2019 (4) TMI 57 - HC - Income Tax

Income recognition - unrealized income - recognizing the income which cannot be recovered - method of accounting - unrealized revenue from sales toits customer - need not be recognized as per Accounting Standard-9 fr the AY 2013-14, as the assessee had filed a suit for recovery of money in April 2014 and the same is pending? - as per tribunal unrealised income need not be recognized on mercantile basis, when the corresponding expenses have been taken into account in the books of the assessee - Defendant has already become a bankrupt - Held that - Admittedly, the assessee entered into service contract for providing software to a South African Government Undertaking called Province for three years. It appears that subsequently the above said undertaking become bankrupt which forced the assessee to file a suit against the said Undertaking in South Africa in the month of April 2014. From the factual narration found in the Orders of Assessing Officer and Commissioner of Income Tax, it could be seen that the amount assessed is not recognized. When the Defendant has already become a bankrupt, realisation of the amount cannot be certain. It will take its own time. There is an uncertainty in the ultimate collection of the revenue. Admittedly, there is a dispute with regard to the collection of the amount between the assessee and his client and the assessee client is also appears to be a bankrupt, certainty of recovering of amount cannot be reasonably expected within the assessment year. The Tribunal considered this aspect and found that there is no point in recognizing the income which cannot be recovered and subsequently writing of bad debts in the subsequent years and come to the conclusion that the Revenue need not be recognized for a sum of ₹ 18,94,96,500/- for the year ending 31.3.2013 for the relevant Assessment Year 2013-14. Accordingly, ordered deletion of the addition made for the relevant assessment year. The Tribunal has considered the factual aspects as well as the Accounting Standard-9 approved by the Central Government and arrived at right conclusion, we are of the view that there is no substantial questions of law involved in this matter. - Decided against revenue

Summary

Issues involved:
1. Recognition of unrealized revenue as per Accounting Standard-9.
2. Recognition of unrealized income on a mercantile basis.

Issue 1: Recognition of unrealized revenue as per Accounting Standard-9

The case involved an appeal by the Revenue against the Income Tax Appellate Tribunal's order for the Assessment Year 2013-14. The Tribunal had allowed the assessee's appeal, raising the question of whether unrealized revenue from sales to customers should be recognized as per Accounting Standard-9. The Tribunal considered the uncertainty in the ultimate collection of revenue due to a pending lawsuit filed by the assessee against a bankrupt client, a foreign Government undertaking. The Tribunal applied Accounting Standard-9, which states that revenue should be recognized only when it becomes reasonably certain that ultimate collection will be made. The Tribunal concluded that since the recovery of the amount was uncertain, the revenue need not be recognized for the relevant assessment year. The High Court upheld the Tribunal's decision, stating that there was no substantial question of law involved in the matter.

Issue 2: Recognition of unrealized income on a mercantile basis

The Assessing Officer had disallowed the assessee's claim for not recognizing revenue in accordance with the Mercantile System of Accounting. The Officer held that revenue should be recognized when services are rendered, and the amount receivable should be recognized as revenue income for the relevant year. However, the Tribunal, considering the uncertainty in recovering dues from the bankrupt client, held that the revenue need not be recognized on a mercantile basis. The Tribunal's decision was based on the fact that the recovery of the amount was uncertain and in line with Accounting Standard-9. The High Court agreed with the Tribunal's reasoning and confirmed the deletion of the addition made for the relevant assessment year. The Court held that there was no substantial question of law involved in the appeal and dismissed it.

In conclusion, the High Court upheld the Tribunal's decision regarding the recognition of unrealized revenue and income, emphasizing the application of Accounting Standard-9 in cases of uncertainty in revenue collection. The Court found no substantial questions of law in the matter and confirmed the deletion of the addition made by the Revenue for the relevant assessment year.