Income Tax Appellate Tribunal - Pune
Kavee Enterprises , New Delhi vs Assessee on 26 November, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
Before Shri G.S.Pannu, Accountant Member,
and Shri R.S.Padvekar, Judicial Member.
ITA.No.83/PN/2011
(Asstt. Year : 2002-03)
M/s.Kavee Enterprises,
C/o VLCC Health Care Ltd.,
M-14 Commercial Complex,
Greater Kailash, Part-II,
New Delhi. .. Appellant
Vs.
ITO, Ward-2(2),
Pune. .. Respondent
Assessee by : Shri Gaurav Bansal
Department by : Smt.Vinita Menon
Date of Hearing : 26.11.2012
Date of Pronouncement : 23.01.2013
ORDER
PER R.S.PADVEKAR, JM:
This appeal has been filed by the assessee challenging the impugned order of the CIT(A)-II, Pune, dated 02.11.2005 for A.Y. 2002-03.
2. The first Ground reads as under:
"1. The learned CIT(A) erred in law and on facts in confirming an addition of Rs.23,96,286/- on account of Unexecuted Packages (UEPs) shown as liability at the year end by ignoring the facts and submissions placed on record. Thus the said addition should be deleted."
3. The issue is in respect of addition of Rs.23,96,286/- on account of unexecuted packages shown as a liability at the year end. The facts which revealed from the record are as under. As 2 noted by the Assessing Officer, the assessee firm is engaged in the business of running slimming and health care centre and a beauty parlour. The Assessing Officer asked the assessee to justify the liability shown in the Balance Sheet to the extent of Rs.38.4 lakhs in respect of unexecuted packages (UEPs) as a liability. The Assessing Officer also asked the assessee to produce month-wise breakup of the unexecuted packages claimed for each of the packages offered by the assessee and also other relevant details. The assessee filed the written reply which is reproduced by the Assessing Officer in the assessment order. The Assessing Officer rejected the explanation of the assessee that amount received as advances representing UEP has not accrued to the income of the assessee and hence cannot be considered as sales. The Assessing Officer rejected the explanation of the assessee that amount received as advances representing UEP has not accrued to the income of the assessee and hence, cannot be considered as sales. The Assessing Officer has given his detailed reasoning in the assessment order. The Assessing Officer, therefore, corrected the gross receipts by enhancing the same by an amount of Rs.25,49,241/- which were the receipts during the year shown as liability of UEP. The Assessing Officer, therefore, taken the gross sales receipt of Rs.77,90,123/- as against Rs.52,40,082/- and after allowing the deduction of the probable expenditure on consumables which has been taken @ 6% of Rs.25,49,241/- and made addition of Rs.23,96,286/- (Rs.25,49,241 - Rs.1,52,955). The assessee challenged the addition before the Ld. CIT(A) but without success. The Ld. CIT(A) put the stamp of approval on the addition of Rs.23,96,286/- made by the Assessing Officer by treating the entire sales without bifurcation as the sales of the A.Y. 2002-03.
4. We have heard the parties. The Ld. Counsel submitted that the issue is covered in favour of the assessee by the decision of the Hon'ble High Court of Delhi in the batch of appeals in one of the assessee's group companies in the case of CIT vs. Dinesh Kumar Goel and Others, ITA.Nos.514/2006, 439/2007, 980/2007, 3 14/2008, 409/2009, 193/2010, 112/2008, 598/2020, ITA.Nos.1093/2008, 1142/2008, 1204/2008, 1099/2008, 627/2009, 1153/2010. The Ld. Counsel pointed out that the copy of the judgment of Hon'ble High Court of Delhi has been placed in the compilation at page Nos.123 to 148. He also pointed out that the decision of the ITAT which was subject matter of the appeals by the Revenue to the Hon'ble High Court of Delhi are also filed in the compilation at page Nos.149 to 167. We have also heard the Ld. DR.
