2021 (7) TMI 1072 - AT - Income Tax

Addition of surveillance fee - Income recognition policy - effect of change in accounting policy - assessee company is following mercantile system of accounting - A.O has made addition of surveillance fee which was not offered in the current year but in the subsequent year i.e.A.Y.2013-14 - CIT(A) has accepted the system of accounting of surveillance fee which the assessee company for the first time has adopted in A.Y 2012-13 - HELD THAT - Method of accounting employed by the assessee is acceptable and is followed by the similar credit rating agencies and the change is bonafide and has been recognized as standard industrial practice. A.O has never doubted the income and has also not accepted the fact of change in accounting policy on revenue recognition as the assessee was following mercantile system of accounting till last financial year. Whereas, in this present assessment year the assessee has bifurcated 60% fees as income of the current year and remaining 40% was carry forwarded and offered in A.Y 2013-14 which cannot be disputed - AR mentioned that due to change in system of accounting policy, the bench mark as applicable to other credit rating agencies are fallowed. When the query was raised to the Ld. AR to explain the basis of offering of fee in 60% and 40% ratio or industry yardstick or standard. AR reply/explanations are not supported by evidences. DR also accepted the fact of offering of income in the A.Y 2013-14 based on the supporting evidences including assessment order u/sec143(3) of the Act filed by the Ld.AR. We find that the CIT(A) relied on the submissions and the accounting policies and has deleted the addition. Whereas, in respect of 100% TDS claim made by the assessee on the 60% income/fee offered for taxation needs to be modified. When the income is recognized, the TDS claim should be restricted to the extent of income offered. In the income tax return filed electronically by the assessee, there is a Schedule of TDS, were there are columns earmarked for set apart/carry forward of income and TDS claim for the Subsequent assessment year, which needs to be opted. CIT(A) has passed a reasoned order and we up hold the same to the extent of deletion of addition of surveillance fee made by the Assessing officer. TDS claim - We modify the CIT(A) order and direct the A.O to restrict the claim of TDS to the extent of income offered in the A.Y.2012-13 and the balance of TDS shall be claimed against the income assessable in the assessment year A.Y.2013-14 and we partly allow the grounds of appeal of the revenue - Appeal filed by the revenue is partly allowed.

Summary

Issues Involved:

1. Deletion of addition on account of surveillance fees.
2. Claim of TDS credit.

Detailed Analysis:

1. Deletion of Addition on Account of Surveillance Fees:

The primary issue in this appeal involves the deletion of an addition of ?19,78,92,924/- related to surveillance fees by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, engaged in credit rating and related services, had previously followed a method of recognizing 100% of the surveillance fee in the year of receipt as per the mercantile system of accounting. However, for the assessment year (A.Y.) 2012-13, the assessee changed its method to recognize only 60% of the surveillance fee in the year of receipt and the remaining 40% in the subsequent year, following a recommendation by the statutory auditor to the audit committee. The Assessing Officer (A.O.) was not satisfied with this change, arguing that it was an afterthought and inconsistent with the previously followed method. The A.O. added the differential income to the assessee's total income, leading to an assessed income of ?147,80,79,990/-.

Upon appeal, the CIT(A) observed that the A.O. did not demonstrate how the change in revenue recognition policy resulted in an underestimation of profit or an incorrect financial picture. The CIT(A) found the policy change to be in line with the Accounting Standard issued by the ICAI and noted that no similar addition was made in subsequent years. Consequently, the CIT(A) directed the deletion of the addition and allowed the credit of TDS in the year when such income is taxed, as per Rule 37BA(3)(i) of the Income Tax Rules.

2. Claim of TDS Credit:

The second issue pertains to the claim of TDS credit. The A.O. contended that the assessee claimed full TDS credit for the surveillance fee amount in A.Y. 2012-13, despite recognizing only 60% of the income. The CIT(A) directed the deletion of the addition and allowed the credit of TDS in the year when such income is taxed. The tribunal agreed with the CIT(A)'s decision to delete the addition but modified the order regarding the TDS claim. The tribunal directed that the TDS credit should be restricted to the extent of the income offered in A.Y. 2012-13, with the balance TDS claimable in the subsequent year (A.Y. 2013-14), in line with Rule 37BA(3)(i).

Conclusion:

The tribunal upheld the CIT(A)'s decision to delete the addition related to the surveillance fee, recognizing the change in accounting policy as bona fide and in line with industry standards. However, it modified the CIT(A)'s order regarding the TDS claim, directing that the TDS credit be proportionally allocated to the years in which the income is recognized. The appeal filed by the revenue was thus partly allowed.