2013 (2) TMI 558 - AT - Income Tax

Revenue recognition - Applicability of AS-9 - Accrual basis of accounting - held that - profits for the purpose of taxation have to be determined as per commercial principles, subject to specific provisions of the Act. Accounting practices and standards, which are widely accepted and adopted, would be a good guide to the determination of commercial profits. However, though accounting standards and practices are relevant, they cannot override specific provisions of the Act. The Supreme Court in Challapali Sugars Ltd. V. CIT, 1974 (10) TMI 3 - SUPREME COURT had laid down that pronouncements of accounting bodies are relevant in determining commercial profits. In Tuticorin Alkali Chemicals & Fertilizers Ld., V. CIT, 1997 (7) TMI 4 - SUPREME COURT , it was held that The argument based on accountancy practice has little merit if such practice cannot be justified by any provision of the Statute or is contrary to it . CIT Vs. Bokaro Steel Ltd., 1998 (12) TMI 4 - SUPREME COURT the subsequent decision in case of reiterated the same principle. The case of Hindustan Housing and Land Development Trust Ltd. 1986 (7) TMI 10 - SUPREME COURT has been distinguished by the Hon ble AP High Court in the case of CIT Vs. KCP Ltd., 1994 (12) TMI 21 - ANDHRA PRADESH HIGH COURT wherein it was held that the assessee s collection was acceptable as a trading receipt in the relevant year. The Hon ble Supreme Court at 2000 (8) TMI 3 - SUPREME COURT affirmed the decision of the AP High Court 1994 (12) TMI 21 - ANDHRA PRADESH HIGH COURT . Therefore, the amount of Rs. 95,40,000/- which is due from M/s Param Power Projects Pvt. Ltd. is to be treated as income of the assessee company. - Decided in favor of revenue.

Summary

Issues:
- Recognition of revenue under dispute
- Applicability of Accounting Standard (AS-9)
- Treatment of disputed income for tax purposes

Analysis:
1. Recognition of revenue under dispute:
The case involved a dispute regarding the recognition of income by an assessee company for the assessment year 2008-09. The revenue receivable from a project with M/s Varam Power Projects Pvt. Ltd. was contested, leading to a legal battle. The appellant argued that the income had not materialized due to uncertainties in collectability, supported by various legal documents and affidavits. The CIT(A) acknowledged the dispute and ruled in favor of the appellant, emphasizing that the income had neither been received nor was receivable during the relevant year.

2. Applicability of Accounting Standard (AS-9):
The dispute revolved around the application of Accounting Standard (AS-9) issued by the Institute of Chartered Accountants of India. The CIT(A) referred to AS-9, highlighting that revenue should only be recognized when its receipt is certain as of the balance sheet date. The appellant's adherence to AS-9 was crucial in justifying the non-recognition of the disputed income, as the uncertainty surrounding the fee claimed in the invoices was evident from the ongoing litigations.

3. Treatment of disputed income for tax purposes:
The Assessing Officer contended that income should be recognized under the mercantile system of accounting, irrespective of uncertainties in collectability. However, the CIT(A) disagreed, emphasizing that commercial realities and adherence to accounting standards like AS-9 should guide the recognition of income for tax purposes. The CIT(A) cited relevant case laws and upheld the appellant's position, ultimately deleting the addition of Rs. 95,40,000/- to the appellant's income for the assessment year 2008-09.

4. Judgment and Appeal:
The revenue, dissatisfied with the CIT(A)'s decision, appealed to the Appellate Tribunal. The Tribunal, after considering arguments from both parties and reviewing the lower authorities' orders, sided with the Assessing Officer's view on recognizing income under the mercantile system of accounting. The Tribunal emphasized that while accounting standards are relevant, they cannot override the specific provisions of the Income Tax Act. Consequently, the Tribunal allowed the revenue's appeal, directing the disputed amount to be treated as income of the assessee company.

This detailed analysis of the judgment highlights the key issues of revenue recognition under dispute, the role of Accounting Standard (AS-9), and the treatment of disputed income for tax purposes, culminating in the Appellate Tribunal's decision favoring the revenue's appeal.