Income Tax Appellate Tribunal - Chennai
Lifecell International Pvt Ltd., ... vs Acit, Chennai on 28 May, 2019
आयकर अपील य अ धकरण, 'बी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : CHENNAI
ी जॉज माथन, या यक सद य एवं
ी इंटूर रामा राव, लेखा सद य के सम
BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND
SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
आयकर अपील सं./I.T.A. Nos.247 & 248/CHNY/2018
नधा रण वष /Assessment years :2013-14 & 2014-15.
Lifecell International Pvt. Ltd, Vs. The Assistant Commissioner
No.26, Vandalur Kelambakkam of Income Tax,
Main Road, Corporate Circle 4(1)
Keelakottaiyur Village, Chennai.
Chennai 600 048.
[PAN AAECA 7997B]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ# क$ ओर से/ Appellant by : Shri. T. Banusekar, C.A.
&'यथ# क$ ओर से /Respondent by : Shri. Homi Raj Vansh, IRS, CIT.
सन
ु वाई क$ तार ख/Date of Hearing : 28-03-2019
घोषणा क$ तार ख /Date of Pronouncement : 28-05-2019
आदे श / O R D E R
PER INTURI RAMA RAO, ACCOUNTANT MEMBER:
These appeals have been filed by the assessee directed against common order of the learned Commissioner of Income Tax (Appeals)-8, Chennai (hereinafter called as 'CIT(A)') dated 08.12.2017 for the assessment years 2013-14 & 2014-15.
:- 2 -: ITA No. 247 & 248/20182. Since, the identical facts and issues are involved in these appeals, we proceed to dispose of the same vide this common order.
3. For the sake of convenience and clarity, the facts relevant in ITA No.247/Chny/2018 for assessment year 2013-2014 are stated herein.
4. The appellant raised the following grounds of appeal:-
1. ''For that the order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case to the extent prejudicial to the interest of the assessee and is opposed to the principles of equity, natural justice and fair play.
2. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without Jurisdiction.
3. For that the Commissioner of Income Tax (Appeals) erred in disallowing an amount of Rs.1,22,98,333/-
incurred towards development expenditure of the land.
4. For that the Commissioner of Income Tax Appeals)erred in disallowing deferred rent of Rs.12,87,618/- u/s.40(a)(ia) of the Income Tax Act, 1961.
5. For that the Commissioner of Income Tax (Appeals) erred in not following the Hon'ble Tribunal Order of the appellant for earlier year.
6. For that the Commissioner of Income Tax (Appeals) erred in treating the storage fees of ₹47,26,08,294/- received in advance, as the income of the assessment year 2013-14.
7. For that the Commissioner of Income Tax (Appeals) erred in concluding that the entire one time storage fees received in advance for a period of 21 years is a revenue receipt chargeable to tax in the year of receipt.
:- 3 -: ITA No. 247 & 248/20188. Without prejudice to the above, the Commissioner of Income Tax (Appeals) is not justified in not giving deduction for Rs.6,03,93,273/- being the revenue of earlier year enrollments recognized during the year.
9. For that the Commissioner of Income Tax erred in disallowing advances written off of Rs.2,87 30,000/- u/s.37 in respect of research and commercial license.
10. For that the appellant objects to the levy of interest u/s.234B''.
5. The brief facts of the case are as under:-
The appellant namely M/s. Life Cell International Private Limited is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of procession, preservation and storage of blood stem cells viz cells from umbical cord, embryonic stem cells and audit stem cells. The return of income for the assessment year 2013-14 was filed on 29.11.2013 disclosing Nil income. Against the said return of income assessment was completed by the Assistant Commissioner of Income Tax, Corporate Circle 4(1), Chennai (hereinafter called 'AO') vide order dated 24.03.2016 passed u/s.143(3) of the Income Tax Act, 1961 (in short ''the Act'') at total income of Rs.35,59,50,658/-. While doing so, the Assessing Officer brought to tax capital gains arising out of sale of land at Zamin Pallavaram, Chennai of Rs.57,72,906/-, the Assessing Officer had not :- 4 -: ITA No. 247 & 248/2018 allowed cost of improvement /development expenses of Rs.1,22,98,333/-. The Assessing Officer also disallowed rent expenses of Rs.12,87,618/- on the ground that no TDS was deducted. The Assessing Officer brought to tax the entire sum of money received towards storage of stem cells for a period of 21 years against the claim of the appellant that income should be spread over of 21 years by holding that major expenses were incurred during the year and the deferment of income alone over a period of contract is against the very principle of matching. Further, taking into consideration, the terms of agreement with clients that the amount collected is not refundable, he inferred that entire receipt had accrued to the assessee. Thus, he brought to tax a sum of Rs.47,26,08,294/- as income pertaining to this assessment year. The Assessing Officer also not allowed advance written off of Rs.2,87,30,000/- as business loss.
