The Commissioner Of Income Tax,Chennai v. M/S.johnson Lifts Pvt.ltd

T.C.A.No.54 of 2015 IN THE HIGH COURT OF JUDICATURE AT MADRAS Reserved On20.08.2024Pronounced On29.10.2024 CORAM: THE HONOURABLE MR.JUSTICE R.SURESH KUMARand THE HONOURABLE MR.JUSTICE C.SARAVANAN T.C.A.No.54 of 2015and M.P.No. 1 of 2015 The Commissioner of Income Tax,Chennai ... Appellant vs. M/s.Johnson Lifts Pvt.Ltd.,No.1, East Main Road,Anna Nagar West Extn.Chennai 600 101. ... Respondent Prayer: Appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Madras “B” Bench, Chennai dated 01.08.2014 in I.T.A.No.222/Mds/2013. For Appellant : M/s.V.Pushpa Senior Standing Counsel For Respondent : Mr.R.Vijayaraghavan for M/s.Subbaraya Aiyar & Ramamani JUDGMENT (Judgment of the Court was delivered by C.SARAVANAN, J.) This appeal has been filed by the appellant/Income Tax Department against Order dated 01.08.2014 passed by the Income Tax Appellate Tribunal, Madras “B” Bench, Chennai in I.T.A.No.222/Mds/2013. 2. By the Impugned Order, the Appellate Tribunal had dismissed I.T.A.No.480/Mds/2015 filed by the appellant/Income Tax Department. Appeal against the same viz., TCA 53 of 2015 by the Income Tax Department was dismissed on account of low tax effect vide order dated 22.10.2018, passed by the Appellate Tribunal, the dispute is confined to the impugned order dated 01.08.2014 passed by the Appellate Tribunal in ITA.No.222/Mds/2013. 3. By the impugned 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. T.C.A.No.54 of 2015 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. On scrutiny of the liability of the assessee regarding annual maintenance charges, if the Assessing Officer finds that certain amounts 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. On scrutiny of the liability of the assessee regarding annual maintenance charges, if the Assessing Officer finds that certain amounts T.C.A.No.54 of 2015 are not necessary to be carried forward in the liability account for the reason that the period of corresponding obligation has already been expired, it is within the competence of the Assessing Officer to bring such amount to tax as income under Section 41(1) of the Act. Whenever the obligation assumed by the assessee expires and correspondingly any provision for liability is remaining in the accounts, that much of the unconsumed provision could be treated as income of the assessee. T.C.A.No.54 of 2015 are not necessary to be carried forward in the liability account for the reason that the period of corresponding obligation has already been expired, it is within the competence of the Assessing Officer to bring such amount to tax as income under Section 41(1) of the Act. Whenever the obligation assumed by the assessee expires and correspondingly any provision for liability is remaining in the accounts, that much of the unconsumed provision could be treated as income of the assessee. 6. Therefore, in the facts and circumstances of the case, we find that the addition sustained by the lower authorities of Rs.8,20,45,067/- is not justified and accordingly, the said addition is deleted.”case, we find that the addition sustained by the lower authorities of Rs.8,20,45,067/- is not justified and accordingly, the said addition is deleted.” 7. The reasons for the above conclusion are in Paragraph 4 of the impugned order dated 01.08.2014, passed by the Appellate Tribunal. It reads as under:- “4. The detailed grounds stated by the assessee, itself makes the matter obvious and clear. The assessee is a manufacturer and supplier of lifts and it undertakes the responsibility of maintenance along with sales. The assessee collects such annual maintenance fees from the customers in advance and attributes such advance collection to the period covered by the annual maintenance contract. The lower itself makes the matter obvious and clear. The assessee is a manufacturer and supplier of lifts and it undertakes the responsibility of maintenance along with sales. The assessee collects such annual maintenance fees from the customers in advance and attributes such advance collection to the period covered by the annual maintenance contract. The lower https://www.mhc.tn.gov.in/judis T.C.A.No.54 of 2015 authorities have treated the entire such collection, as the income of the impugned assessment year, mainly on the ground that the assessee is not supposed to refund such annual maintenance collection to its customers. But the lower authorities have overlooked the crucial fact that the assessee is maintaining its accounts on accrual basis and, therefore, the assessee is bound to follow the matching principle of revenue and expenditure and as such, the assessee is bound to provide for future liability of maintenance from the advance collection made from the customers. In fact, the Accounting Standard on Disclosure of Accounting Policies notified by the Government of India under Section 145(2) supports the above position by stating that “Accrual refers to the assumption that revenues and costs are accrued, that is, recognized as 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”. Therefore, when the assessee has 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 T.C.A.No.54 of 2015 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: 8. Although this appeal was filed in the year 2015, it was not T.C.A.No.54 of 2015 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?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?