COMMISSIONER OF INCOME TAX-IV Vs. UNIQUE MERCANTILE SERVICES PVT. LTD
LAWS(GJH)-2016-6-480
HIGH COURT OF GUJARAT
Decided on June 14,2016

COMMISSIONER OF INCOME TAX-IV Appellant
VERSUS
Unique Mercantile Services Pvt. Ltd Respondents

JUDGEMENT

K.S.JHAVERI,J. - (1.) By way of this appeal, the revenue has challenged the order dated 17.8.2007 passed by the Income Tax Appellate Tribunal, Ahmedabad (for short, "the Tribunal") in Income Tax Appeal No.91/Ahd/2003 & C.O. No.235/Ahd/2003. By the impugned order, the Tribunal has dismissed the appeal filed by the department, whereby the Tribunal confirmed the disallowance to the extent of Rs.51,526/-.
(2.) This Court while admitting the appeal has framed the following question of law:- "Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by CIT (A) deleting protective addition of Rs.63,17,480/- made on account of group bonus commission?"
(3.) Mr. Mehta, learned advocate appearing for the appellant has submitted that the Tribunal has committed an error while confirming the order of CIT (A). He has relied upon the decision of the Apex Court in the case of Madras Industrial Investment Corporation v. Commissioner of Income Tax reported in 225 ITR 802. He has also relied upon a decision of this Court rendered in Tax Appeal No.1471 of 2005, wherein it is held as under:- "5.1 In this regard it shall be relevant to peruse the Notification No. S.O. 69(E) dated 25.01.1996 wherein the Central Government has notified Accounting Standard-1, more particularly, the expression accrual which has been defined as under: (b) "Actual" refers to the assumption that revenues and costs are accrued, that is, recognised and they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate; 5.2 The assessee has accordingly recorded the revenue as well as expenditure in the financial statement of period to which they relate. We find that the Tribunal has rightly observed as under in para 8 as under: ... When the assessee issued facility cards for number of years,t he assessee has received entrance fee as well as membership fee. Entrance fee is recorded in the year of receipt while the membership fee is spread over to the period to which the membership relates. Similarly, the assessee pays insurance premium for the number of years for which the card is issued because the assessee has to provide the accidental insurance for the entire period of the card. Such expenditure is also spread over to the period for which the card is issued. The Revenue has claimed that the receipt of membership fee as well as the expenditure on the commission and the insurance premium is to be recorded in the year in which they are received and paid. The stand of the Revenue is contrary to the definition of accrual as provided in the Accounting Standard specified by the Central Government which is mandatory to be followed by the income tax assessee. 5.3 We find that the Tribunal has rightly relied upon the decision of Hyderabad Bench in the case of Treasure Island (supra) and concluded as under: The above finding of the ITAT would be squarely applicable to the case under consideration before us as the facts in both the cases are identical. In the case under appeal before us also, the assessee is under an obligation to provide the services on continuous basis for the period for which the card is issued. The assessee has spread over the receipt as well as expenditure as per Accounting Standard 9 and the same is disclosed by the assessee by way of Note in the audited accounts. If the contention of the Revenue is accepted and the entire membership fee collected is taxed in the year of receipt then in the subsequent year when the assessee will incur the expenditure there will be loss. That would give distorted picture of the working result of the assessee. In view of the above, we respectfully following the above decision of ITAT, Hyderabad Bench in the case of Treasure Island (P) Ltd (supra) hold that the method of accounting followed by the assessee was proper and correct method and the Assessing Officer has wrongly rejected the same. 6. In this regard we are supported by the decisions of the Apex Court as well as this Court, Bombay and Delhi High Courts. The Bombay High Court in the case of Taparia Tools Ltd. v. Jt. CIT, [2003] 260 ITR 102 has observed that in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed. Under the Mercantile System of Accounting, this Matching is required to be done on accrual basis. Under this Matching concept, revenue and 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 out-flow of cash. It has been further held that the Income Tax Act makes no provision with regard to valuation. It charges for payment of tax, the income which is to be computed in the manner provided by the Act and that it is the duty of the Assessing Officer to deduce a proper taxable income. It is held that the Assessing Officer is required to compute the income in accordance with the method of accounting regularly employed by the assessee and if the system adopted by the assessee does not result in ascertainment of proper profits then, it is the duty of the assessing officer to make appropriate adjustments and deduce true profits. 6.1 The Apex Court in the case of Rakesh Shantilal Mardia v. Deputy Commissioner of Income-tax reported in [2012] 210 Taxman 565 (SC) considering the decision of the Bombay High Court in the case of Taparia Tools Ltd. (supra) has held that matching principle is required to be followed in order to arrive at the real income of the assessee. 6.2 Similarly, in the case of Commissioner of Income- Tax v. Dinesh Kumar Goel reported in [2011] 331 ITR 10 (Delhi), the Delhi High Court has held as under: ... even when the income accrues or arises or is deemed to accrue or arise to the assessee in India during previous year, that is to be taxed in that year. It is important, therefore, that receipt of a particular amount in the relevant year should be an income under the aforesaid provision. 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. 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 interior to rendering of service, the income, therefore, would accrue on rendering of services. 6.3 This Court has also taken the same view in a recent decision in the case of Snesh Resort Pvt. Ltd v. Dy. CIT rendered in Tax Appeal No. 113 of 2004 on 18.11.2014. This Court has observed as under: 6.2 Similarly in the case of Bilahari Investment P. Ltd (supra) the Apex Court has held that since from the various statements produced, the entire exercise arising out of the change of method from the completed contract method to deferred revenue expenditure was revenue neutral, the completed contract method was not required to be substituted by the percentage of completion method. 7. Considering the aforesaid observations of the Tribunal as well as the decisions relied upon by learned advocate for the assessee, we are of the opinion that the Tribunal has committed an error in passing the impugned order so far as considering the membership fees as income when the assessee had not resumed giving the services of the water park to its members. Under such circumstances, the amount received by way of membership fees was required to be considered as an advance and thereafter as and when the business commenced the amount of liability was required to be taxed over a period of time proportionately. The amount of membership fees would be considered as income from the year the business of the assessee commenced. We therefore answer the questions raised in the negative i.e. against the revenue and in favour of the assessee. 7. In view of the aforesaid discussion, we do not find any infirmity in the order passed by the Tribunal. The Tribunal has rightly considered that the method of accounting should be such from which the correct profit of each year can be deducted and that as per the method adopted by the Revenue, the profit in the year in which the card is issued would be more resulting in loss/less profit in the year in which the services will be rendered by the assesseee. We are of the opinion that when the services are rendered partially, revenue is to be shown proportionate to the degree of completion of the service and therefore the assessee was justified in spreading over the amount of membership fee and expenses. 8. Therefore, the Tribunal is justified in setting aside the order of the CIT passed under Section 263 of the Act. We, accordingly, answer the question of law raised in the present appeals in the affirmative i.e in favour of the assessee and against the revenue. The impugned order passed by the Tribunal is hereby confirmed. Appeals are dismissed accordingly." ;


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