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TMI Blog2018 (12) TMI 585X X X X Extracts X X X X X X X X Extracts X X X X ..... the specific period. This is subject to any evidence that some other method would be better and more appropriate for representing the pattern of performance. What is the relevant yardstick is the time of accrual or arisal for the purpose of its taxation, viz., in order to be chargeable, the income should accrue or arise to the assessee during the previous year. If income has accrued or arisen, even if actual receipt of the amount is not there, it would be chargeable to tax in the said year. Though the amount may be received later in the succeeding year, the income would be said to accrue or arise if there is a debt owed to the assessee by somebody at that moment. From this, it follows that there must be the “right to receive the income on a particular date, so as to bring about a creditor and debtor relationship on the relevant date” -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 appropriation of prepaid amount was contingent u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate when income had accrued to the respondent-assessee. The respondent-assessee, however, recognizes revenue on prepaid cards on the basis of actual usage. In other words, unutilized amount outstanding on the prepaid card, if any, at the end of the financial year, was carried forward to the next year. The unutilized amount on the prepaid card was treated as advance in the balance-sheet and recognized as a revenue receipt in the subsequent year, when the talk time was actually used or was exhausted when the card lapsed on expiry of the stipulated time. 6. Learned counsel for the respondent-assessee has rightly submitted that the contention of the Revenue even if accepted would be revenue neutral, since the addition made in the first year will result in correspondingly reduction in the revenue of the next year and so on and so forth. Revenue while not disputing the submission, submits that the respondent-assessee must duly account for the entire unutilized amount in the next year. On the said aspect, learned counsel for the respondent-assessee has drawn our attention to paragraph 16 of the order dated 9th July, 2012 passed by the Income Tax Appellate Tribunal ('Tribunal', ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uce the receipt by a similar amount in the next/succeeding year. Counsel for the Revenue is unable to controvert or deny the said position, albeit he states that the respondent-assessee had not made any such claim in the return. Be that as it may, the Assessing Officer while making addition in one year in respect of receipt which was accounted for in the next year should pass a consequential order to ensure that the income or receipt is not taxed twice. 8. Quantum or revenue earned would be income in one year or the other year. Counsel for the respondent-assessee had drawn our attention to tables/chart filed before us. ₹ 44,42,221/- added to the income of the Assessment Year 2003-04 was required to be reduced from the receipts shown by the respondent-assessee in the Assessment Year 2004-05. Similarly, addition of ₹ 72,64,139/- made in the Assessment Year 2004-05 has to be reduced from the income in the Assessment Year 2005-06. In fact, the income for the Assessment Year 2005-06 would be lower as the carriedforward talk time of ₹ 30,74,152/- was lower than the talk time of ₹ 72,64,139/- carried-forward from the Assessment Year 2004-05. In the Assessment Ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance. (ii) Completed service contract method-Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable. Paragraph 7 stipulates that revenue from service transaction can be recognized either by proportionate completion method or by the completed service contract method. Revenue is generally recognized when the service is performed. Proportionate completion method is a recognized accounting method, as per which revenue is recognized proportionately by reference to the performance of each act. Under this method, revenue is determined on the basis of contract value, associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. Though the amount may be received later in the succeeding year, the income would be said to accrue or arise if there is a debt owed to the assessee by somebody at that moment. From this, it follows that there must be the right to receive the income on a particular date, so as to bring about a creditor and debtor relationship on the relevant 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. Following discussion in this judgment would demonstrate the principle which we have highlighted above: 37. Mukerji J. has defined these terms in Rogers Pyatt Shellac Co. v. Secretary of State for India 1 I.T.C. 363 : 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 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has arrived at a stage when it can be called 'income. 38. The observations of Lord Justice Fry quoted above by Mr. Mukerji J. were made in Colquhoun v. Brooks (1888) 21 Q.B.D. 52 while construing the provisions of 16 and 17 Victoria Chapter 34 section 2 schedule 'D'. The words to be construed there were 'profits or gains, arising or accruing,' and it was observed by Lord Justice Fry at page 59 : In the first place, I would observe that the tax 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. 39. To the same effect are the ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure which is necessary for the purpose of earning the receipts is deducted therefrom 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. 13. In other words, principle of matching between the revenue receipt and the expenditure to be incurred was applied. Reference was also made to the judgment of the Supreme Court in Commissioner of Income Tax Vs. Bilahari Investment (P) Ltd. [2008] 299 ITR 1 (SC), wherein referring to the concept of matching it was observed:- 82. Matching Concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that revenues of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 195354, should be a matter of no consequence to the Department; 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. 16. In Bilahari Investment (P) Ltd. (supra), the Supreme Court had elucidated that revenue recognition was attainable by several methods of accounting. The same result could be attained by any one of the accounting methods. Completed contract method was one such method. Similarly, percentage of completion method was another such method. Percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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