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TMI Blog2012 (7) TMI 955X X X X Extracts X X X X X X X X Extracts X X X X ..... or not. In case no discrepancy is found in this regard, no adjustment is called for with the assessee's mode of revenue recognition. In terms of aforementioned observation this ground is partly allowed for statistical purposes. Addition on excess commission paid by the assessee - Held that:- It is true that AO cannot sit in the judgment of a businessman but at the same time he has to examine that assessee has claimed the expenditure in accordance with commercial considerations and not as per its whims and fancies. The terms of contract fix the reasonableness of amount payable by the assessee and, therefore, any amount paid over and above the same cannot be treated wholly and exclusively for business purposes. However, in the present case, we find that learned CIT(A) had duly referred the addendum for AO's comment and he has only disputed the admission of the said addendum but not the veracity of the addendum per se. We, therefore, do not find any reason to interfere with the order of learned CIT(A). Addition on account of late payment of PF and ESI - Held that:- No reason to interfere with the order of learned CIT(A) because admittedly in respect of disallowance deleted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te payments of PF and ESI without appreciating the fact that the grace period under PF Act and the ESI Act has no relation with the IT Act. 6. Brief facts, apropos ground No. 1 are that from the tax audit report, the AO noticed that the assessee company had declared income from services revenues including revenue from basic telephony services rendered through prepaid cards. It was explained by the assessee that the revenue from telephony services rendered through prepaid cards was recognized on the basis of actual usage by the customers. The AO required the assessee to furnish the details of actual sales of prepaid cards and actual usage by the customers. On going through the details, the AO noticed that the company had sold prepaid cards amounting to ₹ 2,79,32,820 as against which services revenue had been declared at ₹ 2,34,90,599. The AO further observed that assessee company had paid commission to the dealers on actual sales of prepaid cards aggregating to ₹ 2,79,32,820 and the commission had been claimed as expenditure in computing the income/loss of the company. He, therefore, did not accept the assessee's contention and made an addition of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission on the basis of value of cards sold. 8. Learned CIT(A) deleted the addition for the following reasons : (i) telephonic services provided by the company are measured in the form of talk time . (ii) unused value as on the last day of the accounting year was the amount with respect to which the company had not provided services to the customer during the year. (iii) since the revenue in the case of a service company is received by providing services, the revenue only to the extent services were actually provided during the year could be recognized. (iv) the assessee was following correct system of accounting of revenue in respect of prepaid cards which was also used for payment of license fee to DOT. The amount of unused talk time which was carried forward was shown as revenue in subsequent year. 9. Learned Departmental Representative submitted that admittedly, the commission had been paid on entire value of prepaid card sold. But revenue has been declared only with reference to actual user of prepaid card. She submitted that assessee does not refund the amount in respect of unused prepaid card after the expiry of period of prepaid card. She submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween those two years. On a reference at the instance of the assessee, the Hon'ble High Court held that the method of accounting of the assessee being mercantile, the interest accrued to the assessee when the amount due to him had not been paid in each of the relevant assessment years and, therefore, the interest was to be spread over the years between the date of acquisition and the date of payment. Hon'ble Supreme Court upheld the decision of Hon'ble Madras High Court. (2) CITv. Punjab Tractors Co-op. Multipurpose Society Ltd. [1998] 234 ITR 105/[1997] 95 Taxman 579 (Punj. Har.). In this case, the assessee was engaged in the purchase and sales of tractors and motorcycles and their parts, besides doing repair of tractors and motorcycles. The assessee had shown in its balance sheet a sum of ₹ 2,01,236 on the liability side under the head Post warranty services advances . The assessee had received advance from the buyers of tractors to cover the service charges of tractors for a period of one year from the expiry of the warranty period of one year. The assessee explained before the AO, that there was an obligation on the part of the assessee to provide free s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the buyers could not be treated to be income unless the right to appropriate it towards the services had accrued or arisen. So long as the right did not exist, the money received from the buyers remained advance money. Deposits or advances received by the assessee became trading receipts when the assessee became entitled to appropriate the same