The Assessing Officer also made addition of Rs.8,67,538/- invoking the provisions of Section 14A of the Act.
6. Being aggrieved, an appeal was preferred before the Ld. Commissioner of Income (Appeals), who vide impugned order confirmed the action of the Assessing Officer (AO).
:- 5 -: ITA No. 247 & 248/20187. Being aggrieved, the appellant is in appeal before us in the present appeal. Grounds No.1, 2 & 10 are general in nature therefore, does not require any adjudication.
8. Grounds of appeal Nos.3,4,5,8 & 9 are dismissed as not pressed.
9. The only issue that survives in both the appeals relates to recognization of income towards receipts on account of storage of stem cells.
10. The brief factual background of the claim as explained by the assessee before the Assessing Officer are as under:-
''During the course of proceedings, the assessee was asked to furnish the breakup of the total income which received in advance and which is reflected in the various schedules of the notes to the financial statements of the assessee. In this connection, the assessee has submitted as follows:
Sl.No Particulars Amounts in
Millions
1 Storage fees
received in advance 1,472.20
as at 31.03.2014
2 Processing fees
received in advance 142.71
as at 31.03.2014
3 Total 1616.91
3.2.It has been observed from the audited
:- 6 -: ITA No. 247 & 248/2018
financial statements that the assessee has
deferred. income of Rs.1,472.20 million which has been received from the clients as storage fee under 21 years plan.
3.3. Storage fees received in advance represents the current portion of advance fee received from clients towards storing the stem cells for a period not exceeding 21 years, which is expected to be amortized to income over next 21 years.
3.4.The assessee has not deferred any expenditure in relation to such storage fee received. But the assessee has deferred only income and therefore such accounting treatment of the assessee is against the basic accounting principle.
3.5. As per the term of agreement with the client, all fee paid by the client to life cell are non-
refundable. The issue of refund arises only 'in the event of the specimen' being ins client or unfit for processing'. Only in such a situation, the storage component of the fee would be refunded. "Storage fee" will also be refunded when the company itself terminates the agreement and refund will not be made in any other case. The amount in question is neither refundable by the assessee no can be claimed by the clients from the assessee company under any circumstances.
3.6. The facts of the case has been explained in detail and decided in the assessment orders assed for the AY 2013-14 and earlier assessment years since the inception of the assessee company. Further, the assessee's contention that on similar issue in the assessee's own case for the A Y2006- 07,the ITAT has decided the case in favour of the assessee cannot be accepted as the Department has filed appeal u/ s 260A of the IT Act., 1961 before the Hon'ble High Court and the same is pending before the Hon'ble High Court, Madras.
3.7.Based on the above facts, the claim of the assessee cannot be accepted and thereby add d an amount of Rs.44,85,36,5301- to the business income o the assessee the details are as follows.
Particulars Amounts in ₹
Total addition during the 45,73,06,540
year to advance storage fees
Less: Revenue recognised in
the P&L statement of current 87,70,010
:- 7 -: ITA No. 247 & 248/2018
year out of enrolments of
current year
Addition income to be
recognised 44,85,36,530
Hence, an amount of ₹44,85,36,350/- is added to the total income returned''.
11. The Assessing Officer rejected the contentions of the appellant giving the following reasons.
''The appellant has been claiming entire expenditure relating to the one time storage fee in the current year and therefore the accounting treatment of the appellant in deferring the income to future years was not correct.
