9911796707
TMI Blog2024 (11) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... s like the respondent-assessee. The software which is used for operating the lifts is not freely available and never shared by the lift companies with the customers. If the contract for Annual Maintenance Service is not renewed, the cost of maintenance and running of the lifts will high and usurious as the respondent-assessee has the monopoly over not only the software but also the spares as they are not available in the open market. Even if the customer opts to terminate the contract, the respondent-assessee is not bound to refund the amount. If the customer opts to terminate the contract, the customer will still be at the mercy of the respondent-assessee should the lift malfunction. The business model which the respondent-assessee follows in so far as service under the Annual Maintenance Contract is concerned, it leaves no scope for uncertainties as far as income for provision service under its AMC model is concerned. Assessee would have been liable to pay tax under Section 65(64) r/w Section 65(105)(zzg) of the Finance Act, 1994 in the same quarter of it's receipt. Similarly, the same activity could also have been liable to tax under Section 5 of the TNVAT Act, 2006 and liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned order dated 01.08.2014, the Appellate Tribunal has allowed the appeal filed by the respondent-assessee in I.T.A.No.222/Mds/2013 and dismissed the cross-appeal filed by the Income Tax Department. 4. In this appeal, the dispute is confined to the Annual Maintenance Charges (AMC) collected by the respondent-assessee in advance from its customers for maintenance of Lifts installed and commissioned by the respondent-assessee. 5. The respondent-assessee had treated the same in their Books of Accounts as a current liability viz., Income Received in Advance . Therefore, the Respondent-Assessee did not offer the same to tax in the returns filed for A.Y. 2009-10. The Assessing Officer disallowed the same in the assessment order. The said decision was affirmed by the Appellate Commissioner. 6. The Appellate Tribunal has allowed the appeal of the respondent-assessee in the light of Section 41(1) of the Income Tax Act,1961 vide impugned order dated 01.08.2014 in I.T.A.No.222/Mds/2013 with the following observations:- 5. The apprehension of the Revenue that the assessee is not bound to refund the money to the customers, is answered by the provisions of law stated in Section 41(1) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumed the obligation for maintaining the lifts sold by the assessee for a particular period of time and the assessee collects fee for such services in advance, it is incumbent upon the assessee to provide the liability for unexpired period from the total advance collections made from the customers. 8. Although this appeal was filed in the year 2015, it was not admitted and it was adjourned from time to time. As such, no question of law was framed since 2015. 9. The appellant-Income Tax Department has raised the following questions of law as substantial questions of law: i. Whether on the facts and in the circumstances of the case, the Tribunal was right in deleting the addition made by the Assessing Officer (AO) on account of Annual Maintenance Charges (AMC) received in advance and shown by the assessee as liability in the balance sheet especially when the period of Annual Maintenance Charges (AMC) was only one year? ii. Is not the finding of the Tribunal bad especially when the assessee is following mercantile system of accounting and has received the entire Annual Maintenance Charges (AMC) amount in advance without any clauses in the agreement for refunding the same? iii. Wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative is right when he states that the assessee is under obligation to perform maintenance services, in fact that is not in dispute, and that is for what AMC stands for and the assessee gets paid. Hence, part of AMC shown under current liability amounting to Rs. 8,20,45,067/- has to be assessed in this year only. In view of the discussion supra income received in advance of Rs. 8,20,45,067/- is assessed to tax. 14. The respondent - assessee preferred an appeal before the Appellate Commissioner/Commissioner of Income Tax (Appeals)-III, Chennai in I.T.A.No.148/2011-2012/A.III. 15. The Appellate Commissioner by an Order dated 07.12.2012, partly dismissed the appeal of the respondent-assessee and distinguished the decision of the Division Bench of this Court in Commissioner of Income Tax Vs. Coral Electronics (P) Limited , 274 ITR 336 (Mad) and the decision of the Income Tax Appellate Tribunal (ITAT) in DCIT Vs. TVS Electronics Limited , [(2012) 22 Taxmann.com 215 (Chennai)] from the case of the Respondent-assessee with the following observations:- A perusal of the ratio laid down by the Hon'ble Chennai ITAT in the case of TVS Electronics Ltd (supra) and Hon'ble Madras High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the appellant-Income Tax Department would submit that since the amount has been received in advance, it is to be taxed in the year in which, it is received irrespective of the fact whether services were to be provided over a period of time which may spill over to the succeeding financial year. 18. That apart, the learned counsel for the appellant/Income Tax Department would submit that as and when the payments are received by the respondent-assessee from its customers, the payments were after deduction of tax under Section 194C of the Income Tax Act, 1961 for that Assessment Year. 19. That apart, the learned counsel for the appellant-Income Tax Department would submit that amount received towards Annual Maintenance Charges was to be treated as total income of the respondent-assessee and was chargeable to tax under Section 4 read with Section 5 of Income Tax Act, 1961. 