5. The assessee is in the business of running slimming and health care centre and a beauty parlour. The assessee made the apportionment in respect of the amount of package which was spread over two financial years. As argued by the assessee, that was the method followed in the industry/business. It is seen that identical issue has come for the consideration before the Lordships of the Hon'ble High Court of Delhi in the case of Dinesh K.Goel and Others (supra) and the issue has been decided by passing the common order in the batch of appeals. It is seen that the decision of the ITAT, Delhi Bench, in the case of DCIT vs. VLCC Health Care Ltd., was also subject matter of the challenge having the identical issue. We further find that the decision of the ITAT, Delhi Bench, in the case of Curls and Curves India Ltd., for A.Y. 2002-03 (ITA.Nos.3682 and 3523/Del/2005 order dated 24.02.2008) was also subject matter before the Hon'ble High Court of Delhi in the said batch of appeals. The operative part in the decision in the case of DCIT vs. Curls and Curves India Ltd., in ITA.Nos.1093/2008, DCIT vs. VLCC Health Care Ltd. in ITA.No.1153 of 2010, is as under:
"19. In all these appeals, the assessees which belong to the same group, are in the same business activities, viz., beauty and slimming which operates under the brand name of VLCC. They have various centres in Delhi and outside. Clients come to them spanning over a period of time and attend different sessions for beauty treatments and/or for the purposes of weight loss, etc. The clients pay entire fee in advance for a 4 beauty and slimming package. The assessees have given many franchisees for which purpose MoUs are executed with Joint Venture Partners (JVP). These MoUs, laid down various terms regarding investment in machinery, interior, rent of the place, franchisee fee, etc. The centres are managed by the assessee and operating surplus is calculated every month which is then distributed between the assessee and the JVP in the ratio 60:40 or 50:50. The sales of the centre are included in the accounts of the assessee. Part of the sale on which services remain to render and which is to be rendered in the succeeding year, those sales are shown as "unexecuted packages" at the end of the year by the assessee. It means that the assessee treats the said receipt for which services yet to be rendered and are going to be rendered in the next assessment year as advance and is not shown as income exigible to tax.
20. The question, thus, remains the same, viz., whether the sale of unexecuted packages is an income accrued/arising in the financial year in which it is received or it belongs to the next year, i.e., whether there was right to receive this amount when the agreement is signed. Therefore, we are of the opinion that the circumstances in which the advance fee is charged for the services to be rendered are almost the same as in the case of M/s. FIITJEE noted above. When the question of application of principle of law arises, there is hardly any difference between the two, which would persuade us as to take a view what is taken in the aforesaid cases of M/s. FIITJEE. We would, however, like to give some additional reasons in support of our conclusion. These are based on the submissions made by the learned counsel for the assessee, Dr. Rakesh Gupta, which have also appealed to us.
21. Section 145 of the Act deals with the method of accounting and states that in case of business income, inter alia, the same is to be computed in accordance with the cash or mercantile system of the company. Sub-section (2) thereof authorizes the Central Government to 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. Section 211 of the Companies Act, on the other hand, prescribes the form and contents of balance sheet and profit and loss account, which are to be maintained by the companies under the said Act. Sub- section (2) castes a duty on a company to give true and fair view of a profit and loss of a company for the financial year in its profit and loss accounts. Sub-section (3A) adheres to the accounting standards for preparing profit and loss balance sheet. Sub-section (3C) defines accounting standards as under:
"(3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered 5 Accountants of India constituted under the Chartered Accountants Act, 1949 as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A :
Provided that the standard of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section."
