2020 (10) TMI 1167 - HC - Income Tax

Income recognition - 'unearned income' - scrutiny under Computer Aided Scrutiny Selection (CASS) - Change of accounting method - Accounting Standard - 9 Applicability - as per AO assessee to be an insurance company by treating it as outside the purview of Accounting Standard - 9 - HELD THAT - Assessee in the instant case has changed invoice method to proportionate completion method. Till 31.03.2007, the assessee used to recognize revenue immediately on raising of invoice, even though, the service under the contract is not completed or substantially completed. The assessee is involved in execution of more than one act i.e., rendering service in the entire year, therefore, it adopted the proportionate completion method. The revenue from service transactions usually recognized as the service is performed either by proportionate completion method or completed service contract method. The assessee is therefore, rightly adopted proportionate completion method as it is engaged in rendering service in the entire year. The assessee in the instant case is covered by Accounting Standard - 9 as it does not deal with revenue of insurance companies arising from insurance contracts. It is open for the assessee to change the method of accounting and the burden is on the department to prove that the method invoked is not correct and that such a method distorts the profits of a particular year. The aforesaid burden has not been discharged by the revenue in the instant case. Besides that, the revenue has accepted the change in the method of accounting in subsequent Assessment Years viz., 2010-11, 2011-12 and 2012-13, therefore, there is no justification on the part of the Assessing Officer to change the method adopted by the assessee and to determine the income on estimate basis. - Decided in favour of assessee. Entitlement to follow accounting standard 9 for revenue recognition in respect of TPA fee received from insurance companies - As held that business of a third party agent is insurance business as third party agent makes payments to the hospital / individuals policy holders, therefore, Accounting Standard - 9 is not applicable in the fact situation of the case - HELD THAT - Regulation 3 prescribes the health services, which may be provided by a third party agent to an insurer under the agreement in connection with health insurance business. Section 2(9) of the Insurance Act defines the expression 'insurer' which includes insurance company. Thus, it is evident that the third party agent and the insurance company are different entities. Therefore, the finding recorded by the tribunal that the assessee's business activities do not fall under the business of insurance company is correct. - Decided in favour of assessee.

Issues:
1. Revenue recognition for third party administrator of insurance companies.
2. Method of accounting for third party agent fees.
3. Classification of business activities as insurance company.
4. Applicability of Accounting Standard - 9 for revenue recognition.

Issue 1: Revenue Recognition for Third Party Administrator of Insurance Companies
The appeal under Section 260A of the Income Tax Act, 1961 pertains to the Assessment year 2009-10. The primary issue revolves around the correct method of revenue recognition for the assessee, a third party administrator of insurance companies. The Assessing Officer added a sum to the income of the assessee, contending that unearned income must be recognized as revenue in the year of invoicing. However, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal held in favor of the assessee, allowing revenue recognition on a pro rata basis. The tribunal concluded that the activity of the assessee is not akin to insurance business, leading to the dismissal of the revenue's appeal.

Issue 2: Method of Accounting for Third Party Agent Fees
The revenue argued that the assessee cannot postpone income recognition under the mercantile system of accounting. They contended that the income accrues when the assessee acquires the right to receive it. The assessee, on the other hand, defended its change in accounting method from invoice to proportionate completion method. The court noted that the assessee's change in accounting method was justifiable, and the burden to prove otherwise lay on the revenue, which they failed to discharge. The court highlighted that the revenue had accepted the new method in subsequent years, further supporting the assessee's stance.

Issue 3: Classification of Business Activities as Insurance Company
The tribunal correctly determined that the assessee's business activities do not align with those of an insurance company. The regulatory framework and definitions under the Insurance Act and Insurance Regulatory and Development Authority of India (Third Party Administrators - Health Services) Regulations distinguish between third party administrators and insurers. The court upheld this distinction, emphasizing that the assessee's activities do not fall under the purview of an insurance company.

Issue 4: Applicability of Accounting Standard - 9 for Revenue Recognition
The court analyzed the applicability of Accounting Standard - 9 to the assessee's financial services, emphasizing that it does not pertain to revenue from insurance companies' contracts. The court highlighted that the assessee's revenue recognition aligns with Accounting Standard - 9, considering the costs related to services rendered. The court further noted that the revenue failed to justify challenging the assessee's accounting method, especially since it had been accepted in subsequent assessment years.

In conclusion, the court dismissed the appeal, finding no merit in the revenue's contentions. The judgment favored the assessee on all substantial questions of law raised, emphasizing the correctness of the revenue recognition method, the validity of the accounting change, the distinction between the assessee and an insurance company, and the compliance with Accounting Standard - 9.

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