20. That apart, the learned counsel for the appellant-Income Tax Department would submit that not only the tax was paid under the provisions of the Tamil Nadu Value Added Tax (TNVAT) Act, 2006 but also service tax under the provisions of the Finance Act, 1994. 21. It is therefore submitted that merely becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of the Annual Maintenance Charges (AMC) is only one year. The Appellate Tribunal had also failed to note that the nature of contract entered by the respondent-assessee cannot be considered as current liability of the respondent-assessee and the Annual Maintenance Charges (AMC) amount received as income of the respondent-assessee and there is no clause for refund or termination of the contract by the customer. 27. It is submitted that the Appellate Tribunal had wrongly relied upon the decision of the Special Bench of the Tribunal in ACIT Vs. Mahindra Holidays Resorts India Limited , (2010) 131 TTJ (Chennai) (SB), which is distinguishable on facts as the unexpired period of the contract therein was very long and the income was spread over 33/25 years depending on the scheme whereas in the present case, the Annual Maintenance Charges (AMC) period was only one year. 28. It is submitted that the Appellate Tribunal had wrongly applied the Judgment of the Income Tax Appellate Tribunal (ITAT) in TVS Electronics Limited case (referred to supra) wherein the customer had right to terminate the contract with the services rendered by the vendor therein if it was not up to the satisfaction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have also considered the Accounting Standard (AS) 9 issued by the Institute of Chartered Accountant of India. 36. The respondent-assessee being a company was required to maintain its accounts, the Balance Sheet and the Profit and Loss Account strictly in accordance with the provisions of the Companies Act, 1956, as it stood during the period in dispute. 37. As per Section 211 of the Companies Act, 1956 (since repealed and substituted with Companies Act, 2013), every Balance Sheet of a company should give a true and fair view of the state of affairs of the company at the end of the financial year. 38. Similarly, Profit and Loss Account is also expected to be prepared to give a true and fair view of the profit or loss of the company for the financial year. The Profit Loss Account is prepared to summarize the revenue and expenditure incurred by the Company. Information therein would have been based on accounts maintained by the respondent-assessee either under the mercantile system of accounting or under the cash system of accounting which is statutorily now recognized under Section 145 of the Income Tax Act, 1961. 39. As per Section 211(1) of the Companies Act, 1956, a Balance She ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Act governing such class of company. 42. The returns that were filed by the respondent-assessee under Section 139(1) of the Income Tax Act, 1961 for the period in dispute would have been based on the Profit and Loss Accounts of the respondent-assessee which should have satisfied the requirement of Section 211(2) of the Companies Act,1956. 43. For preparing Balance Sheet and Profit and Loss Accounts, an assessee has to maintain its/her/his or their accounts either under the cash system of accounting or mercantile system of accounting as per Section 145(1) of the Income Tax Act,1961, which prescribes the Method of Accounting , statutorily recognizes these two methods of accounting. 44. As per Section 145(1) of the Income Tax Act, 1961, income chargeable to tax under the head Profits and gains of business or profession (under Section 28 of the Income Tax Act, 1961) or Income from other sources (under Section 56 of Income Tax Act, 1961), shall be computed either in accordance with :- (i) cash system of accounting ; or (ii) mercantile system of accounting regularly employed by an assessee. 45. However, Section 145(1) of the Income Tax Act, 1961 is subject to the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2008) 299 ITR 1 (SC), the Hon'ble Supreme Court held that every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. This is in line with Section 145 of the Income Tax Act, 1961. 50. It further held that only in those cases, where the Department records a finding that the method adopted by the assessee results in distortion of profits , the Department can insist on substitution of the existing method. 