Shri Ravindra Kumar Tongia v. The Assistant Commissioner Of Income Tax, Circle-7, Ncr Buildingstatue Circle Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 611 / 2011 Shri Ravindra Kumar Tongia, R/o R-8, Yudhisthir Marg, C-scheme ,Jaipur ----Appellant Versus The Assistant Commissioner of Income Tax, Circle-7, NCR BuildingStatue Circle Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sandeep Taneja For Respondent(s) : Mr. Daksh Pareek for Mr. Sameer Jain _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHJudgment 30/08/2017 1. By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby tribunal has allowedthe appeal of the department. 2.This court while admitting the appeal on 29.2.2012 framedfollowing substantial question of law:- “(i) Whether on the facts and in thecircumstances of the case, the Tribunalwas justified in holding that theprovisions of section 145(1) are notapplicableespeciallywhentheMemorandum of Understanding cast anobligation upon the appellant not tocompete with the business of M/s CardiacCare and Allied Health Pvt. Ltd. for aperiod of two years? (ii) Whether the entire amount ofRs.1,00,00,000/- is income earned under mercantile system in the year of receiptor will accrue with reference to passageof time of non-competition obligation?” 3.The facts of the case are that assessee who is a Doctor byprofession, upto August, 2006 was Director in M/s. Cardian Care &Allied Health Pvt. Ltd. from where he was earning professional fee.Thereafter, he transferred the company and resigned therefrom.An agreement was entered into by assessee that during the yearunder consideration and subsequent two years no work similar tothe work done in M/s. Cardian Care & Allied Health Pvt. Ltd will bedone by the assessee. The agreement was entered in lieu ofRs.1,00,00,000/- which was received during the year underconsideration. Certain conditions were incorporated in theagreement that if assessee violates the clauses of the agreementthen he will pay a sum equal to Rs.4,00,000/- per month to theother party. 3.1Accordingly, the assessee shown proportionate amount ofthe total amount received of Rs.1,00,00,000/- during the yearunder consideration which was equivalent to Rs.29,26,667/-. 4.Counsel for the appellant relied upon of the decision ofGujarat High Court in Commissioner of Income Tax vs. WinnerBusiness Link Pvt. Ltd. ITA No.1159/2006 decided on 18.12.2014which was referred in the order dt. 31.7.2017 reads as under: “5. We have heard learned advocates for boththe sides and perused the materials on record.The main dispute in all these appeals is withregard to the correctness of the method ofaccounting of the assessee company forrecording the receipt by way of membership feethe sides and perused the materials on record.The main dispute in all these appeals is withregard to the correctness of the method ofaccounting of the assessee company forrecording the receipt by way of membership fee and the expenses by way of commission andinsurance premium. The assessee company isfollowing mercantile system of accounting but thedispute is when the assessee has issued thefacility card for a number of years, whether themembership fee received for number of yearsaccrues in the year in which the card is issued orwhether it should be spread over to the numberof years for which the card is issued.” 5.1 In this regard it shall be relevant to perusethe Notification No. S.O. 69(E) dated 25.01.1996wherein the Central Government has notifiedAccounting Standard-1, more particularly, theexpression ‘accrual’ which has been defined asunder: and the expenses by way of commission andinsurance premium. The assessee company isfollowing mercantile system of accounting but thedispute is when the assessee has issued thefacility card for a number of years, whether themembership fee received for number of yearsaccrues in the year in which the card is issued orwhether it should be spread over to the numberof years for which the card is issued.” 5.1 In this regard it shall be relevant to perusethe Notification No. S.O. 69(E) dated 25.01.1996wherein the Central Government has notifiedAccounting Standard-1, more particularly, theexpression ‘accrual’ which has been defined asunder: “(b) “Actual” refers to the assumption thatrevenues and costs are accrued, that is,recognized ad they are earned or incurred (andnot as money is received or paid) and recorded inthe financial statements of the periods to whichthey relate;” 5.2 The assessee has accordingly recorded therevenue as well as expenditure in the financialstatement of period to which they relate. We findthat the Tribunal has rightly observed as under inpara 8 as under: “... When the assessee issued facility cards fornumber of years, the assessee has receivedentrance fee as well as membership fee.Entrance fee is recorded in the year of receiptwhile the membership fee is spread over to theperiod to which the membership relates.Similarly, the assessee pays insurance premiumfor the number of years for which the card isissued because the assessee has to provide theaccidental insurance for the entire period of thecard. Such expenditure is also spread over to theperiod for which the card is issued. The Revenuehas claimed that the receipt of membership feeas well as the expenditure on the commissionand the insurance premium is to be recorded inthe year in which they are received and paid. Thestand of the Revenue is contrary to the definitionof accrual as provided in the Accounting Standardspecified by the Central Government which ismandatory to be followed by the income taxassessee.” 