22. A conjoint reading of the aforesaid provisions of the Income-
tax Act and the Companies Act shows that those assessees, which are companies and showing income, inter alia, under the head "business or profession" have to follow the accounting standards prescribed. The Government of India has notified accounting standards in exercise of its power under section 145(2) of the Act, which are dated 29-5-1996. Accounting Standard-I relates to the disclosure of accounting policy and puts an obligation on the assessee to disclose all significant accounting policies adopted in the preparation and presentation of financial stages. Para 6 thereof denies certain expression which accrued in Paras 1 to 5. Clause (b) whereof spells out the definition of accrual in the following manner:
"(b)"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 period to which they relate;"
From the above, that the term 'accrual' relates to revenues earned or cost incurred. Two things follow from this, viz., unless the revenue is earned, it is not accrued. Likewise, the expenses unless are incurred, cost in respect thereof cannot be treated as accrued. Secondly, it recognizes the matching concept, viz., receipts are to be matched income to arrive at the net income, which would then be exigible to tax. In the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 2541 , the Supreme Court, albeit, in other context, explained this concept. The principle laid down would be relevant even for our purpose and therefore, we extract the same:
"14. In the case of M.P. Financial Corporation v. CIT reported in 165 ITR 765 the Madhya Pradesh High Court has held that the expression "expenditure" as used in section 37 may, in the circumstances of a particular case, cover an amount which is a "loss" even though the said amount has not gone out from the pocket of the assessee.6
This view of the Madhya Pradesh High Court has been approved by this Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT reported in [1997] 225 ITR 802 (SC). According to the Law and Practice of Income- tax by Kanga and Palkhivala, section 37(1) is a residuary section extending the allowance to items of business expenditure not covered by sections 30 to 36. This section, according to the learned Author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of section 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under sections 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word "paid" in section 43(2), which is used in several sections 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under section 28/29. That is why in deciding the question as to whether the word "expenditure" in section 37(1) includes the word "loss" one has to read section 37(1) with section 28, section 29 and section 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. Under section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P&L account the value of the stock-in- trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading section 37(1) with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance 7 with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under section 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, accounting standard which is continuously adopted by an assessee can be superseded or modified by Legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the Assessing Officer stating that the assessee has not complied with the accounting standards."
23. We may refer to the judgment of the Supreme Court in the case of CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR 11 wherein the Supreme Court has taken various judgments where the matching concept is defined and explained. We may refer to the passage extracted by the Supreme Court from its judgment in the case of J.K. Industries v. Union of India [2007] 165 Taxman 323 in the following terms:
"82. Matching Concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that "revenues"
of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future years which brings in the concept of Deferred Tax Accounting. Therefore, today it cannot be said that the concept of accrual is limited to one year.
883. It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component of accrual basis of accounting. As stated above, the object of AS 22 is to reconcile the matching principle with the Fair Valuation Principles. It may be noted that recognition, measurement and disclosure of various items of income, expenses, assets and liabilities is done only by Accounting Standards and not by provisions of the Companies Act."
24. Even the Institute of Chartered Accountant of India (ICAI) has laid down accounting standards which the companies are supposed to follow. We are concerned Accounting Standard (AS)
9. Relevant portion whereof is extracted below:
"Introduction
1. This Statement deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise. The Statement is concerned with the recognition of revenue arising in the course of ordinary activities of the enterprise from
-the rendering of services, and
-the use by others of enterprise resources yielding interest, royalties and dividends.
** ** ** Definitions 4.3. Proportionate completion method is a method of accounting which recognizes revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract.
** ** ** Explanation
7. Rendering of Services 7.1 Revenue from service transactions is usually recognized 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 recognized proportionately by reference to the performance of each act. The revenue recognized under this method would be determined on the basis 9 of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance.
(ii) Completed service contract method -Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognized when the sole or final act takes place and the service becomes chargeable.
(emphasis supplied)"
25. Reading of the aforesaid (AS) 9 makes it clear that revenue is recognized only when the services are actually rendered. If the services are rendered partially, revenue is to be shown proportionate with the degree of completion of the services. This really clinches the issue in favour of the assessee.
26. Though our discussion on the issue is complete, the parting comments need to be made. The receipts relate to the unexecuted packages, which are not shown in the instant year would be shown in the succeeding year. Rate of tax in respect of companies remains the same in all these years. Therefore, the Revenue does not lose anything, as it would receive the tax on this income in the succeeding year. Still issues are raised and much outcry is made for nothing."
6. So far as the issue before us is concerned, it is identical as in the case of Curls and Curves India Ltd. (supra) and VLCC Health Care (supra), as decided by the Hon'ble High Court of Delhi. We therefore hold that the method followed by the assessee for bifurcating the amount of the packages in respect of unexecuted packages which were rolled over to the subsequent financial year is correct as per the Accounting Standard specified by the Institute of Chartered Accountants of India. We, therefore, respectfully following the decision of the Hon'ble High Court of Delhi, allow Ground No.1 and delete the addition.