to its income at the time of rendering the service. The Tribunal was right in holding that ₹ 1,45,490 received by the assessee under post-warranty services charges was not assessable in the asst. yr. 1978-79 and, therefore, the CIT had no jurisdiction to pass order under s. 263 of the Act. (Emphasis, italicized in print, supplied) (3) Asstt. CITv. Mahindra Holidays Resorts (India) Ltd. [2010] 39 SOT 438 (Chennai) (SB). The assessee company was in the business of selling time share units in its resorts. The assessee had shown substantial amount under the heading deferred income advance towards member's facili-ties . This figure represented the amount collected from time share members but not recognized as revenue for the current year. The expla-nation of the assessee was that it had considered only 40 per cent of the mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in services and direct the assessee to pay damages. The point we are trying to drive home is that the matter does not end on signing of the agreement and on a person becoming a member. There is a continuing liability on the part of the assessee not only to provide accommodation but also to provide other incidental services attached with the accommodation. This is an important aspect of the matter. 31. We have held that there is a definite liability cast on the assessee to fulfil its promise and therefore, it cannot be said that the entire fee received by it has accrued as income. (4) CITv. Dinesh Kumar Goel [2011] 331 ITR 10/ 197 Taxman 375/9 taxmann.com 188 (Delhi). In this case the assessee ran a coaching institute where students were coached for entrance examinations conducted by engineering institutions. The total fee for the entire course, which may be of two years duration, was taken at the time of admission of the students. For the asst. yr. 1997-98, the assessee claimed that fees received in the financial year relevant to that assessment year were to be carried forward to the next assessment year as they related to the next financial year. The AO did not permit thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;Accounting Standards'. A conjoint reading of these provisions of the Act and the Companies Act, 1956 shows that assessees, which are companies and showing income, inter alia, under the head 'Business or profession' have to follow the Accounting Standards prescribed. The Government of India has notified Accounting Standards in exercise of its power under s. 145(2) of the Act. AS-1 relates to the disclosure of accounting policy and puts an obligation on the assessee to disclose all significant accounting policies adopted in the preparation and presentation of financial statements. Para 6(b) defines accrual as the assumption that revenues and costs are accrued that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate. Two things follow from this, viz., unless the revenue is earned, it is not accrued likewise, unless the expenses are incurred, cost in respect thereof cannot be treated as accrued. Secondly, It recognizes the matching concept, viz., receipts are to be matched against expenses to arrive at the net income, which would then be exigible to tax. Under AS-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 (Hyd.). (d) T.K. International Ltd. v. Asstt CIT [2004] 91 ITD 481 (Cuttack) (e) Career Launcher (India) Ltd. v. Asstt. CIT [2011] 131 ITD 414/10 taxmann.com 242 (Delhi) 13. We have heard the submissions of both the parties and have perused the record of the case. 14. The facts are not disputed. The assessee's main source of income is on account of providing services through prepaid and post-paid cards. The service was provided in the form of talk time. Once the assessee provided the talk time to its subscriber, its obligation to provide any further service gets over. The company had to share its revenue with DOT (Department of Telecommunica-tion, Government of India) as per terms of license granted to the assessee. It is not disputed that license fee was paid on revenue sharing basis and for this purpose assessee had installed an integrated software for billing and account-ing purposes. According to this system the revenue in respect of services that had been provided in the form of talk time to the subscribers was automatically recognized in the accounts, both in respect of prepaid and post-paid cards. Further it is not disputed that the prepaid card sold by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 Dictio-nary). 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', 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three expressions 'accrues', 'arises' and 'is received' having been used in the section, strictly speaking 'accrues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e file of AO for verification of this aspect only. We, therefore, restore the matter to the file of AO for the limited purpose of verification whether in the subsequent year the assessee has declared the revenue in respect of expired prepaid cards or not. In case no discrepancy is found in this regard, no adjustment is called for with the assessee's mode of revenue recognition. In terms of aforementioned observation this ground is partly allowed for statistical purposes. 17. Ground No. 2 reads as under : 2. