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TMI Blog2010 (10) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... e first take up the discussion in respect of I.T.A. No. 514 of 2006 and other connected matters wherein the legal prop- osition would also be explained. I. T. A. Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 and 598/2010 3. The assessee in these cases running an institute under the name M/s. Fiitjee and is the sole proprietor of these concerns. M/s. Fiitjee is a coaching institute where students are admitted for getting coaching and preparing them for appearing in entrance examination conducted by engineering institutes. The assessee is following mercantile method of accounting. From these students, total fee of the entire course, which may be of two years duration, is initially taken at the time of admission of the students. 4. For the assessment year in question, i.e., 1997-98, the assessee filed his return on October 29, 1997, declaring the total income of Rs. 3,42,620. This return was processed under section 143(1)(a) of the Income-tax Act (hereinafter referred to as "the Act") on January 1, 1998, at the aforesaid income. Thereafter, notice under section 143(2) of the Act was issued to the assessee on October 26, 1998. It so happened ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, receipt of this amount could not be treated as "income" in the hands of the assessee in the assessment year in question. This contention of the assessee impressed the Commissioner of Income-tax (Appeals) and by accepting the same, the Commissioner of Income-tax (Appeals) deleted the addition. The following discussion in the order of the Commissioner of Income-tax (Appeals) needs to be extracted, which depicts the amount and the reasons of the Commissioner of Income-tax (Appeals) for arriving at the aforesaid conclusion : "I agree with the authorised representative that the receipt was without acquiring the right to receive it as income, as services had yet to be rendered and it would be in the nature of advance. Only when the services were rendered, it will become income in the hands of the appellant. In the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) the assessee dealt in land and property and carried on land developing business. The whole development was not carried out when the plot was sold. The appellant credited Rs. 43,692 and also estimated Rs. 24,809 as the expenditure for development to be carried out. There was no actual disbursement of the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been dismissed by the Tribunal. The Tribunal, in the process, noted one additional fact, viz., the Consumer Forum, Chandigarh had decided a case filed by the student for refund of unexpired period fee when he had left the course after few months of joining the institute. It was held that since the services were not rendered for the second year for which fee had already been paid in advance, the assessee should refund one year's fee to the said student (this decision of the Consumer Court, Chandigarh has been upheld by the Supreme Court as well). The Tribunal, thus, observed as under : "8 . . . Any receipt by an assessee without acquiring the right to receive it as income would be only in the nature of an advance and cannot partake of the character of income unless the services are rendered or required part of the contract is performed. The fee received at the time of admission of a student cannot be said to be nonrefundable inasmuch if no service of coaching is provided to the student, the assessee is statutorily liable to refund the amount under the Consumer Protection Act, 1986" 10. Still not satisfied, the Department has come up to this court by filing the instant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt date". The court further explained that 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 following discussion in this judgment would demonstrate the principle which we have highlighted above (page 49) : "Mukerji J. has defined these terms in Rogers Pyatt Shellac and Co. v. Secretary of State for India [1925] 1 ITC 363, 371 : `Now what is income ? The term is nowhere defined in the Act ... In the absence of a statutory definition we must take its ordinary dictionary meaning-"that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money) ; annual or periodical receipts accruing to a person or corporation" (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. "Accrues," "a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax is in respect of "profits or gains arising or accruing." I cannot read those words as meaning "received by". If the enactments were limited to profits and gains "received by" the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this county. The result would be that no income-tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words "arising or accruing" are general words descriptive of a right to receive profits.' To the same effect are the observations of Satyanarayana Rao J. in CIT v. Anamallais Timber Trust Ltd. [1950] 18 ITR 333 (Mad) and Mukherjea J. in CIT v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC) where this passage from the judgment of Mukerji J. in Rogers Pyatt Shellac and Co. v. Secretary of State for India [1925] ILR 52 Cal 1 ; 1 ITC 363, is approved and adopted. It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, represented by its managing partner, Sri A. T. Abraham, would disclose that Jay Films had agreed to pay royalty of Rs. 45,000 for acquiring Malayalam dubbing rights of the abovesaid film and Sri Lakshmi narayana Films had agreed to lease out the abovesaid Malayalam dubbing rights of the abovesaid picture for the abovesaid royalty of Rs. 45,000 on August 27, 1974. It is also evident from a perusal of the abovesaid agreement that a sum of Rs. 10,000 was paid by demand draft dated June 21, 1974, Rs. 7,500 was paid by cheque dated June 26, 1974, Rs. 7,500 was paid by cheque dated July 26, 1974 and Rs.7,500 was paid by cheque dated August 27, 1974, which the assessee had acknowledged. Another sum of Rs. 7,500 was also agreed to be paid by cheque on or before August 27, 1974, the date of the agreement. There was a balance of Rs. 5,000 on the date of agreement, which Jay Films had agreed to pay at the time of taking delivery of the prints from the assessee. If the abovesaid facts contained in the agreement dated August 27, 1974, are considered, it is evident that the assessee had already received a sum of Rs. 40,000 out of Rs.45,000 and agreed to receive the balance amount of Rs. 5,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst party.'" 