Upon termination of the agreement, the appellant has all rights over the specimen The appellant is under no obligation to refund the fees collected Insurance companies, which are in a similar situation, do not defer their income but account the same in the year of receipt.
Rule 6E has clearly prescribed how income of insurance companies has to be deferred for the purpose of future liabilities. In the absence of such specific rules, deferment of income was not possible The Assessing Officer consequently held that the deferment of income by the appellant was arbitrary and therefore could not be allowed''.
:- 8 -: ITA No. 247 & 248/201812. The ccontentions of the appellant before the ld.
Commissioner of Income Tax (Appeals) are as under:-
It is most humbly submitted that • The expenditure claimed by the appellant is only the current expenditure whereas the monies received relate to future periods. The appellant has accounted for current period income and current period expenditure and deferred the income relating to the future. The contention of the Assessing Officer that the entire expenditure relating to the one-time storage fee has been claimed in the current year is incorrect, as the appellant has not incurred the entire expenditure in the impugned year and therefore, the question of claiming the same does not arise. Expenditure relating to future periods will be incurred in those years and claimed as a deduction at that time which is why the appellant has deferred the proportionate income to comply with the matching concept.
• Further it is most humbly submitted that whether such onetime storage fees is refundable or not on termination of contract is of no relevance for determining the accrual of income. The fact remains that the appellant is responsible for the storage of the stem cells during the entire period of contract and would be incurring expenses towards power, personnel, consumables, etc. for each year over the period of contract. Therefore in. adherence with the matching concept, storage fee is to be deferred over the period of the contract so that the corresponding expenses can be matched with the income.
• It is most humbly submitted that the Assessing Officer has stated that even insurance companies do not defer their Income and then immediately referred to Rule 6E relating to provision in respect of reserve for unexpired risks, which is nothing but transferring to a liability account a predetermined percentage of :- 9 -: ITA No. 247 & 248/2018 the current receipts. The estimate of unexpired risks prescribed in Rule 6E is a portion of the premium collections which is transferred to a reserve instead of being treated as current income.
Attention of this respected authority is drawn to the fact that the appellant has included in income, the entire amount of enrolment and processing fees as well as the annual storage fees received. It is only deferring the lump-sum storage fees received upfront for 21 years.
As regards the decision of the Chennai Bench of the Tribunal in the case of Sterling Holiday Resorts (India) Ltd (supraj, it is most humbly submitted that subsequent to this decision, there is a decision of the Chennai Special Bench in the case of Assistant Commissioner of Income tax v Mahindra Holidays & Resorts (India) Ltd. [2010] 3 1TR 600, where the Chennai Special Bench has held that "Entire amount of time-share membership fee receivable by the assessee upfront at the time of enrolment of a member cannot be charged to tax in the initial year on account of contractual obligation that is fastened to the receipt to provide services in future over the term of contract; it has to be spread over the ensuing years."
Thereafter in the case of Sterling Holiday Resorts (India) Ltd I.r.A. Nos. 471, 472, 473 and 160/Mds/2012 (copy enclosed) in respect of Assessment Year: 2002- 03, 2006-07, 07-08 and 08- 09, the Hon'ble Chennai Tribunal placing reliance on the decision in the case of Mahirtdra Holidays & Resorts (India) cited supra, has held as follows:
"32. Accordingly, to answer the question posed to the Special Bench, the entire amount of timeshare membership fee receivable by the assessee up front at the time of enrolment of a member is not the income chargeable to tax in the initial year on account of contractual obligation that is fastened to the receipt to provide services in future over the term of contract."
