2014 (6) TMI 436 - AT - Income Tax

Accrual of income - taxability of advances received - Addition of advance fee from clients for services Held that - Income tax is to be charged at the rate or rates fixed for the year by the annual Finance Act - the subject of charge is the income of the previous year - mere receipt of amount is not taxable unless the same or the part embedded in that receipt partakes the character of income - Section 5 determines the scope of total income depending upon residential status of the assessee - It prescribes the gamut of total income of an assessee Relying upon ED. Sassoon And Company Limited And Others Versus Commissioner Of Income-Tax, Bombay City 1954 (5) TMI 2 - SUPREME Court - when the assessee acquired a right to receive that income - Merely because an amount has been entered into in assessee s book, is not conclusive proof that income has accrued - Section 145 deals with method of accounting and is a procedural section - This section cannot be resorted to for taxing a particular receipt unless the receipts come with section 4 r.w. section 5 partaking character of income - If an assessee may be required to refund the amount then it cannot be treated as assessee s income in that particular year - unless the assessee can exercise his entire rights over a particular receipt, it cannot be said that income has accrued in his favour - No other person should have any charge over that receipt. The dominion over the amount should be of assessee. The amount will be accrued to the assessee only on rendering of services - receipt by itself is not sufficient to attract tax, but, it is only receipt as income , which can attract tax - receipt in advance amount come within the provisions of section 4 or 5 of the IT Act - Every receipt cannot be treated as income in the hands of the assessee, but, it is only when it bears the character of assessee s income at the time when it reaches the hands of the assessee that it becomes exigible to tax Relying upon CIT Vs. Tollygunge Club Ltd. 1977 (3) TMI 1 - SUPREME Court - the assessee received the fee in advance for which no service was rendered in the assessment under consideration and it cannot be held as taxable in the hands of the assessee in the year of receipt even though such income was reflected in the books of the assessee, as not only actual receipt to be seen but constructive receipt to be seen to tax the income in the assessment under consideration - services are not performed in the current assessment year and till the performance of the service by the assessee, the assessee could not be said to be received the amount on accrual as the assessee could not exercise its dominion over the receipt and the impugned amounts should be taxed in the year in which the assessee renders service to the payee. Being so, in our opinion, issue of tax of amount cannot be done in the AY Decided in favour of Assessee.

Summary

Issues Involved:
1. Whether the CIT(A) erred in confirming the addition of Rs. 1,04,94,192/- as income for the assessment year 2008-09.
2. Whether the CIT(A) should have directed the AO to make a consequential reduction in the incomes offered in the subsequent years.

Detailed Analysis:

Issue 1: Confirmation of Addition of Rs. 1,04,94,192/- as Income for AY 2008-09

The appellant, a company engaged in rendering Financial and Corporate Consultancy Services, raised an appeal against the order of CIT(A)-IV, Hyderabad, which confirmed the addition of Rs. 1,04,94,192/- as income for the assessment year 2008-09. The appellant contended that this amount was collected as advance fees for services to be rendered in subsequent years and should not be taxed in the year of receipt.

The Assessing Officer (AO) found a discrepancy between the gross receipts reported by the appellant and the amount reflected in the Profit & Loss account. The appellant explained that the difference was due to advance fees received for services to be rendered over three financial years (2008-09 to 2010-11). The AO, however, treated the entire amount as income for the year 2008-09, citing the absence of a specific stipulation in the contract regarding the deferral of income.

During the appellate proceedings, the appellant's representative explained that the consultancy contract with Country Club (India) Ltd. involved two different sets of fees: 0.275% for raising funds and 0.225% as a retainer fee for services over three years. The retainer fee was billed in advance and prorated over the subsequent three years. The appellant also argued that income accrues only upon the performance of services, in line with Accounting Standard-9 of ICAI, and submitted relevant case laws supporting the deferral of income recognition.

The CIT(A) upheld the AO's decision, stating that the appointment letter and TDS certificates did not indicate the amount as an advance. The CIT(A) concluded that the entire amount should be considered as income in the year of receipt.

Issue 2: Consequential Reduction in Subsequent Years

The appellant alternatively requested that if the addition was confirmed, the AO should be directed to reduce the income offered in the subsequent years to avoid double taxation. The appellant submitted that the advance retainer fee was recognized as income in the subsequent years, as evidenced by audited financials and IT returns.

Tribunal's Findings:

The Tribunal considered the rival submissions and relevant case laws. It emphasized that mere receipt of an amount is not taxable unless it partakes the character of income. The Tribunal noted that the appellant's contract specified services to be rendered over three years, and the advance fee was meant to cover future costs. The Tribunal referred to the principle that income accrues only when the right to receive it arises, and the appellant had not rendered the services in the assessment year 2008-09.

The Tribunal highlighted that the appellant's method of prorating the advance fee over three years was consistent with Accounting Standard-9 and the matching principle. It also cited various judicial precedents supporting the recognition of income based on the performance of services.

Conclusion:

The Tribunal concluded that the advance retainer fee of Rs. 1,09,35,925/- should not be taxed in the assessment year 2008-09, as the services were to be rendered in subsequent years. The Tribunal allowed the appeal, directing that the addition made by the AO and confirmed by the CIT(A) be deleted.

Outcome:

The appeal of the assessee was allowed, and the addition of Rs. 1,04,94,192/- was deleted.