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of ₹ 21 lac made by the AO on account of excess commission paid by the assessee without appreciating the fact that the assessee did not produce the addendum on the basis of which the commission was paid. 18. Brief facts apropos this issue are that assessee had claimed dealers commission of Rs, 2,53,02,841. This included commission amounting to ₹ 1,90,54,200 on activation of telephone connection to M/s Jaipur Telecom (P) Ltd. The AO examined the copy of agreement with M/s Jaipur Telecom (P) Ltd. and noticed that as per Annex. A of the agreement, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular month is more than 250 but less than 500 connections 550 In case total connections activated in a particular month is more than 500 connections 800 22. Thus, it was clarified and agreed upon by the two parties that in case the total connections activated in a particular month were more than 500, the rate of commission per connection would be ₹ 800 for all connections. Since the number of connections activated of all the months of the year were more than 500, the commission was computed @ ₹ 800 per connection. It was further submitted that since the AO did not grant specific opportunity to explain the matter during the assessment proceedings, the addendum to the agreement could not be produced before him. Therefore, the terms of agreement were misinterpreted and part of the commission was disallowed. Learned CIT(A) admitted the addendum under r. 46A as additional evidence and called for the comments of AO. The AO in the remand report pointed out that assessee was specifically asked to file details of dealer commission with confirmation and justification thereof in respect of parties to whom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of slab rates prescribed in Annex. A of the agreement and not in the manner the assessee computed. Learned counsel for the assessee submitted that commission had been paid to channel partner viz. Jaipur Telecom (P.) Ltd. He submitted that this company is not related to assessee. He referred to the table as per which on the basis of slab rates ? commission was payable. He pointed out that once the number of connections exceeded 500, the commission was payable @ ₹ 800 in respect of all the connections. He submitted that AO misread the agreement and, there-fore, the disallowance was not called for. He further submitted that, in any view of the matter, since the addendum had been executed prior to assessment proceedings the commission should have been computed as per the addendum which only clarified the original terms of agreement. In this regard learned counsel referred to p. 17 of the paper book, wherein the agreement between assessee and Jaipur Telecom (P) Ltd. is contained in which the appointment of M/s Jaipur Telecom (P) Ltd. was as under : 2.1 Telelink hereby appoints M/s Jaipur Telecom (P) Ltd. as a channel partner of Telelink for the service area of Telelink i.e. t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the same could be disallowed. He pointed out that it is not the case of Department that any part of the commission came back to the assessee and, therefore, the commission had not been paid for extra commercial consider-ation. Learned counsel further pointed out that liability for payment of commis-sion crystallized the moment connection was activated. Learned counsel relied on the decision, ofPioneer Consolidated Co. of India Ltd. v. CIT [1972] 85 ITR 410 (Afl.) 25. We have considered the submissions of both the parties and have perused the record of the case. There is no dispute that commission was payable to the channel partners as per agreement. Therefore, it was the agreement which governed the payment of commission and the commission had to be computed as per the agreement. If the computation had not been made as per the agreement then excess amount paid could be disallowed. The terms of agree-ment decide quantum of expenditure, which is allowable as business expendi-ture. If we accept the argument of learned counsel for the assessee that it was not within the AO's jurisdiction to examine the terms of contract then it would render the very object of entering into con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised the following grounds of appeal: 1. Learned CIT(A) has erred in the facts and under the circumstances of the case' in deleting the addition of ₹ 72,64,139 made by the AO on account of revenue for services on unused prepaid cards without appreciating the fact that the income of one year cannot be shifted to subsequent years. 2. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of ₹ 21 lacs made by the AO on account of excess commission paid by the assessee without appreciating the fact that the assessee did not produce the addendum on the basis of which the commission was paid. 3. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of ₹ 28,15,974 made by the AO on account of late payment of PF and ESI without appreciating the fact that the grace period under PF Act and the ESI Act has no relation with the IT Act. 33.GroundNo. 1 is identical to ground No. 1 of asst. yr. 2003-04 vide ITA No. 177/ Delhi/2009. Therefore, for the reasons given in asst. yr. 2003-04 this ground is allowed for statistical purposes as directed in asst. yr. 2003-04 f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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