7. The Coordinate Bench of this Tribunal in the case of Mahindra Holidays and Resorts India Ltd in. ITA No. 1613/Mds/201 1 dated :- 10 -: ITA No. 247 & 248/2018 25.05.20l2considered the decision in the case of Calcutta Stock Exchange and Delhi Stock Exchange Association (supra), to which the counsel for the Revenue was referring to and by following the Special Bench decision (supra) decided the issue in favour of the assessee. Hence, respectfully following the decision of the Chennai Special Bench in the case of Mahindra Holidays and Resorts India Ltd (supra), we decide the above common issue in favour of the assessee for all the relevant assessment years.' The circumstances in the case of Mahindra Holidays & Resorts (India) Ltd (supra) are similar to the case under appeal before this respected authority. In the case of time-share resorts, the membership fee is payable up-front but the services by the company are to be rendered / made available to the customer over the pre-determined period of time. Recognising that the assessee (Mahindra Holidays & Resorts (India) Ltd.) was under a continuing liability to provide the service, the Special Bench held that #it cannot be said that the entire fee received by it has accraed as income, and recognizing the entire receipt as income in the year of receipt would lead to distortion--Only way to minimize the distortion is to spread over a part of the income over the ensuing years--Therefore, the entire amount of time-share membership fee receivable by the assessee upfront at the time of enrolment of a member is not income chargeable to tax in. the initial year." In the appellant's own case for the Assessment years 2005-06 to 2011-12 (details given in the table below) (copies of decisions enclosed), the Hon'ble Bench of the income tax Appellate Tribunal in respect of the matter of storage fee, has held that the assessee has given a proper treatment to the accounting of storage fee collected in advance. The lump sum payment is spread over the period of service for which the assessee is liable. This is the correct method of accounting"
Assessment Details of decision
year
2005-06 ITA No.2849/Mds/2014, decision
rendered on 08.04.2015
2006-07 ITA No.851/Mds/2011, decision
rendered on 13.07.2011
2007-08 ITA No.2850/Mds/2014, decision
rendered on 08.04.2015
:- 11 -: ITA No. 247 & 248/2018
2008-09 ITA No.342/Mds/2012, decision
rendered on 03.05.2012
2009-10 ITA No.2851/Mds/2014, decision
rendered on 08.04.2015
2010-11 ITA No.2142/Mds/2014, decision
rendered on 11.03.2015
2011-12 ITA No.527/Mds/2016, decision
rendered on 22.07.2016
In the appellant's case for the Assessment year 2011-12, the Commissioner of Income Tax (Appeals) in his order dated 22.12.2015 (copy of decision enclosed) has followed the above decisions of the Hon'ble Chennai Bench and has deleted the addition made on this score.
In respect of appellant's case for the Assessment year 2008-09, Commissioner of income Tax(Appeals), following the above decision of the Hon'ble Bench of the Income tax Appellate Tribunal had deleted the addition made towards storage fee received for that year. The revenue had gone on appeal against the said order of the Commissioner of Income Tax(Appeals). In this connection the Hon'ble Bench of the Income tax Appellate Tribunal in its order has held as follows "This issue was considered by the Tribunal in assessee's own case for assessment year 2006-07 in ITA No 852/Mds/201 1 through its order dated J3h July 2011. The Commissioner of Income Tax (Appeals) in his order relied on the above order of the Tribunal and held the matter in favour of the assessee. It is against the above that the revenue has come in appeal before us. The ground of the Revenue is that the order of the Tribunal passed in has preferred an appeal before the Hon'ble High Court of Madras.
Anyhow the matter as on date stands covered by the order of the Tribunal passed in assessee's own case for the assessment year 2006-07 the Commissioner of Income Tax(Appeals) has rightly followed the said order and allowed the contentions raised by the assessee.
In view of the above, the appeal filed by the Revenue is liable to be dismissed."
:- 12 -: ITA No. 247 & 248/2018Applying the principles in the above decisions, it is most humbly submitted that the entire lumpsum payments received is not income chargeable to tax in the initial year, i.e. the year of receipt and the same should be spread over the ensuing years, which is what the appellant has done.
Further as held by the Hon''ble Bench of the Income tax Appellate Tribunal in its order 1TA No. 342/Md s/2012 in the appellant's case for assessment year 2008-09. the issue stands covered by the order of the Hon'ble Bench of the Income tax Appellate Tribunal passed for the assessment year 2006-07. ' It is therefore most humbly prayed that this respected authority may be pleased to hold that the addition made by the Assessing Officer is unwarranted and unjustified and to delete the addition made of Rs.47,26,08,294/- on account of storage fees.
