2018 (12) TMI 585 - HC - Income Tax

Accrual of income - accounting treatment in respect of prepaid cards - Rendering of Services - Income recognition - Accounting standards - amount received on sale of prepaid cards to the extent of unutilized talk time - assessee was engaged in the business of providing basic telecom services in the State of Rajasthan and had both prepaid and postpaid subscribers - Held that - Paragraph 7 of Accounting Standards stipulates that revenue from service transaction can be recognized either by proportionate completion method or by the completed service contract method. Revenue is generally recognized when the service is performed. Proportionate completion method is a recognized accounting method, as per which revenue is recognized proportionately by reference to the performance of each act. Under this method, revenue is determined on the basis of contract value, associated costs, number of acts or other suitable criteria. When services are provided by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight line basis over the specific period. This is subject to any evidence that some other method would be better and more appropriate for representing the pattern of performance. What is the relevant yardstick is the time of accrual or arisal for the purpose of its taxation, viz., in order to be chargeable, the income should accrue or arise to the assessee during the previous year. If income has accrued or arisen, even if actual receipt of the amount is not there, it would be chargeable to tax in the said year. Though the amount may be received later in the succeeding year, the income would be said to accrue or arise if there is a debt owed to the assessee by somebody at that moment. From this, it follows that there must be the right to receive the income on a particular date, so as to bring about a creditor and debtor relationship on the relevant date -a right to receive a particular sum under the agreement would not be sufficient unless the right accrued by rendering of services and not by promising for services and where the right to receive is anterior to rendering of service, the income, therefore, would accrue on rendering of services. The appropriation of prepaid amount was contingent upon the assessee performing its obligation and rendering services to the prepaid customers as per the terms. If the respondent-assessee had failed to perform the services as promised, it would be liable and under an obligation to refund the advance payment received under the ordinary law of contract or special enactments, like the Consumer Protection Act. The aforesaid legal position would meet the argument of the Revenue that the prepaid amount received was not liable to be refunded or repaid, whether or not any services were rendered. - Decided in favour of assessee.

Issues Involved:
1. Year of taxability of prepaid cards.
2. Revenue recognition method for prepaid cards.
3. Revenue neutrality and accounting treatment.
4. Legal principles regarding income accrual and revenue recognition.

Issue-wise Detailed Analysis:

1. Year of Taxability of Prepaid Cards:
The central issue was whether the amount received on the sale of prepaid cards, to the extent of unutilized talk time, should be recognized as income in the year of sale. The Revenue argued that the entire amount paid for prepaid cards should be accounted for in the year of purchase. The respondent-assessee, however, recognized revenue based on actual usage, carrying forward the unutilized amount to the next financial year.

2. Revenue Recognition Method for Prepaid Cards:
The respondent-assessee followed the principles of revenue recognition as per Accounting Standards, specifically recognizing revenue as services were rendered. The Tribunal upheld this method, stating that as long as the assessee was obligated to provide talk time, the amount could not be appropriated as income. The Tribunal restored the matter to the Assessing Officer to verify if there was any revenue leakage and to ensure that unutilized talk time was accounted for in the subsequent year.

3. Revenue Neutrality and Accounting Treatment:
The respondent-assessee argued that the Revenue's contention was revenue neutral since any addition in one year would result in a corresponding reduction in the next year. The Tribunal agreed, noting that the Assessing Officer should ensure that income is not taxed twice and should pass consequential orders to reflect this. For instance, amounts added to income in one year should be reduced from the receipts in the subsequent year.

4. Legal Principles Regarding Income Accrual and Revenue Recognition:
The Tribunal referred to legal precedents, including the Delhi High Court's decision in Commissioner of Income-Tax Vs. Dinesh Kumar Goel and the Supreme Court's ruling in E.D. Sassoon and Co. Ltd. Vs. Commissioner of Income Tax. These cases emphasized that income accrues when there is a right to receive it, and revenue should be recognized when services are performed. The Tribunal also highlighted that the prepaid amount was an advance subject to the respondent-assessee providing the promised services, failing which it would be refundable.

Conclusion:
The Tribunal found merit in the respondent-assessee's method of accounting and revenue recognition, which complied with Accounting Standards. It was noted that the prepaid amount received was contingent upon the provision of services, and unutilized amounts should be recognized as income when the prepaid card lapsed. The Tribunal directed the Assessing Officer to ensure that unutilized talk time was included in the receipts of the year in which it lapsed. The appeals were disposed of in favor of the respondent-assessee, with no order as to costs.

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