5.3 We find that the Tribunal has rightly reliedupon the decision of Hyderabad Bench in thecase of Treasure Island (supra) and concluded asunder: “The above finding of the ITAT would be squarelyapplicable to the case under consideration beforeus as the facts in both the cases are identical. Inthe case under appeal before us also, theassessee is under an obligation to provide theservices on continuous basis for the period forwhich the card is issued. The assessee hasspread over the receipt as well as expenditure asper Accounting Standard – 9 and the same isdisclosed by the assessee by way of Note in theaudited accounts. If the contention of theRevenue is accepted and the entire memebershipfee collected is taxed in the year of receipt thenin the subsequent year when the assessee willincur the expenditure there will be loss. Thatwould give distorted picture of the working resultof the assessee. In view of the above, werespectfully following the above decision of ITAT,Hyderabad Bench in the case of Treasure Island(P) Ltd (supra) hold that the method ofaccounting followed by the assessee was properand correct method and the Assesing Officer haswrongly rejected the same.” 6. In this regard we are supported by thedecisions of the Apex Court as well as this Court,Bombay and Delhi High Courts. The Bombay HighCourt in the case of Taparia Tools Ltd. vs. Jt. CIT,[2003] 260 ITR 102 has observed that in order todetermine the net income of an accounting year,the revenue and other incomes are matched withthe cost of resources consumed. Under theMercantile System of Accounting, this Matching isrequired to be done on accrual basis. Under thisMatching concept, revenue and income earnedduring an Accounting Period, irrespective ofactual cash in-flow, is required to be comparedwith expenses incurred during the same period,irrespective of actual outflow of cash. It has beenfurther held that the Income Tax Act makes noprovision with regard to valuation. It charges forpayment of tax, the income which is to becomputed in the manner provided by the Act andthat it is the duty of the Assessing Officer todeduce a proper taxable income. It is held thatthe Assessing Officer is required to compute theincome in accordance with the method of accounting regularly employed by the assesseeand if the system adopted by the assessee doesnot result in ascertainment of proper profits then,it is the duty of the assessing officer to makeappropriate adjustments and deduce true profits. 6.1 The Apex Court in the case of RakeshShantilal Mardia vs. Deputy Commissioner ofIncome-tax reported in [2012] 210 Taxman 565(SC) considering the decision of the Bombay HighCourt in the case of Taparia Tools Ltd. (supra)has held that matching principle is required to befollowed in order of arrive at the real income ofthe assessee. 6.2 Similarly, in the case of Commissioner ofIncome-Tax vs. Dinesh Kumar Goel reported in[2011] 331 ITR 10 (Delhi), the Delhi High Courthas held as under: “... even when the income accrues or arises or isdeemed to accrue or arise to the assessee inIndia during previous year, that is to be taxed inthat year. It is important, therefore, that receiptof a particular amount in the relevant year shouldbe an “income” under the aforesaid provision.What is the relevant yardstick is the time ofaccrual or arisal for the purpose of its taxation,viz., in order to be chargeable, the income shouldaccrue or arise to the assessee during theprevious 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 thesucceeding year, the income would be said toaccrue or arise if there is a debt owed to theassessee by somebody at that moment. Fromthis, it follows that there must be the “right toreceive the income on a particular date, so as tobring about a creditor and debtor relationship onthe relevant date”. The Court further explainedthat a right to receive a particular sum under theagreement would not be sufficient unless theright accrued by rendering of services and not bypromising for services and where the right toreceive is interior to rendering of service, theincome, therefore, would accrue on rendering ofservices.” 6.3 This Court has also taken the same view in arecent decision in the case of Snesh Resort Pvt.Ltd vs. Dy. CIT rendered in Tax Appeal No. 113 of 2004 on 18.11.2014. This Court has observed asunder: “6.2 Similarly in the case of Bilahari InvestmentP. Ltd (supra) the Apex Court has held that sincefrom the various statements produced, the entireexercise arising out of the change of methodfrom the completed contract method to deferredrevenue expenditure was revenue neutral, thecompleted contract method was not required tobe substituted by the percentage of completionmethod. 6.3 This Court has also taken the same view in arecent decision in the case of Snesh Resort Pvt.Ltd vs. Dy. CIT rendered in Tax Appeal No. 113 of 2004 on 18.11.2014. This Court has observed asunder: “6.2 Similarly in the case of Bilahari InvestmentP. Ltd (supra) the Apex Court has held that sincefrom the various statements produced, the entireexercise arising out of the change of methodfrom the completed contract method to deferredrevenue expenditure was revenue neutral, thecompleted contract method was not required tobe substituted by the percentage of completionmethod. 7. Considering the aforesaid observations of theTribunal as well as the decisions relied upon bylearned advocate for the assessee, we are of theopinion that the Tribunal has committed an errorin passing the impugned order so far asconsidering the membership fees as incomewhen the assessee had not resumed giving theservices of the water park to its members. Undersuch circumstances, the amount received by wayof membership fees was required to beconsidered as an advance and thereafter as andwhen the business commenced the amount ofliability was required to be taxed over a period oftime proportionately. The amount of membershipfees would be considered as income from theyear the business of the assessee commenced.We therefore answer the questions raised in thenegative i.e. against the revenue and in favour ofthe assessee.” 7. In view of the aforesaid discussion, we do notfind any infirmity in the order passed by theTribunal. The Tribunal has rightly considered thatthe method of accounting should be such fromwhich the correct profit of each year can bededucted and that as per the method adopted bythe Revenue, the profit in the year in which thecard is issued would be more resulting inloss/less profit in the year in which the serviceswill be rendered by the assesseee. We are of theopinion that when the services are renderedpartially, revenue is to be shown proportionate tothe degree of completion of the service andtherefore the assessee was justified in spreadingover the amount of membership fee andexpenses. 5.Taking into consideration, the decision referred above, theissue is answered in favour of the assessee and against thedepartment. The TDS will also be spread over in the respectiveyears. 6.The appeal stands accordingly allowed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Brijesh 23.