2016 (8) TMI 329 - HC - Income Tax

Accrual of income - Selection of year of assessment - tds liability - Cash system of accounting - ITAT appears to have proceeded on the basis that since the services were to be performed by each of the Assessees for over a period of five years, the amount received from UGHPL had to be spread over a period of five years - Held that - There is merit in the contention of the learned counsel for the Revenue that since admittedly no books of accounts were maintained by any of the three Assessees it had to be presumed that they followed the cash system of accounting. In that view of the matter, the question of income accruing or the right to earn income accruing only upon the performance of a service at the end of a period would not arise. As rightly pointed out by learned counsel for the Revenue, the matching principle or the application of AS-9 issued by the ICAI which deals with the principle of revenue recognition appear to apply only to companies and not individuals. Once it is clear that it is the cash system of accounting that is followed, the further question whether the sum received in one year could be spread over several years, and that too in the absence of any agreement at the time of such payment would not arise. The ITAT could not have overlooked the fact that the agreements produced before the CIT (A) regarding engaging the Assessees as hospital consultant was more than four years after the amount had been paid. Such agreements were not reliable pieces of evidence. Assessees had offered to tax in the later AYs the sum proportionate to the period of service, the fact remains that the entire sum was received upfront in the year in question and TDS was also deducted on that basis. The agreements purportedly entered into between each of the Assessees and UGHPL was a document drawn up four years after they received the entire remuneration upfront in December 2005. Consequently, the Court is of the view that the ITAT erred in concluding that the sum received in each of the AYs in question could be spread over five years on the basis of the subsequent agreements dated 15th June 2010 between the UGHPL and the Assessees. Significantly, what the Trust was being paid was only a monthly payment whereas over a sum of ₹ 4 crores as lump sum payment was made to the Assessees. The questions raised by the CIT (A) do not appear to have been satisfactorily answered by the Assessees. In the facts and circumstances, the Court is of the view that the CIT (A) was right in affirming the order of the AO to the extent of bringing the entire amount received by the Assessees to tax in the year in question. For the aforementioned reasons the question framed is answered in the affirmative i.e. in favour of the Revenue and against the Assessees.

Issues Involved:
1. Taxability of lump sum payment received by the Assessees.
2. Validity of spreading the lump sum payment over five years.
3. Allowance of additional evidence by the CIT (A).
4. Applicability of Accounting Standards and matching principle.
5. Penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

Issue 1: Taxability of Lump Sum Payment
The core issue was whether the lump sum payment of ?1,21,83,494 received by each Assessee from UGHPL should be taxed entirely in the assessment year (AY) 2006-07 or spread over five years. The Assessees argued that the payment was for consultancy services to be rendered over five years, and hence, should be proportionately taxed. The AO, however, taxed the entire amount in AY 2006-07, noting that the Assessees did not maintain regular books of accounts and the payment was made upfront.

Issue 2: Spreading the Lump Sum Payment Over Five Years
The ITAT had accepted the Assessees' contention, relying on the decision in E.D. Sasoon & Co. Ltd. v. Commissioner of Income Tax and Accounting Standard 9 (AS-9). The ITAT concluded that since services were to be rendered over five years, the income should be spread proportionately. However, the High Court found this reasoning flawed, noting that the Assessees followed a cash system of accounting, and there was no agreement at the time of payment to support the spread over multiple years. The Court emphasized that the entire sum was received upfront and TDS was deducted accordingly.

Issue 3: Allowance of Additional Evidence by CIT (A)
The CIT (A) had allowed additional evidence, including an agreement dated 15th June 2010, which purportedly supported the Assessees' claim of spreading the income. The High Court questioned the reliability of this agreement, noting it was created four years after the payment. The Court held that the CIT (A) should not have permitted this additional evidence as it did not satisfy the conditions under Rule 46A of the Income Tax Rules.

Issue 4: Applicability of Accounting Standards and Matching Principle
The Assessees argued that AS-9 and the matching principle should apply, allowing the income to be spread over the period of service. The High Court rejected this, stating that AS-9 and the matching principle are relevant for companies, not individual Assessees. The Court noted that since the Assessees followed a cash system of accounting, the entire amount received should be taxed in the year of receipt.

Issue 5: Penalty Proceedings
The CIT (A) had set aside the penalties imposed by the AO, relying on the ITAT's deletion of the addition. With the High Court setting aside the ITAT's order, the penalty appeals were remanded to the CIT (A) for fresh consideration. The Court directed the CIT (A) to re-evaluate the penalty issues in light of the High Court's findings on the quantum appeals.

Conclusion:
The High Court concluded that the entire lump sum payment received by the Assessees in AY 2006-07 should be taxed in that year. The ITAT's decision to spread the income over five years was set aside. The Court affirmed the CIT (A)'s order to the extent of bringing the entire amount to tax in the year of receipt. The penalty appeals were remanded to the CIT (A) for fresh consideration. The Assessees' plea for accounting the tax paid in subsequent years was noted, but the Court emphasized that the correct legal position required taxing the entire amount in the year of receipt.

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