This respected authority may kindly note that the appellant has recognised, in the current year, enrolment fees of Rs.6,03,96,273.00, being the annual proportionate income of the storage fees collected in earlier years. The break of the same is as follows:
Particulars Value in Rs.
FY 2004-04 34,468.00
FY 2005-06 11,45,272.00
FY 2006-07 32,12,533.00
FY 2007-08 40,87,421.00
FY 2008-09 56,80,120.00
FY 2009-10 1,13,46,253.00
FY 2010-11 1,57,50,212.00
FY 2011-12 1,91,39,994.00
Total 6,03,96,273.00
Notwithstanding anything mentioned in the above paragraphs, as per the opinion of the department, if income has to be recognised in the year of receipt, then storage fees collected in the previous years but recognised in the current year, being Rs.6,03,96,273/-, has to be deleted as the same shall be recognised only in earlier years when it was collected.
:- 13 -: ITA No. 247 & 248/2018Since the department has already added it with the income of earlier years, this amount of Rs.(5,03,96,273/- has to be deducted from the income of the impugned year. If this amount is not deducted from the income of current year. it will amount to double taxation of same income in different assessment years.
Therefore, the appellant humbly request this respected authority to consider the same and deduct this amount, being Rs.6,03,96,273/-, from the addition made by the Assessing Officer.
Considering the above submissions of the assessee and after analyzing the profit and loss account, ld. Commissioner of Income Tax (Appeals) had come to conclusion that the method of recognisation of income adopted by the appellant gives distorted figure of the profit or loss for the period as the corresponding expenditure had not been deferred while deferring the income over period of contract. Accordingly, dismissed the claim of the appellant.
13. Being aggrieved, the appellant is in appeal before us in the present appeal. It is contented before us that the income had not accrued to the assessee unless otherwise the services are rendered and the assessee is under obligation to render service for period of 21 years and therefore the income though received in advance cannot be said to be accrued and the income received in advance should be apportioned for a period of 21 years. In this connection, he placed :- 14 -: ITA No. 247 & 248/2018 reliance on the decision of Special Bench of the Tribunal in the case of ACIT vs. Mahindra Holidays & Resorts (India) Ltd, (2010) 3 ITR 0600 and also Co-ordinate Bench decisions in assessee's own cases in ITA No. 851/Mds/2011 for assessment year 2006-07, dated 13.07.2011, ITA No. 342/Mds/2012 for assessment year 2008-09, dated 03.05.2012, ITA No. 2142/Mds/2014 for assessment year 2010-11, dated 11.03.2015, ITA Nos.2849, 2850 & 2851/Mds/2014 for assessment years 2005-06, 2007-08 & 2009-10, dated 08.04.2015, ITA No. 527/Mds/2016 for assessment year 2011-12, dated 22.07.2016 and ITA No. 3427/Mds/2016 for assessment year 2012- 13, dated 12.06.2017 and finally submitted that the ratio of the decision of Hon'ble Jurisdictional High Court in the case of TVS Finance & Services Ltd vs. JCIT, 318 ITR 0435 cannot be applied to the facts of the present case as there is continuous obligation on the part of the assessee to discharge his part of the duties.
14. On the other hand, the ld. Sr. Departmental Representative placed reliance on the orders of lower authorities.
15. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to taxability of income deferred in the books of accounts over period of agreement. The issue whether or not particular receipt had :- 15 -: ITA No. 247 & 248/2018 accrued to the assessee is to be decided with reference to the terms of agreement assessee had with his clients. It is settled proposition of law that income is said to be accrued to the assessee only when he had created a debt in his favour, a debt could come into existence only when he acquitted a right to receive the payment. This concept was accepted by the Hon'ble Supreme Court in the case of E.D. Sassoon & Company Ltd and Others vs. CIT, 26 ITR 27, wherein it was held that the word "earned" even though it does not appear in section 4 of the Act has been very often used in the course of the judgments bv learned Judges both in the High Courts as well as the Supreme Court, (Vide CIT Bombay v. Ahmedbhai Umarbhai & Co., Bombay [1950] 18 ITR 472, and CIT Madras v. K.R.M.T.T. Thiagaraja Chetty & Co. [1953] 24 ITR 525at 533). It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk [1900] A.C. 588 at 592. The concept, however, cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he had contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by :- 16 -: ITA No. 247 & 248/2018 rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in praesenti, solvendum in futuro it cannot be said that any income has accrued to him. The mere expression "earned" in the sense of rendering the services etc. by itself is of no avail."
