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TMI Blog2022 (3) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... W.P.(C) No.10373/2019; W.P.(C) No.10374/2019 and W.P.(C) No.10375/2019. 3.2. These writ petitions were disposed of by a coordinate bench of this Court, via a common judgment dated 18.02.2020. The Court, while disposing of the writ petitions, had issued the following operative directions: "19. In absence of any cogent reasons justifying withholding of the refund due to the petitioner under Section 143(1) for AY 2017-18, 2018-19, we find that the proposal as well as the approval granted by Principal Commissioner of Income Tax lacks consideration of the relevant and germane conditions. We, accordingly, set aside the order and direct the respondents to undertake the exercise afresh and pass an order under Section 241A. We, therefore, grant six weeks' time to the respondents to consider the aspect whether the amount found due to be refunded, or any part thereof, is liable to be withheld under Section 241A. While doing so, the Assessing Officer shall, firstly, with reasons, make a prima facie estimation of the probability that additions would be made in the Scrutiny Assessment Proceedings; secondly, he shall make an estimation of the quantum of additions/disallowances, if any, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Quantum of additions and disallowances, if any, on the basis of estimations and their likely tax impact. (iii) The financial wherewithal of the petitioner-assessee and its ability to meet and service any demand for tax that may be raised against it. 3.4 For the aforesaid purpose, the Assessing Officer [ÁO] was required to take into account, illustratively, past demands, pending litigation and the past conduct of the assessee. 3.5. It is not in dispute that after the judgment dated 18.02.2020 was rendered by this Court, the respondents-revenue refunded Rs. 561.72 crores (including interest) to the petitioner-assessee on 02.05.2020, in respect of AY 2017-2018. 3.6. Insofar as the AY in issue is concerned i.e., AY 2018-2019, a fresh order was passed, as noticed above, i.e. order dated 28.04.2020. Via this order, the respondents-revenue have withheld Rs. 349,41,45,020/-. The foundation of this order is the view of the concerned AO that the petitioner-assessee may have to bear tax liability in the range of Rs. 500 crores as and when an assessment order is framed qua AY 2018-2019. 4. Mr Vishal Kalra, who appears on behalf of the petitioner-assessee, says that the impugned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y likelihood of tax liability on this score seems unlikely. 8. This brings us to the second head i.e., disallowance of foreign exchange losses on account of "Marked to market losses". 8.1. A careful perusal of the impugned order shows that the AO has, in fact, not made any estimation as to what is the foreign exchange fluctuation loss (which includes Marked to market loss), that he is likely to disallow. The only aspect that the AO has touched upon to justify the tax liability under this head is that an addition of Rs. 11 crores was made in AY 2016-2017, concerning Marked to market losses. 8.2. After adverting to this aspect, the AO has let the issue hang in the air as he has not gone on to indicate an estimated amount which he is likely to disallow in AY 2018-2019 on account of foreign exchange fluctuation loss, which includes Marked to market losses, and, therefore, the additional tax burden it would result in imposing on the petitioner-assessee under this head. 9. This brings us to the third head. This is one head where, according to the AO, there is likely to be a humongous addition to the taxable income of the petitioner-assessee. 9.1. Briefly, it is the AO's estimati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 and 31.03.2008 also show that unearned I income had been recognized in the past as well as in the subsequent years. It shows that the accounting policy of recognizing unearned revenue each year and offering the same in the year in which services are rendered has been regularly followed by the assessee. As per the chart submitted by the assessee it has offered unearned income of Rs. 1,65,47,889/- this year, and Rs. 560034756/- has I been offered in AY 2008-09. This similar practice has been followed by the assessee right from AY 2003-04 till 2011-12. This being the case, the DRP is of the opinion that keeping in view the accounting policy being followed regularly, the addition made of Rs. 5,60,34,756/- is unjustified. Therefore the assessee's objection on this point is accepted and addition is deleted." [Emphasis is ours] 9.3. A close scrutiny of the observations made by the DRP in the aforementioned order would show that the assessee has been following a consistent accounting policy of recognizing unearned revenue in each financial year, and offering it for tax as and when services are rendered and/or goods are sold. This accounting policy, as per the aforementioned order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1999) 240 ITR 355]) Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the AO on the correctness of the accounting standard followed by the assessee(s) in this batch of civil appeals. 35. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under Section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard 11 mandatory, we are now required to examine the said accounting standard (AS). 36. AS 11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS 11 deals with effects of exchange differences. Under Para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words "monetary items" are defined to mean money held and assets and liabilities to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rting period." 9.5(a) Also see observations made in Commissioner of Income Tax-III v. ShyamTelelink Ltd., 2018 SCC OnLine Del 12872 : "15. On the question of application of the accounting principles, Section 145 of the Act and mandate of the Companies Act and paragraph 9 of the Accounting Standards, in Dinesh Kumar Goel (supra) it was observed:- "28. Reading of the aforesaid (AS) 9 makes it clear that revenue is recognized only when the services are actually rendered. If the services are rendered partially, revenue is to be shown proportionate with the degree of completion of the services. This really clinches the issue in favour of the assessee. 29. Though our discussion on the issue is complete, the parting comments need to be made. The receipts relate to the unexecuted packages, which are not shown in the instant year would be shown in the succeeding year. Rate of tax in respect of companies remains the same in all these years. Therefore, the Revenue does not lose anything, as it would receive the tax on this income in the succeeding year. Still issues are raised and much outcry is made for nothing." 16. Thereafter, the Delhi High Court in Dinesh Kumar Goel (supra) had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received was not liable to be refunded or repaid, whether or not any services were rendered. 19. In J.K. Industries Ltd. v. Union of India, [2008] 297 ITR 176 (SC) and Commissioner of Income Tax v. Woodward Governor India P. Ltd., [2009] 312 ITR 254 (SC), the Supreme Court has emphasized that the accounting standards as framed and followed by the auditors should be respected, for they provide harmonization of concepts and accounting principles and ensure discipline. Accounting methods followed continuously by the assessee for given period of time would ensure revenue neutrality and reflect true and correct income or profits."[Emphasis is ours.] 9.6. As would be evident upon a perusal of the aforesaid extracts, the court laid emphasis and gave weight to the aspects such as consistent application of accounting policy and the concept of revenue neutrality. 9.7. As would be noticed, in this case as well, it is not as if the petitioner/assessee is not offering unearned revenue for tax; it is only on account of accounting policy followed consistently that unearned revenue is offered for tax in the year in which services are rendered and/or goods are sold. Thus, the transaction, in ef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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