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.Whether the Tribunal was right in holding that the assessee was bound to provide for future liability of maintenance from the advance collection made from its customer irrespective of the fact that no such liability had accrued or had been incurred during the year in respect of the Annual Maintenance Charges (AMC) received in advance? assessee was bound to provide for future liability of maintenance from the advance collection made from its customer irrespective of the fact that no such liability had accrued or had been incurred during the year in respect of the Annual Maintenance Charges (AMC) received in advance? T.C.A.No.54 of 2015 10. The brief facts of the case are that the respondent-assessee is well-known manufacturer of lifts is also engaged in providing annual maintenance services to its customers. On various dates, during the Financial Year 2008-2009, the respondent-assessee had received a total sum of Rs.8,20,45,067/- for providing annual maintenance services to its customers under Annual Maintenance Contract signed with the respective customer for maintenance of lifts and escalators installed by it. 11. An Assessment Order dated 12.12.2011 was passed by the Assistant Commissioner of Income Tax, Chennai, Section 143 (3) of the Income Tax Act, 1961. It records that the respondent-assessee had two different kinds of Annual Maintenance Agreements as detailed below:- (a)Comprehensive Maintenance Agreement (b)Routine Maintenance Agreement 12. Under “Comprehensive Maintenance Agreement”, the Respondent-assessee is required to replace all proprietary parts and components during the course of its maintenance works to its customers free of costs if such replacement was necessary. On the other hand, under “Routine Maintenance Agreement”, the customer was under an obligation to pay for any part or components that were replaced. 13. The Assistant Commissioner of Income Tax, Chennai, finalized the assessment on 12.12.2011 and observed as under:- “5.3 Considering the above points discussed supra (a)Comprehensive Maintenance Agreement (b)Routine Maintenance Agreement 12. Under “Comprehensive Maintenance Agreement”, the Respondent-assessee is required to replace all proprietary parts and components during the course of its maintenance works to its customers free of costs if such replacement was necessary. On the other hand, under “Routine Maintenance Agreement”, the customer was under an obligation to pay for any part or components that were replaced. 13. The Assistant Commissioner of Income Tax, Chennai, finalized the assessment on 12.12.2011 and observed as under:- “5.3 Considering the above points discussed supra assessee's Annual Maintenance Contract (AMC) is for one year, it is simple and non-refundable and the entire money for AMC was received in advance and during the year. While distinguishing the CIT Vs. GSR Krishnamurthy case cited supra, the Authorised Representative of the assessee vide point 9 of his letter dated 26.08.2011 filed on 10.10.2011 stated that “the respondent in the above case” was not required to refund the amount collected in advance thereby he is allowed to enjoy the full consideration received. The assessee is under obligation to perform the activity of routine maintenance services of lifts to its customers at periodical intervals”. The Authorised Representative 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.” T.C.A.No.54 of 2015 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 Court in the Coral Electronics P Ltd (supra) reveal that in both these cases, customer had a right to terminate the contract if the services rendered by the vendor were not to the satisfaction of the customer. In the case of M/s.Coral Electronics (supra), the Court observed that the services may be rendered or may not be rendered depending upon withdrawal of the money as and when the T.C.A.No.54 of 2015 “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 Court in the Coral Electronics P Ltd (supra) reveal that in both these cases, customer had a right to terminate the contract if the services rendered by the vendor were not to the satisfaction of the customer. In the case of M/s.Coral Electronics (supra), the Court observed that the services may be rendered or may not be rendered depending upon withdrawal of the money as and when the T.C.A.No.54 of 2015 customer required, so, it is highly uncertain as to whether it would at all remain as income of the assessee, only when the service is done the assessee has a right over the amount that was deposited. Similarly, in the case of TVS Electronics (Supra) it was noted very clearly that the clients of the assessee could at any point cancel the contract and get a refund for the unexpired period. This itself meant that the amount received by the assessee at the point of time it entered into an AMC was nothing but an advance, which on the progress of each day got converted into revenue. The income was accruing on a day-to-day basis based on the progress of time and it did not accrue on the day of entering into the contract. An obligation was there on the assessee in that case to refund the unexpired value of AMC, if the AMC was cancelled by its customers. However, in the instant case, a perusal of the specimen copy of the contract agreement entered into by the appellant with M/s.Udhi Eye Hospital, it is noticed that there is no clause for cancellation of contract by the client.” 