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2016 (5) TMI 975 - AT - Income TaxAccrual of Income - Addition towards service fees received - Held that:- The assessee was able to supply the man power starting from 20 numbers in Nov’07 and managed to increase this level to 112 nos. by Mar’08, not even 50% mark to the agreed level of service. No doubt assessee agreed to supply the manpower and as understand assessee is a new entrant to this field. The assessee was in the process of setting the business. Our understanding is that the assessee will have right to claim the service charges only when he reaches the level of service agreed and as per the agreement or as per terms of agreement with regard to commencement of the agreement period. In the given case, the assessee neither reached the level of service expected nor the agreement has commenced. Hence, assessee is not in a position to claim any professional fees during the period of 01/11/2007 to 31/03/2008. It is clear that the income has not accrued to the assessee. Income can be recognized only when it is earned or accrued i.e. there is a right to receive. In the present case, neither the assessee had achieved the level of service i.e. to supply 300 manpower nor the terms of contract commenced, resulting in no right to receive. We must interpret the situation in the normal course of business i.e. in a situation where the holding company has to deal with outsiders. Just because the assessee is dealing with holding company, it will not get a right to receive. Even in dealing with the outside party, the right to receive would not have arisen simply because the assessee had not achieved the expected service level nor the terms of agreement has commenced. The business decisions are done purely on commercial basis. When assessee has not achieved the expected level of services it has no right to claim any service charges. Income has to be realized or there has to be a right to receive the income, in absence of such right, income cannot be recognized. Hence, the addition made by the Assessing Officer in this case needs to be deleted. Hence, the addition made by the Assessing Officer is hereby deleted. - Decided in favour of assessee.
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