2019 (3) TMI 1536 - AT - Income Tax

Income recognition - accrual of income under the mercantile system of accounting - bills were not raised on the customers for value of services which had already accrued - application of AS-9 - difference between concept of value of service for the purpose of levy of service tax and total income for the purpose of levy of income tax - HELD THAT - There is no dispute that under mercantile system of accounting debit of value of services was not because of non-accrual of income but only because bills were not raised on the customers for value of services which had already accrued. The fact that bills were not raised does not stop accrual of income under the mercantile system of accounting. Therefore the claim of the Assessee which is purely based on AS-9 is not sustainable and the action of the revenue authorities in making the impugned addition was justified. The aforesaid observations will hold good only for AY upto AY 2012-13 because Sec.145 of the Act has undergone some statutory amendments and the position after such amendment is not and cannot be subject of decision in this appeal. The fact that value of services recognised for the purpose of levy of service tax is not relevant in the context of computation of total income for the purpose of levy of income tax under the Act. The concept of value of service for the purpose of levy of service tax and total income for the purpose of levy of income tax are different and are determined on relevant statutory provisions applicable. Income recognition of which was postponed by the Assessee by following AS-9 cannot be regarded as income in the year in which it is offered to tax by the Assessee, because the law is well settled that same income cannot be taxed twice. The burden will however be on the Assessee to show as to how the income offered in a later assessment year was income which was not recognised in earlier Assessment year by reason of application of AS-9. - Decided against assessee.

Issues Involved:
1. Justification of the addition of ?1,50,84,240 to the total income of the assessee.
2. Compliance with Accounting Standard 9 (AS-9) in revenue recognition.
3. Application of mercantile system of accounting as per Section 145 of the Income Tax Act.
4. Potential double taxation of income.

Issue-wise Detailed Analysis:

1. Justification of the Addition of ?1,50,84,240:
The primary issue in this appeal is whether the revenue authorities were justified in adding ?1,50,84,240 to the total income of the assessee. The assessee, a company engaged in counseling and consultation services, had reduced this amount from its total sales of ?3,15,97,038. The assessee argued that this reduction was due to the intangible nature of the services rendered, and revenue should be recognized only when bills are raised. However, the Assessing Officer (AO) did not accept this explanation and deemed the reduction from the sale value as impermissible.

2. Compliance with Accounting Standard 9 (AS-9):
The assessee contended that it followed AS-9 issued by the Institute of Chartered Accountants of India (ICAI), which allows revenue recognition either by the proportionate completion method or by the completed service contract method. The assessee explained that it recorded accrued revenue, which is recognized when services are performed but not yet billed. This method is common in service industries to match revenues with expenses properly. However, the CIT(Appeals) and the Tribunal concluded that while AS-9 might reflect a true and fair view of the business, it does not align with the mercantile system of accounting as per Section 145 of the Income Tax Act.

3. Application of Mercantile System of Accounting:
The Tribunal emphasized that under the mercantile system of accounting, revenue is recognized on an accrual basis when an agreement to render services is entered into, regardless of whether bills are raised. The relevant statutory provisions under Section 145 of the Income Tax Act mandate that income be computed in accordance with either the cash or mercantile system of accounting. The Tribunal noted that AS-9 has not been notified under Section 145 and therefore does not have statutory force. The Tribunal held that the assessee's reduction of ?1,50,84,240 from its sales was not justified under the mercantile system, as the income had already accrued.

4. Potential Double Taxation of Income:
The assessee argued that if the Tribunal did not accept its method of revenue recognition, the income recognized in the subsequent assessment year would suffer double taxation. The Tribunal acknowledged this concern and clarified that the same income cannot be taxed twice. The burden would be on the assessee to demonstrate that the income offered in a later assessment year was not recognized in an earlier year due to the application of AS-9.

Conclusion:
The Tribunal dismissed the appeal, upholding the revenue authorities' addition of ?1,50,84,240 to the assessee's total income. The Tribunal concluded that the assessee's method of revenue recognition, based on AS-9, was not in accordance with the mercantile system of accounting as required by Section 145 of the Income Tax Act. The Tribunal also provided clarity on the issue of potential double taxation, stating that the same income cannot be taxed twice, and the assessee must prove any such claims. The appeal was pronounced dismissed on February 8, 2019.

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