16. Applying the above principles to the facts of the present case from the perusal of the terms of agreement, it is clear that the agreement is valid for a period of 21 years and the processing fees is payable prior to the birth of the child. The fees paid is refundable only in the case, if the agreement is terminated by the client at any time prior to the collection of Umbilical code or child (on attaining majority) at any time prior to the retrieval of the specimen where agreement is terminated by the assessee or by operation of law. These would go to show that there is no uncertainty as regards to the vesting of right to receive the payments. These conditions would suggest that there is no uncertainty on the receipt of the income. Thus, it can be safely concluded that debt has been created in favour of the assessee, :- 17 -: ITA No. 247 & 248/2018 the contingencies under which income has to be refunded, has no much relevance since the refund has to be given in a short span of period after entering into agreement with the client. Therefore it can be safely said that assessee has acquired the right to receive fees, the moment the assessee entered into agreement and received the fees, the movement the assessee entered into agreement with the client and received the payment in order income is said to have accrued, it is also necessary that the assessee had performed his part of the service. But undoubtedly, in the present case, the assessee is under obligation to store the stem cells over a period of 21 years. Therefore, the income can be apportioned for a period of 21 years. The judicial precedents had recognized the principle of matching which requires matching of expenditure against the corresponding revenue. Reference in this regard can be made to the decision of Hon'ble Supreme Court in the case of J.K. Industries Ltd and Another vs. Union of India and Others, 297 ITR 176. The principle enunciated therein as follows:-
''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 :- 18 -: ITA No. 247 & 248/2018 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.
83. 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." (p. 424)''.
17. Subsequently the Hon'ble Supreme Court reiterated the same principle in the case of CIT vs. Bilahari Investment (P) Ltd, 299 ITR 1. The Hon'ble Bombay High Court in the case of Taparia Tools Ltd vs. JCIT, 260 ITR 102 had explained the concept of matching principle as under:-
"The mercantile system of accounting is based on accrual. Basically, it is a double entry system of accounting. Under the mercantile system of accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax insofar as monies due and payable by the parties to whom they are debited [see Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 , 239 (SC)]. Therefore, under the Mercantile System of Accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed [expenses]. 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 :- 19 -: ITA No. 247 & 248/2018 compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following mercantile system of accounting. This matching concept is very relevant to compute taxable income particularly in cases involving DRE. It has been recognised by numerous judgments. In the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) the facts were as follows: The assessee bought lands and sold them in plots. When the plots were sold, the purchasers paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee, in turn, agreed to develop the plots within six months. In the relevant accounting year, the assessee actually received only Rs. 29,392 towards sale price of the lands, but, in accordance with the mercantile system of accounting followed by the assessee, it credited in its accounts Rs. 43,692 representing the full sale price of the lands. At the same time, it also debited Rs. 24,809 as expenditure for the development it had undertaken even though, no part of that amount was actually spent. The department, therefore, disallowed the expenditure of Rs. 24,809 on the ground that the amount was not actually spent. The assessee ultimately succeeded in the Supreme Court. It was held by the Supreme Court that the expression "profits or gains" in section 10(1) of the Income-tax Act, 1922 should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purposes of earning the receipts is deducted therefrom. Accordingly, the Supreme Court took the view, that since the assessee was following Mercantile System of Accounting and since the assessee had credited the full sale price of lands in its accounts amounting to Rs. 43,692, the assessee was entitled to estimate the expenditure because, without such estimation of expenditure, it was not possible to compute profits and gains. This concept is also applied by the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. [1997] 225 ITR 802 underfollowing observations (headnote):
'Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.' :- 20 -: ITA No. 247 & 248/2018 Therefore, the matching concept, which we have referred to is well- recognised by various judgments of the Supreme Court. In this case, the issue is whether the entire expenditure distorts the profits of a particular year. . . . ." (p. 116) The judgment of Hon'ble Bombay High Court in the case of Taparia Tools Ltd (supra) was approved by the Hon'ble Supreme Court in the case of Rakesh Shantilal Mardia vs. DCIT, 210 Taxman 565 and affirmed by Supreme Court in the case of CIT vs. Taparia Tools Ltd, 372 ITR 605 by holding as under:-
12. The next question which arises for consideration is as to whether the assessee was estopped from claiming deduction for the entire interest paid in the year in which it was paid merely because it had spread over this interest in its books of account over a period of five years. Here, the submission of learned counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of account is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of account. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(1)(iii) of the Act as all the conditions thereof were fulfilled and, thus, it was exercising the statutory right which could not be denied.