107. The next issue is the addition of Rs.98,000/- being rent paid for Air conditioners. The Assessing Officer has noted that the assessee has shown the payment of Rs.98,000/- paid to one Mr.Jaswinder Singh Maniktala for Air conditioners. The Assessing Officer asked the assessee to prove that the payment was made for use of the Air conditioners as per his investigation, Shri Jaswinder Singh Maniktala does not own any Air conditioners and the said person is the husband of Smt.Chandrakiran Kaur Maniktala who is a partner of M/s.Kavee Enterprises. He made disallowance of Rs.98,000/- and made addition to the income of the assessee. The assessee challenged the addition before the Ld. CIT but without success. The Ld. CIT(A) has given is finding in para 3.4 on page 26 of his Order.
8. We have heard the parties. We have anxiously gone through the reasoning given by the Ld. CIT(A). We find that no evidence is filed to prove that in fact the payment to Shri Jaswinder Singh Maniktala was for supply of Air conditioners. In our opinion, the Ld. CIT(A) has rightly confirmed the addition. Accordingly Ground No.2 is dismissed.
9. The next issue is addition of Rs.76,620/- which was in respect of Advertisement expenses pertaining to the preceding year. We have heard the parties. The Ld. Counsel submits that though the services were incurred during the preceding years, but the liability was actually accrued in this year as the bills were received in the financial year relevant to A.Y. 2002-03. We find substance in the argument of the Ld. Counsel. It is not disputed by the Revenue that the expenditure is not genuine. We further find that though the expenditure is relevant to the immediately preceding year, but the liability to pay the same has accrued in this year. We, therefore, allow Ground No.3 and delete the addition.
10. The next issue is the addition of Rs.90,850/- for expenditure incurred on Advertisements in the month of October, 2001 by 11 alleging that the benefit of the said expenditure accrued to the successor of the assessee's business. The Assessing Officer has noted that assessee incurred expenditure on Advertisements in local market as well as at the corporate level. In the opinion of the Assessing Officer, the expenditure on Advertisements for the month of October, 2001 was not allowable since the benefit of giving the Advertisements accrued during the subsequent months, i.e., from November, 2001 as assessee firm has stopped functioning as such and benefit might have been passed to its successor, i.e., CCIL who has taken over the business. The Assessing Officer made the addition of Rs.1,13,350/-. The Ld. CIT(A) gave relief of Rs.22,500/-. As noted by the Ld. CIT(A), the debit notes issued by the CCIL dated 31.10.2001 for Rs.85,000/- in respect of Advertisement expenses incurred by the assessee in the month of October, 2001. In our opinion, therefore, to that extent, the disallowance made by the Assessing Officer and confirmed by the Ld. CIT(A) is justified as admittedly the CCIL has taken over the business of the assessee from November, 2001, and debit note is also issued to the assessee. It is seen that so far as Rs.22,500/- is concerned, the bill issued by Nithin Creations is dated 06.06.2001 and date of insertion of Advertisement is 6th June. The Ld. CIT(A) allowed the said amount. So far as Rs.6,000/- is concerned, the payment made was to the Rotary Club for releasing an advertisement in the Souvenir. In our opinion that cannot be the ground to make the disallowance merely because Advertisement is published in the Souvenir of Rotary Club. We, therefore, direct the Assessing Officer to allow the same. In the result, Ground No.4 is partly allowed.
11. In the result, assessee's appeal is partly allowed.
Pronounced in the open court on this the 23rd day of January, 2013.
Sd/- Sd/-
( G.S.PANNU ) ( R.S.PADVEKAR )
ACCOUNTANT MEMBER JUDICIAL MEMBER
gsps
Pune, dated the 23rd January, 2013
12
Copy of the order is forwarded to:
1. The Assessee
2. The ITO, Ward-2(2), Pune.
3. The CIT(A)-II, Pune.
4. The CIT-II, Pune.
5. The DR "B" Bench, Pune.
6. Guard File.
By Order
//TRUE COPY//
Private Secretary,
Income Tax Appellate Tribunal,
Pune.