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TMI Blog2023 (1) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... the matching concept. We also notice that in the decision relied on by the AR in the case of Ericsson India Pvt. Ltd. 2022 (3) TMI 674 - DELHI HIGH COURT the decision was rendered in favour of the assessee by the Hon ble High Court after factual verification of the details pertaining to the advance payments. It is clear that the following facts are to be verified before coming to the conclusion on the treatment of unearned income in the hands of the assessee. (i) The financials of the assessee is to be verified to substantiate that the accounting practice is consistently followed. (ii) Revenue neutrality in terms of income deferred is offered to tax subsequently needs to be examined (iii) Whether the revenue earned is contingent upon the assessee performing its obligations and rendering services to the pre-paid customers. The additional evidence in the form of invoices and the party wise breakup of the unearned income that is produced before us requires verification by the lower authorities to decide the case on merits. In view of the above, we remit the issue back to the AO for de novo consideration of the issue afresh in accordance with law, after giving rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MEMBER Appellant by : Shri Aliasger Rampurwala, CA Respondent by : Shri Narayana, K.R., Addl.CIT(DR) ORDER Per Padmavathy S., Accountant Member These appeals are directed against the separate orders of the CIT(Appeals)-4, Bangalore, all dated 28.02.2018 for the assessment years 2013-14 to 2015-16. They were heard together and disposed of by this common order for the sake of convenience and brevity. 2. The common issue arising in all these three appeals is the addition/disallowance made by the AO towards unearned income shown by the assessee as current liability in the balance sheet. In AY 2013-14 there is one more issue in respect of disallowance u/s. 40(a)(ia) of the Income-tax Act, 1961 [the Act]. 3. We will take up the appeal pertaining to AY 2013-14 first for adjudication where the assessee has raised the following grounds:- 1. That that the order of the Commissioner of Income Tax (Appeals) [`CIT(A)] is contrary to law, facts and circumstances of the case to the extent prejudicial to the interest of the appellant. 2. That the CIT(A) failed to appreciate that the order of the Assessing Officer is without jurisdiction. 3. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting standards prescribed, unless it is recognized under the Act. The AO noted that the assessee has not furnished any explanation for the claim of unearned revenue as liability. 7. On appeal before the CIT(Appeals), the assessee submitted that the accounting entries passed with regard to revenue recognition in the books of assessee along with sample invoices. The CIT(Appeals) after going through the details upheld the order of the AO with the following observations:- 6.3 The AO has made the impugned disallowance on basis of the observations contained in the notes to account at para 2.6, accordingly to which the sum of 1,33,53,000/- has been shown under the head 'Other current liabilities', as unearned-revenue. The AO has recorded a categoric finding that, the assessee did not submit any explanation whatsoever in support of the accounting treatment of the impugned sum of Rs. 1,33,53,000/-. A perusal of the assessee's submissions during the appeal proceedings reveals that, apart from certain general observations, on accounting methodology, no specific party-wise detail or valid justification has been provided for the non-assessability of the aforesaid sum during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of appeal are therefore disallowed, subject to above direction. 8. The assessee is now in appeal before the Tribunal against the order of the CIT(Appeals). The ld. AR reiterated the submissions made before the lower authorities. He also submitted that recognition of revenue is done under Accounting Standards [AS-9] issued by the Institute of Chartered Accountants of India (ICAI) which is consistently followed by the assessee. Though invoices are raised in the year under consideration, the services are not rendered by the assessee during the year and hence income is not recognized. The ld. AR relied on the decision of the Delhi High Court in the case of Ericsson India Pvt. Ltd. v. ACIT, 136 taxmann.com 228 (Delhi). 9. The ld. AR filed additional evidence during the course of hearing with complete party wise details of invoices along with copies of all invoices raised on the customers. He prayed for admission of additional evidence stating that the lower authorities did not insist upon the same. 10. The ld. DR vehemently opposed admission of additional evidence filed before the Tribunal stating that the assessee was given ample opportunity before the AO and the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual outflow of cash. The crux of mercantile system of accounting is that revenue is recognized at the time when the invoice is raised to the customer. In the instant case, the assessee has raised invoice to the customer during the previous year 2006-07 relevant to the assessment year 2007-08. 11. We will first consider the issue of admission of additional evidence. The ld AR submitted the detailed break-up of the unearned revenue along with invoices in the form of additional evidence before us. The additional evidence submitted goes to the root of the issue of whether the entire amount of invoice raised is to be treated as income or whether to be deferred based on the period to which the invoice is raised. Therefore, in the interest of justice, the additional evidence is admitted for the purpose of adjudication. 12. We have considered the rival submissions and perused the material on record. The assessee is in the business of providing cable television distribution services. It raises invoic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed. 4.3 Proportionate completion method is a method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract. Explanation 5. Revenue recognition is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition 7. Rendering of Services 7.1 Revenue from service transactions is usually recognised 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 recognised proportionately by reference to the performance of each act. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue is postponed. 9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised. 10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. 11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been 135 fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. 12. In a transaction involving the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies had alone been notified as Accounting Standards to be followed by an Assessee and no other accounting standard has been notified. 18. In the present case, the CIT(Appeals) has recorded a finding that the reconciliation substantiating the recognition of revenue in subsequent years was not produced by the assessee. Further, we agree with the argument of the ld. DR that the claim of the assessee requires to be factually verified in terms of the matching concept. We also notice that in the decision relied on by the ld. AR in the case of Ericsson India Pvt. Ltd. (supra), the decision was rendered in favour of the assessee by the Hon ble High Court after factual verification of the details pertaining to the advance payments. 19. From the above discussion, it is clear that the following facts are to be verified before coming to the conclusion on the treatment of unearned income in the hands of the assessee. (i) The financials of the assessee is to be verified to substantiate that the accounting practice is consistently followed. (ii) Revenue neutrality in term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is claimed as a deduction in the subsequent in the computation of income as the year end provisions are reversed on 1st April 2012. The contention of the assessee that the deduction claimed if not allowed will result in double disallowance has merits. The expenses disallowed is eligible for deduction u/s.40(a) of the Act as and when the tax is deducted at source on such expenses. The reversal of provisions done on 1st April 2012, would go to nullify the impact of the expenses claimed by way of debit to the profit and loss account on which is tax is deducted at the time of the payment. Therefore the reversal of provisions disallowed in the computation of assessment year 2012-13 is to claimed as a deduction in the assessment year 2013-14 so that the expenses eligible for deduction u/s.40(a) is rightly claimed in the computation. However the most important fact that needs to be verified in this regard is whether the provision made on 31st March 2012 to the tune of Rs.3,35,10,157 is reversed on 1st April 2012 and that the same is reflected correctly in the provision for expenses ledger of the assessee. This needs to be verified to justify the claim of deduction of the said amount in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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