16. The Appellate Commissioner also relied on the decision of the Division Bench of this Court in Commissioner of Income Tax Vs. G.S.R.Krishnamurthy, (2003)262 ITR 393 and in the result, the appeal https://www.mhc.tn.gov.in/judis T.C.A.No.54 of 2015 was dismissed as far as the other issues with the following observations:- “The facts of the appellant's case being identical, I find no force in the appellant's contention that the entire amount received on account of AMC should not be added to the total income of the current year. Considering the factual position and legal precedents as discussed in pre-pages, I agree with the AO's finding that part of AMC shown under the head current liabilities in the balance-sheet amounting to Rs.8,20,45,067/- has to be assessed in the current year only. The appellant fails on this ground of appeal. This ground is accordingly dismissed.” 17. Arguing the case on behalf of the appellant-Income Tax Department, the learned counsel 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 https://www.mhc.tn.gov.in/judis T.C.A.No.54 of 2015 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. https://www.mhc.tn.gov.in/judis T.C.A.No.54 of 2015 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 because the amount received by the respondent-assessee was treated as current liability in the Books of Accounts viz Income Received in Advance ipso facto would not mean no tax was payable and that such tax is to be paid only during the succeeding financial year, as service is provided during the succeeding financial year. 22. It is submitted that the Appellate Tribunal failed to note that the respondent-assessee is following mercantile system of accounting and once the amount of Annual Maintenance Charges (AMC) is received, the income has occurred to it and therefore, is liable for taxation in the year of receipt only. 23. Furthermore, the expenditure incurred stands accrued in the year of providing service as per the Annual Maintenance Charges (AMC) terms and conditions. The Appellate Tribunal ought to have seen from the details stated in the various clauses of the Annual Maintenance Charges (AMC) contract entered by the respondent-assessee with that of its customer which the CIT(A) has elaborately dealt with and should have decided the issue in favour of the Department. 24. It is submitted that the Appellate Tribunal had wrongly held that the respondent-assessee maintains its accounts on accrual basis and is bound to provide for future liability or maintenance for the advance https://www.mhc.tn.gov.in/judis 13/58 T.C.A.No.54 of 2015 collection made for the customer especially when the Annual Maintenance Charges (AMC) amount are actually received by the respondent-assessee in the present year and the expenditure incurred during the year for the Annual Maintenance Charges (AMC) have already been debited by the respondent-assessee to its profit and loss account and the expenditure in respect of Annual Maintenance Charges (AMC) amount received by the respondent-assessee in advance. 25. It is further submitted that the Appellate Tribunal missed to note that the respondent-assessee has not provided any quantification of the liability in respect of contracts relating to only services and in respect of the other contracts whereby parts of machinery have to be replaced along with services to be provided and therefore in the absence of any quantification the order of the Tribunal is wrong. 26. It is submitted that the Appellate Tribunal failed to note that the Annual Maintenance Charges (AMC) amount received in advance which are actually the amount received by the respondent-assessee and https://www.mhc.tn.gov.in/judis 14/58 T.C.A.No.54 of 2015 the same is quantifiable since the period 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. 26. It is submitted that the Appellate Tribunal failed to note that the Annual Maintenance Charges (AMC) amount received in advance which are actually the amount received by the respondent-assessee and https://www.mhc.tn.gov.in/judis 14/58 T.C.A.No.54 of 2015 the same is quantifiable since the period 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 https://www.mhc.tn.gov.in/judis 15/58 T.C.A.No.54 of 2015 had right to terminate the contract with the services rendered by the vendor therein if it was not up to the satisfaction of the customer and therefore there was an obligation of the respondent-assessee to refund the unexpired value of Annual Maintenance Charges (AMC) if the same was cancelled by its customer which is not the case on hand. 29. On the other hand, the learned counsel for the respondent-assessee would submit that the substantial questions of law has already been answered by the Division Bench of this Court in Coral Electronics (P) Limited case (referred to supra), which wrongly distinguished by the Assessing Officer and the Commissioner of Income Tax (Appeals) and thus, it was correctly interfered by the Appellate Tribunal and therefore, the impugned order of the Appellate Tribunal does not warrant any interference. 30. Learned counsel for the respondent-assessee has placed reliance on the decision of Division Bench of the Allahabad High Court, Delhi High Court & Gauhati High Court in the following cases:- https://www.mhc.tn.gov.in/judis i.Commissioner of Income Tax Vs. Hindustan Computers Ltd., (1997) 65 CCH 0088 All Computers Ltd., (1997) 65 CCH 0088 All T.C.A.No.54 of 2015 HC/(1998) 233 ITR 0366. ii.Commissioner of Income Tax and another Vs. Dinesh Kumar Goel, 331 ITR 0010 (Del). iii.MKB (Asia) (P) Ltd., Vs. Commissioner of Income Tax, 294 ITR 0655 (Gauh.) 31. Learned counsel for the respondent-assessee has also drawn attention to the decision of the Hon'ble Supreme Court in the following two cases:- i. Commissioner of Income Tax Vs. Bilahari Investment (P) Ltd., 299 ITR 0001 (SC). ii.Rotork Controls India (P) Ltd., Vs. Commissioner of Income Tax, 314 ITR 0062 (SC). 