51. Relevant portion from the decision of the Hon ble Supreme Court in CIT vs. Bilahari Enterprises (P) LTD. (2008) 299 ITR 1 (SC) is extracted below:- 20 In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee s, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits , the Department can insist on substitution of the existing method. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of Accounting Standards is to see that accounting income is adopted as the taxable income and not merely as the basis from which taxable income is to be computed. Thus, it observed that if Accounting Standards are properly applied , accounting income is to be the adopted as the taxable income of an assessee. 57. The expression income is defined in Section 2(24) of the Income Tax Act, 1961. The definition of income in Section 2(24) of the Income Tax Act, 1961 is an inclusive definition. It includes profits and gains . There is no definition for the expression profits and gains in the Income Tax Act, 1961. In fact, there is also no such definition in the Companies Act, 1956. 58. Thus, it is the total income after expenditure which is the income. Such income could be income actually received but also the deemed to be received and/or income which has accrued or arises or is deemed to accrue or arises during such year. 59. Section 5 of the Income Tax Act, 1961, deals with Scope of Total Income . Section 5 of the Income Tax Act, 1961 reads as follows:- 5. Scope of Total Income: (1). Subject to the provisions of this Act, the total income of any previous year of a person who is a resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income , then tax laws do not need to lay down the rules and the tax authorities do not need to examine the computation of the value of inventories and its effect on computation of income. 63. There, the Hon ble Supreme Court also underscored the point that the adoption of Accounting Standards and of accounting income as taxable income would avoid distortion of accounting income which is the real income. Relevant portion from the above decision is extracted below:- 4. In its origin, Accounting Standard is a policy statement or document framed by Institute. Accounting Standards establishes rules relating to recognition, measurement and disclosures thereby ensuring that all enterprises that follow them are comparable and that their financial statements are true, fair and transparent. Accounting Standards (A.S. for short) are based on a number of accounting principles. They seek to arrive at true accounting income. One such principle is the matching principle. The other is fair value principle. The aim of the Institute is to go for paradigm shift from matching to fair value principle. 10.The main object sought to be achieved by Accounting Standards which is now made mandatory is to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Official Gazette from time to time accounting standards to be followed by any class of assessee s or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in Sub-Section (1) or accounting standards as notified under Sub- Section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144. 67. It is thus clear that Accounting Standards adopted by an assessee should not result in Distortion of Profits , so as to render the mandate prescribed under Section 211 of the Companies Act, 1956 qua true and fair view and the provisions of the Income Tax Act, 1961, otiose. 68. It is also clear that every assessee is entitled to arrange its affairs and follow one of the two methods of accounting, which the Department had earlier accepted. 69. However, if the Assessing Officer records a finding that the method adopted by an assessee results in distortion of profits, i.e., taxable income for the purpose of computation and payment of income tax, the Assessing Officer can ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, it has been specifically stated that the Accounting Standard does not deal with the following aspects:- (i) Revenue arising from construction contracts; (ii) Revenue arising from hire-purchase, lease agreements; (iii) Revenue arising from Government grants and other similar subsidies; (iv) Revenue of insurance companies arising from insurance contracts. 75. Para 3 of Accounting Standard (AS) 9 lists out examples of items not included within the definition of revenue for the purpose of Accounting Standard (AS) 9. They are as follows:- i. Realised gains resulting from the disposal of, and unrealised gains resulting from the holding of, non-current assets e.g., appreciation in the value of fixed assets; ii. Unrealised holding gains resulting from the change in value of current assets, and the natural increase in herds and agricultural and forest products; iii. Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments arising on the translation of foreign currency financial statements; iv. Realised gains resulting from the discharge of an obligation at less than its carrying amount; v. Unrealised gains resulting from the restatement of the carryin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a specific period of time, 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. 