234C of the Income Tax Act, 1961, which pertain to interest for defaults in payment of advance tax and deferment of advance tax, respectively. However, this issue was not elaborately discussed in the judgment, as the primary focus was on the assessment of consultancy fees and the disallowance of expenses.

Conclusion:
The ITAT ruled in favor of the assessee, allowing the appeal and setting aside the orders of the lower authorities. The ITAT concluded that the consultancy fees should be recognized proportionately over the five-year period as services are rendered, and the expenses claimed by the assessee were justified. The appeal was allowed, and the issue was decided in favor of the assessee.