13. We find that the High Court has taken into consideration the provisions of Section 36(1)(iii) of the Act and the conditions which are to be fulfilled for allowing the deduction on this account in the following words::- 21 -: ITA No. 247 & 248/2018
...The term "interest" has been defined under Section 2(28A) of the Act. Briefly, interest payment is an expense under Section 36(1)(iii). Interest on monies borrowed for business purposes is an expenditure in a business [see 35 ITR 339 -Madras]. For claiming deduction under Section 36(1)(iii), the following conditions are required to be satisfied viz. the capital must have been borrowed; it must have been borrowed for business purpose and the interest must be paid. The word "Paid" is defined in Section 43(2). It means payment in accordance with the method followed by the assessee. In the present case, therefore, the word "Paid" in Section 36(1)(iii) should be construed to mean paid in accordance with the method of accounting followed by the assessee i.e. Mercantile System of accounting...' Notwithstanding the aforesaid, the High Court chose to decline the whole deduction in the year of payment, thereby affirming the orders of the authorities below, by invoking the 'Matching Concept'. It is observed by the High Court that under the mercantile system of accounting, book profits are liable to be taxed and in order to determine the net income of an Accounting Year, the revenue and other incomes are to be matched with the cost of resources consumed (expenses). For this reason, in the opinion of the High Court, this matching concept is required to be done on accrual basis. As per the High Court, in this case, payment of Rs. 55 per debenture towards interest was made, which pertained to five years, and, thus, this interest of five years was paid in the first year. We are of the opinion that it is here the High Court has gone wrong and this approach resulted in wrong application of Matching Concept. It is emphasized once again that as per the terms of issue, the interest could be paid in two modes. As per one mode, interest was payable every year and in that case it was to be paid on six monthly basis @ 18% per annum. In such cases, the interest as paid was claimed on yearly basis over a period of five years and allowed as well and there is no dispute about the same. However, in the second mode of payment of interest, which was at the option of the debenture holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. By this, the assessee had benefited by making payment of lesser amount of interest in comparison with the interest which was payable under the first mode over a period of five years. We are, therefore, of the opinion that in order to be entitled to have deduction of this amount, the only aspect which needed examination was as to whether provisions of Section 36(1)(iii) read with Section 43(ii) of the Act were satisfied or not. Once these are satisfied, there is no question of denying the benefit of entire deduction in the year in which such an amount was actually paid or incurred.
14. The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of :- 22 -: ITA No. 247 & 248/2018 deferred revenue expenditure in the Act except under specified sections, i.e. where amortization is specifically provided, such as Section 35-D of the Act.
15. What is to be borne in mind is that the moment second option was by the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs. 55 per debenture. In Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC), this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date.
Following passage from the aforesaid judgment is worth a quote:
"The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be disharged is not certain."
The present case is even on a stronger footing inasmuch as not only the had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year.
16. Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself:
:- 23 -: ITA No. 247 & 248/2018"15.. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs.3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.
16. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures."
17. Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.
18. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures.
19. In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the :- 24 -: ITA No. 247 & 248/2018 return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC); Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC).