15. She also referred to the judgment of the Jodhpur Bench of the Appellate Tribunal in the case of Suraj Prakash Soni v. Asst. CIT [2008] 303 ITR (AT) 366 (Jodhpur) which is to the same effect. 16. Mr. C. S. Aggarwal, learned senior counsel for the assessee, on the other hand, submitted that the two authorities below, viz., the Commissioner of Income-tax (Appeals) as well as the Tribunal had considered the facts of the case at greater detail and had rightly opined that till the services were rendered, there was no right to receive the fee. He argued that the amount that the tuition fee which pertained to the financial year 1996-97 was only a "deposit and advance" and not an income at the hands of the assessee, as the services against the said advance were yet to be provided, which could be rendered by the assessee only in the year 1996-97 and therefore, income qua those receipts would accrue only in that year. He also emphasized the matching concept highlighted by the Tribunal as well as by the Commissioner of Income-tax (Appeals) submitting that these were only receipts and the taxable income would be only after deduction of expenses, which were to be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple was enunciated by the Supreme Court in Calcutta Co. Ltd. [1959] 37 ITR 1 (headnote) : "The expression `profits or gains' in section 10(1) of the Income-tax Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted there from-whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date." 18. We may also, at this stage, usefully refer to another judgment of the apex court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675 in the following terms (page 680) : "It is, however, well-established that the income may accrue to an assessee without actual receipt of the same and if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on, on its being ascertained. The legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens. But if it is a debt the fact that the amount has to be as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifference between the two, which would persuade us as to take a view different from what is taken in the aforesaid cases of M/s. Fiitjee. We would, however, like to give some additional reasons in support of our conclusion. These are based on the submissions made by the learned counsel for the assessee, Dr. Rakesh Gupta, which have also appealed to us. 23. Section 145 of the Act deals with the method of accounting and states that in case of business income, inter alia, the same is to be computed in accordance with the cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. Section 211 of the Companies Act, on the other hand, prescribes the form and contents of balance-sheet and profit and loss account, which are to be maintained by the companies under the said Act. Sub-section (2) casts a duty on a company to give a true and fair view of the profit and loss of a company for the financial year in its profit and loss accounts. Sub-section (3A) adheres to the accounting standards for pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept. The principle laid down would be relevant even for our purpose and therefore, we extract the same (page 263): "14. In the case of M. P. Financial Corporation v. CIT [1987] 165 ITR 765 the Madhya Pradesh High Court has held that the expression `expenditure' as used in section 37 may, in the circumstances of a par-ticular case, cover an amount which is a `loss' even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this court in the case of Madras Industrial Investment Corporation Ltd. v. CIT reported in [1997] 225 ITR 802 (SC). According to the Law and Practice of Income Tax by Kanga and Palkhivala, section 37(1) is a residuary section extending the allowance to items of business expenditure not covered by sections 30 to 36. This section, according to the learned author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of section 145. That section recognizes the rights of a trader to adopt either the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under section 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, accounting standard which is continuously adopted by an assessee can be superseded or modified by Legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the recognition of revenue arising in the course of ordinary activities of the enterprise from -the sale of goods, -the rendering of services, and -the use by others of enterprise resources yielding interest, royalties and dividends. Definitions 4.3 Proportionate completion method is a method of accounting which recognizes revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract. Explanation 7. Rendering of services 7.1 Revenue from service transactions is usually recognized as the service is performed, either by the proportionate completion method or by the completed service contract method. (i) Proportionate completion method.-Performance consists of the execution of more than one act. Revenue is recognized proportionately by reference to the performance of each act. The revenue recognized under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight line basis ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment ; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other." 31. In this court, in its decision dated May 6, 2008 in I. T. R. No. 229 of 1988 entitled CIT v. Vishnu Industrial Gases P. Ltd. had quoted the aforesaid passage and thereafter remarked that the situation does not seem to have changed over the last fifty years and the Revenue continue to agitate the question whether tax is leviable in a particular year or in some other year. Alas ! The aforesaid words of wisdom of the Bombay High Court reminded to the Revenue authorities more than two years ago again have not made any dent on the psyche of the Revenue. 32. In these circumstances, we are constrained to dismiss all these appeals with costs quantified at Rs. 10,000 in each appeal. The entire cost shall be paid within a period of two weeks to the library ..... X X X X Extracts X X X X X X X X Extracts X X X X
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