2014 (10) TMI 7 - HC - Income Tax

Accrual of income - Services charges deemed to be income or not part of trading receipts Held that - The amount received by the assessee in the name of the service charges were meant for the service to be rendered in the second year from the date of sale of television sets - It was an advance money for which separate account was maintained - the amount cannot be treated as the income of the assessee during the assessment year - It was meant for the future service the amount was treated, during the assessement as an income, but the appellate authorities have deleted the said amount by observing that it was service charges - relying upon M. Janardhana Rao Vs. JCIT 2005 (1) TMI 14 - SUPREME Court the order of the Tribunal is upheld Decided against revenue.

Issues Involved:
1. Interpretation of service charges as income for the assessment year.
2. Treatment of prepaid warranty service charges in the books of account.
3. Justification of addition of service charges as income by the Assessing Officer.
4. Maintenance of separate accounts for service charges.
5. Consideration of service charges for future services.
6. Application of legal precedents in determining the nature of service charges.
7. Deletion of addition of a specific amount as income.

Analysis:
1. The appeal concerned the interpretation of service charges as income for the assessment year. The Department filed an appeal under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal. The Tribunal had held that service charges realized should not be deemed as income for the year under consideration but assessed in subsequent years when services were to be rendered as per contract. The Appellate Authority and Tribunal both supported this view, leading to the dismissal of the Department's appeal.

2. The case involved prepaid warranty service charges shown in the books of account by a private limited company engaged in manufacturing and selling television sets. The Assessing Officer treated this amount as income, which was later deleted by the Appellate Authority and confirmed by the Tribunal. The Department challenged this treatment, leading to the present appeal.

3. The Department contended that unaccrued service charges were received in advance without actual service provision, diverting profits under the guise of service charges. The Department argued that no specific contracts existed for these charges to be taxed in the year of receipt. The Department's position was supported by written submissions justifying the Assessing Officer's order.

4. On the contrary, the assessee maintained separate accounts for service charges, showing them in the profit & loss account. The first Appellate Authority confirmed the issuance of job cards to buyers of television sets, indicating the provision of services. Separate bills for prepaid services in the second year were issued, with services being optional and provided at various locations.

5. The Court observed that the amount received as service charges was intended for future services to be rendered in the second year after the sale of television sets. The separate account maintenance and issuance of job cards supported this position, indicating that the charges were not income for the assessment year but advance payment for services.

6. Legal precedents were cited to support the Tribunal's decision, emphasizing that the Tribunal is the final fact-finding authority. The judgments of M. Janardhana Rao Vs. JCIT and Kamla Ganpati Vs. Controller of Estate Duty were referenced to uphold the Tribunal's findings on the nature of service charges.

7. Lastly, the deletion of a specific amount as income during the assessment year was also upheld by the Court, further supporting the Tribunal's decision. The judgment favored the assessee, leading to the dismissal of the Department's appeal.

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