2014 (9) TMI 725 - HC - Income Tax

Unexplained cash credits u/s 68 Accrual of income - receipt of service charges for providing maintenance for five years with the supply of spare parts and another five years - assessee had offered the entire amount of 55,12,088 for tax in proportionate basis, in 5 assessment years as the corresponding or necessary expenditure would be incurred in the said span of 5 years - Held that - The Tribunal has referred to remand report of AO in which he had reported that expenditure made for the maintenance of equipments in the subsequent years was adjusted against the provisions made for equipment maintenance by the assessee and the provision for equipment maintenance for AYs 2006-07, 2007-08 and 2008-09 were verified by the AO the calculations had been made on scientific basis and the balance amount was offered for taxation in the subsequent years - for a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation - where there are a number of obligations the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole - if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the any of such sophisticated goods would be entitled to deduction from the gross receipts under Section 37 of the Act - It would all depend on the data systematically maintained by the assessee invocation of section 68 is not warranted - The source of money and genuineness of credit entry was never doubted Decided against revenue.

Summary

Issues Involved:
1. Addition of Rs. 60,70,492 under Section 68 of the Income Tax Act, 1961.
2. Treatment of income from annual maintenance contracts for medical equipment.
3. Matching of income with expenditure.
4. Application of Section 68 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Rs. 60,70,492 under Section 68 of the Income Tax Act, 1961:
The Assessing Officer (AO) had made an addition of Rs. 60,70,492 to the respondent-assessee's income under Section 68 of the Income Tax Act, 1961. The respondent-assessee, a proprietor of M/s International Surgical Agency, had received a commission of Rs. 1,41,33,516 for the sale and maintenance of medical equipment. The AO observed that the respondent-assessee had bifurcated the commission amount, treating 39% (Rs. 55,12,088) as expenditure for maintenance over five years, which was excluded from the returned income for the assessment year in question. The AO did not accept this bifurcation, arguing that the entire amount should be taxed in the year of receipt.

2. Treatment of Income from Annual Maintenance Contracts for Medical Equipment:
The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO's finding, noting that the respondent-assessee's work involved installation and maintenance of medical equipment, with an obligation to provide maintenance for five years with spares and another five years without spares. The CIT(A) accepted the respondent-assessee's allocation of 39% of the commission as deferred income to be taxed proportionately over five years. The CIT(A) found merit in the respondent-assessee's submission that maintenance costs would increase over time due to wear and tear. The CIT(A) also noted that no maintenance income was allocated for the assessment year 2007-08 as the equipment was installed at the end of the year.

3. Matching of Income with Expenditure:
The CIT(A) and the Tribunal both affirmed that the matching principle should apply, where income is matched with the corresponding expenditure. The CIT(A) referred to the decision in Mahindra Holidays & Resorts (India) Ltd. and the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. vs CIT, which supported the deferral of income to match future obligations. The Tribunal also noted that the respondent-assessee had provided scientific calculations and that the deferred income was taxed in subsequent years.

4. Application of Section 68 of the Income Tax Act, 1961:
The Tribunal observed that invoking Section 68 was not warranted as the source and genuineness of the credit entry of Rs. 1,41,33,516 were never in doubt. The Tribunal noted that the addition of Rs. 60,70,492 was not related to unexplained cash credits but to the deferred income from maintenance contracts. The Tribunal and the CIT(A) both concluded that the AO's addition under Section 68 was based on incorrect assumptions and a lack of proper appreciation of the facts.

Conclusion:
The High Court dismissed the appeal, affirming the findings of the CIT(A) and the Tribunal. The court held that the entire amount received for maintenance contracts could not be taxed in one year as the respondent-assessee had future obligations and corresponding expenditures. The court also noted that the matching principle applied, and the deferred income was correctly allocated over the subsequent years. The addition under Section 68 was found to be unjustified as the source and genuineness of the income were not in question.