81. Under the Proportionate Completion Method of accounting, the revenue is recognized proportionately by referring to the performance of each act and it would be determined on the basis of contract value , associated costs , number of acts or other suitable basis. The Revenue is recognised on a straight line basis over the specific period when services are provided by an indeterminate number of acts over that specific period, unless there is evidence that some other method better represents the pattern of performance. The Learned Counsel for the Respondent-Assessee referred to the above during the course of hearing. 82. On the other hand, under the Completed Service Contract Method of accounting, the revenue is recognized in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed. It may consist of the execution of a single act of service or services are performed in more than a single act, and the services yet to be perf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance, there is no uncertainty and therefore there was performance of service immediately after payments were received in advance, even if mercantile system of accounting was followed. 87. Paragraph 12 of the Accounting Standards (AS) 9 reads as under:- 12 . In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service. 88. Thus, it is clear that if there is no doubt regarding the consideration that will be derived from rendering the service, performance of service shall be regarded as having been achieved as per Paragraph 12 of the Accounting Standards (AS) 9. Since, the receipt of the amounts is in advance, it leaves no uncertainty regarding rendering of the service in future. Therefore, it an income of the respondent assessee at the time of its receipt. 89. Thus, it is evident, if the amount is received in advance, it is a reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then, he has no right over the same. It is in that sense till then, it cannot be considered as an income of the assessee and is not exigible to tax. Therefore, the issue is answered in favour of the assessee and against the Revenue. 93. The Court in Commissioner of Income Tax Vs. Coral Electronics (P) Limited 274 ITR 336 (Mad) though referred to its earlier decision in CIT Vs. Shaik Mohamed Rowther [2000]246ITR161(MAD) where the assessee used to receive amounts in advance from the principals and then submits bills for payments and after bills were passed on, the amounts so received were passed and credited to the profit and loss account. Till then the amounts received were shown only as advance. 94. In Shaik Mohamed Rowther case ( supra ), the assessee was following this practice for a number of years and the Department used to accept it. However, in the year under reference, the Income-tax Officer stated that what the assessee received as advance was really its income. The Court referred to the decision of the Hon ble Supreme Court in CIT v. British Paints India Ltd. AIR 1991 SC 1338 and accepted the contention of the Income Tax Department. 95. The Division Bench in Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ph 5.3 to the Assessment Order dated 12.12.2011 has not expressly held that the Respondent-Assessee's accounts distorted the income, the conclusion in Paragraph 5.3 of the Assessment Order dated 12.12.2011 is confined to AMC shown under current liability amounts to Rs. 8,20,45,067 /- which is to be assessed in the year of it's receipt in the light of the decision of the Division Bench of this Court in G.S.R.Krishnamurthy (supra) . 99. The Hon'ble Supreme Court in M/s.JK Industries Limited (supra), in Paragraph 4, has made it clear that there is a paradigm shift from the Matching Principle concept to Fair value Principle under the Accounting Standards. 100. Therefore, the observation of the Appellate Tribunal in the Impugned Order dated 01.08.2014, that the respondent-assessee was bound to follow the Matching Principle of revenue and expenditure and was bound to provide future liability of maintenance from the advance collection made from the customers is an irrelevant consideration to the issue under consideration. Further, the Matching Principle is not an absolute principle invariably applicable to each and every case. 101. The reference to Section 41(1)(a) of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. 105. In the case of Indian Molasses Co. (P) Ltd. vs CIT, (1959) 37 ITR 66 the Hon'ble Supreme Court observed expenditure which is deductible for income tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. Relevant portion of the said decision reads as under : - 36. In our opinion, the payment was not merely contingent but the liability itself was also contingent. Expenditure which is deductible for income tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure . In the present case, nothing more was done in the account years. The money was placed in the hands of trustees and/or the insurance company to purchase annuities of different kinds, if required, but to be returned if the annuities were not bought and the setting apart of the money was not a paying out or away of these ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