20. At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.
18. From reading of the above judgments, it is clear that the principle of matching postulates that the expenditure corresponding to the income recognized should also be accounted for. But in the present case from the analysis of Profit and Loss account made by the ld. Commissioner of Income Tax (Appeals) vide para 7.4 of the impugned order, it is clear that the appellant had not followed this matching principle while apportioning the income over the period of 21 years by not apportioning the expenditure over a period of :- 25 -: ITA No. 247 & 248/2018 21 years. Undoubtedly, this resulted in the distortion of the profit or loss for the period and therefore the accounting policy of recognization of income adopted by the assessee does not give true picture of profit or loss for the period. The Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs. CIT, 227 ITR 172 had held that accounting policies cannot override the provisions of Income Tax Act. Therefore the ratio of the decision of Jurisdictional High Court in the case of TVS Finance & Services Ltd (supra) wherein while dealing in the issue, whether or not income accrued on discounting of bills by bank, it was held as under:-
''15. Therefore, the Tribunal was right in holding that the transaction of discount is complete at the moment, the customer is given 90 per cent. of the value of the bill. The discount is equivalent to the interest. What can be seen from the extracts of Tannan' s Banking is that the accrual of this is certain and arises on the date of discount itself. The Tribunal was right in concluding that the uncertainty regarding the discharge of the bill or rediscounting has no relevance and on that ground the income cannot be postponed or spread over the period of discount, because that is a separate transaction. CIT v. Bank of Tokyo [1993] 71 Taxman 85 (Cal) cannot apply since there the payability of the guarantee commission was a tentative right to receive the commission for the unexpired period and the right became perfected and crystallize only with the expiry of the unexpired period and the date for the entire amount would arise only when the whole guarantee period is made in the complete round. But here, while discussing the advantages of bills discounting it is seen from the above that in the case of bills discounting the yield is at the time of discounting and it is higher than loans or advances. Questions Nos. (i), (iii), (iii), (iii) in T. :- 26 -: ITA No. 247 & 248/2018 C. Nos. 107 to 110 of 2002, respectively, are answered against the assessee''.
The ld. Counsel for the assessee had not controverted the findings of the ld. CIT(Appeals) that the profits for the year are distorted by not apportioning the expenditure over a period of contract. The method adopted by the assessee runs counter to the very matching principles emanated by the above judicial precedents. The accounting policy adored by the assessee does not give the true picture of profits. Therefore the claim of the assessee that the income can be apportioned over a period of contract cannot be accepted. Therefore we do not find any fallacy in the reasoning of the ld. Commissioner of Income Tax (Appeals). The decision of Co-ordinate Bench of the Tribunal in assessee's own case, the issue whether the corresponding expenditure had been deferred over a period of contract was not discussed nor the Tribunal analyzed the profit and loss account of the assessee and therefore the decision of the Co-ordinate Bench loses the binding nature. Accordingly, we uphold the order of the ld. Commissioner of Income Tax (Appeals) and dismiss the appeal filed by the assessee.:- 27 -: ITA No. 247 & 248/2018 ITA No.248/CHNY/2018 for assessment year 2014-15.
19. Since, the facts in the present appeal is identical to the facts in ITA No.247/Chny/2018, for the reasons mentioned therein, we dismiss the appeal filed by the assessee on the same lines indicated in appeal ITA No.247/Chny/2018 supra. Hence, the above captioned appeal filed by the assessee is dismissed.
20. In the result, the appeals filed by the assessee are dismissed.
Order pronounced on 28th day of May, 2019, at Chennai.
Sd/- Sd/-
(जॉज माथन) (इंटूर रामा राव)
(GEORGE MATHAN) (INTURI RAMA RAO)
या यक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER
चे नई/Chennai
.दनांक/Dated: 28th May, 2019.
KV
आदे श क$ & त1ल2प अ3े2षत/Copy to:
1. अपीलाथ#/Appellant 3. आयकर आय4
ु त (अपील)/CIT(A) 5. 2वभागीय & त न9ध/DR
2. &'यथ#/Respondent 4. आयकर आय4
ु त/CIT 6. गाड फाईल/GF