2014 (6) TMI 472 - AT - Income Tax

Deletion of commission income received Held that - The assessee is following AS-9 and AS- 29 - In the Accounting Standard-9 issued by the ICAI provides that Revenue is recognised in a transaction involving rendering of services either under the completed service contract method or under the proportionate completion method - the work of commissioning was not completed in the previous year - amount received by the assessee included remuneration towards the services to be provided during extended warranty support also - assessee had to support during three years warranty period. CIT(A) rightly held that the remuneration received for extended warranty period cannot be considered as income - assessee would legally claim the amount only after the rendering the services - receipt was relatable to a particular period in future, it would fructify and mature into income during that period and not earlier - assessee has been following this principle of recognizing revenue in the past also - when the assessee has been following AS-9 and AS-29 and has been following consistent system of accounting, there is no need to interfere with the assessee s method of accounting - Relying upon Commissioner of Income Tax Versus M/s Excel Industries Ltd. and Mafatlal Industries P. Ltd. 2013 (10) TMI 324 - SUPREME COURT - there is no case of making the addition in the hands of thee assessee thus, there was no infirmity in the order of the CIT(A) Decided against Revenue.

Summary

Issues:
1. Deletion of addition of commission income by CIT(A) - assessment year 2004-05.

Analysis:
The case involved the deletion of an addition of Rs. 49,23,437 made by the Assessing Officer (AO) on account of commission income received by the assessee. The assessee, an electronics engineer and proprietor of a company, received an amount from a foreign company towards commission and costs for executing an order from a state corporation to install a broadcasting system for All India Radio. The AO disallowed the provision for service charges, arguing that the assessee had credited only 25% of the total amount received as income for the year, leaving 75% as provisions for future services. The AO raised concerns about lack of proof of services provided, absence of agreements, and details of expenses incurred by the assessee.

Upon the assessee's appeal, the CIT(A) considered the matter. The CIT(A) noted that the revenue recognition should align with Accounting Standard 9 and 29, which relate revenue to work accomplished. Since the work was not fully executed in the year under consideration, the CIT(A) agreed that only part of the receipts should be treated as income for that year. The CIT(A) also highlighted that the revenue recognition policy was consistent with accounting standards and previous years' practices. The CIT(A) directed the AO not to disallow the provision for services.

In the appeal before the ITAT, it was observed that the assessee followed Accounting Standard 9 and 29, which require revenue recognition based on completed service or proportionate completion method. The work assigned to the assessee was not completed in the relevant year, and the received amount included remuneration for extended warranty support. The ITAT agreed with the CIT(A) that the remuneration for the warranty period should not be considered income for the relevant year. The ITAT also noted that the impugned amount had been offered for taxation in subsequent years, indicating no tax evasion. Referring to a Supreme Court decision, the ITAT upheld the CIT(A)'s order and dismissed the Revenue's appeal.

In conclusion, the ITAT upheld the CIT(A)'s decision, emphasizing that the assessee's revenue recognition method was in line with accounting standards and past practices, and there was no case of income escaping assessment.