32. That apart, it is submitted that the respondent-assessee has been followed the practice of treating the income on accrual basis and therefore, there is no justification in the stand of the Department to alter the account practice with a view to augment tax in the same year and its receipt during the Assessment Year 2009-2010. T.C.A.No.54 of 2015 33. That apart, the learned counsel for the respondent-assessee has also drawn attention to Accounting Standard (AS) 9, which has also been referred to in the above mentioned cases. 34. We have perused the Appellate Order dated 07.12.2012 passed by the Commissioner of Income Tax (Appeals)-III, Chennai and the impugned order dated 01.08.2014 passed by the Income Tax Appellate Tribunal (ITAT). Vs. Commissioner of Income Tax, 314 ITR 0062 (SC). 32. That apart, it is submitted that the respondent-assessee has been followed the practice of treating the income on accrual basis and therefore, there is no justification in the stand of the Department to alter the account practice with a view to augment tax in the same year and its receipt during the Assessment Year 2009-2010. T.C.A.No.54 of 2015 33. That apart, the learned counsel for the respondent-assessee has also drawn attention to Accounting Standard (AS) 9, which has also been referred to in the above mentioned cases. 34. We have perused the Appellate Order dated 07.12.2012 passed by the Commissioner of Income Tax (Appeals)-III, Chennai and the impugned order dated 01.08.2014 passed by the Income Tax Appellate Tribunal (ITAT). 35. We have also considered the provisions of the Income Tax Act, 1961 and Companies Act, 1956 as in force during the period in dispute and the rules made thereunder. We have also considered the Accounting Standard (AS) 9 issued by the Institute of Chartered Accountant of India. 36. The respondent-assesseebeing 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. T.C.A.No.54 of 2015 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 Sheet also had to be in the Form set out in Part I of Schedule VI of the Companies Act, 1956, or as near thereto, as circumstances admit or in such other form as may be approved by the Central Government, either generally or in any particular case. T.C.A.No.54 of 2015 40. It further mandates that while preparing the Balance Sheet due regard shall be had, as far as may be, to the general instructions for preparation of Balance Sheet under the heading "Notes" at the end of that Part. 41. As per Sub-section (2) to Section 211 of Companies Act, 1956, every Profit and Loss Account of a company shall also give a true and fair view of the profit or loss of the company for the financial year and comply with the requirements of Part II of Schedule VI of the Companies Act, 1956, so far as they are applicable. Sub-section (1) and Sub-section (2) to Section 211 of the Companies Act, 1956 are reproduced below for clarity:- 211. Form and contents of balance sheet and profit and loss account .- (1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as 211. Form and contents of balance sheet and profit and loss account .- (1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as (2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto:a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto: may be approved by the Central Government either generally or in any particular case; and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading "Notes" at the end of that Part: Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of balance sheet has been specified in or under the Act governing such class of company.] T.C.A.No.54 of 2015 Provided that nothing contained in this sub-section shall apply to any insurance or banking company [or any company engaged in the generation or supply of electricity], or to any other class of company for which a form of profit and loss account has been specified in or 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. T.C.A.No.54 of 2015 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 Sub-Section (2). The Hon’be Supreme Court in Keshav Mills Ltd. vs. Commissioner of Income Tax AIR 1953 SC “ T.C.A.No.54 of 2015 187, brought out the difference between “Cash basis” of accounting and “Mercantile/Accrual basis” of accounting. Relevant portion of the judgment reads as under :- “13.The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. (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 Sub-Section (2). The Hon’be Supreme Court in Keshav Mills Ltd. vs. Commissioner of Income Tax AIR 1953 SC “ T.C.A.No.54 of 2015 187, brought out the difference between “Cash basis” of accounting and “Mercantile/Accrual basis” of accounting. Relevant portion of the judgment reads as under :- “13.The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The profits or gains of the business which are thus credited are not realised but having been earned are treated as received though in fact there is nothing more than an accrual or arising of the profits at that stage. They are book profits. Receipt being not the sole test of chargeability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax, the assess ability of these profits which are thus credited in the books of account arises not because they are received but because. they have accrued or arisen.” T.C.A.No.54 of 2015 46. As per Sub-Section (2) to Section 145 of the Income Tax Act, 1961, the Central Government may notify in the Official Gazette from time to time “Accounting Standards” to be followed by any class of assessees or in respect of any class of income. 47. The “Accounting Standards” are issued by the Central Government in consultation with the Institution of Chartered Accountants from time to time. During the period in dispute, Accounting Standard (AS) 9 was also issued by the Institution of Chartered Accountants. 48. Whichever method of accounting is followed, ie. whether the “cash systemof accounting” or “mercantile systemof accounting”, it is intended to facilitate an assessee to prepare its financial documents namely the Balance Sheet and the Profit and Loss Accounts/Cash Flow Statement etc including its returns under Section 139 of the Income Act, 1961. In this case, the Respondent-Assessee is stated to be following the “mercantile system of accounting”. 49. In CIT vs. Bilahari Enterprises (P) LTD. (2008) 299 ITR 1 T.C.A.No.54 of 2015 (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:- https://www.mhc.tn.gov.in/judis 20……… In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, 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 T.C.A.No.54 of 2015 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:- https://www.mhc.tn.gov.in/judis 20……… In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, 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 T.C.A.No.54 of 2015 insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court. 52. The above ratio is applicable to the facts of the present case. However, as held if the profit and loss account results in distortion of profit, the Assessing officer can insist on substitution of the existing method. Such a substitution of the existing method will apply to for the prospective period. However, for the relevant assessment year when such distortion is found, the Assessing Officer has to complete the assessment under the Best Judgment Method under Section 145(3) read with Section 144 of the Income Tax Act, 1961. In the present case also the Assessing Officer has impliedly resorted to best judgment assessment order though it fails to refer to Section 144 of the of the Income Tax Act, 1961. 53. Considerations received in advance by the respondent-assessee for provision of the service under the Annual Maintenance Contract signed with its customer(s)/client(s) were not fully shown as a part of the T.C.A.No.54 of 2015 total income received by the respondent-assessee in the year of its/ their receipt, since the service were to be provided by the respondent-assessee partly during the ensuing Financial Year. It is the contention of the department that the tax was payable in the year of its receipt during for the relevant assessment year. 54. At this stage it will be also useful to refer to the decision of the Hon’ble Supreme Court in J.K. Industries Ltd. vs. Union of India (2007) 13 SCC 673. There the Hon’ble Supreme Court observed that the Accounting Standard is a policy statement or document framed by Institute, consisting of 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. 55. The Court further added that the adoption of “Accounting Standards” for the “accounting income” as “taxable income”would avoid distortion of accounting income. It also observed that “Accounting Standards” are based on a number of accounting principles, namely, matching principle and fair value principle. https://www.mhc.tn.gov.in/judis 27/58 56. The Court further stressed that the object 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 thatif “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. https://www.mhc.tn.gov.in/judis 27/58 56. The Court further stressed that the object 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 thatif “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. T.C.A.No.54 of 2015 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 resident includes all income from whatever source derived which—any previous year of a person who is a resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; orIndia in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.arise to him in India during such year. (c) accrues or arises to him outside India during such year :during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-Section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; orIndia in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.or arise to him in India during such year. Explanation 1.- Income accruing or arising outside India shall not be outside India shall not be T.C.A.No.54 of 2015 deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.- For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.”hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.” 60. As per Section 5(1) of the Income Tax Act, 1961, the total income of any previous year of a person in India in a year by or on behalf of such assessee includes all income derived from any source which is either:- (i) received ;or (ii) is deemed to be received . 60. As per Section 5(1) of the Income Tax Act, 1961, the total income of any previous year of a person in India in a year by or on behalf of such assessee includes all income derived from any source which is either:- (i) received ;or (ii) is deemed to be received . 61. We are not concerned with the situation covered by Section 5(1)(b) of the Income Tax Act, 19961 as in the transaction in question, the https://www.mhc.tn.gov.in/judis 30/58 T.C.A.No.54 of 2015 consideration for th