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2018 (12) TMI 585 - HC - Income TaxAccrual of income - accounting treatment in respect of prepaid cards - Rendering of Services - Income recognition - Accounting standards - amount received on sale of prepaid cards to the extent of unutilized talk time - assessee was engaged in the business of providing basic telecom services in the State of Rajasthan and had both prepaid and postpaid subscribers - Held that:- Paragraph 7 of Accounting Standards stipulates that revenue from service transaction can be recognized either by proportionate completion method or by the completed service contract method. Revenue is generally recognized when the service is performed. Proportionate completion method is a recognized accounting method, as per which revenue is recognized proportionately by reference to the performance of each act. Under this method, revenue is determined on the basis of contract value, associated costs, number of acts or other suitable criteria. 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. This is subject to any evidence that some other method would be better and more appropriate for representing the pattern of performance. What is the relevant yardstick is the time of accrual or arisal for the purpose of its taxation, viz., in order to be chargeable, the income should accrue or arise to the assessee during the previous year. If income has accrued or arisen, even if actual receipt of the amount is not there, it would be chargeable to tax in the said year. Though the amount may be received later in the succeeding year, the income would be said to accrue or arise if there is a debt owed to the assessee by somebody at that moment. From this, it follows that there must be the “right to receive the income on a particular date, so as to bring about a creditor and debtor relationship on the relevant date” -a right to receive a particular sum under the agreement would not be sufficient unless the right accrued by rendering of services and not by promising for services and where the right to receive is anterior to rendering of service, the income, therefore, would accrue on rendering of services. The appropriation of prepaid amount was contingent upon the assessee performing its obligation and rendering services to the prepaid customers as per the terms. If the respondent-assessee had failed to perform the services as promised, it would be liable and under an obligation to refund the advance payment received under the ordinary law of contract or special enactments, like the Consumer Protection Act. The aforesaid legal position would meet the argument of the Revenue that the prepaid amount received was not liable to be refunded or repaid, whether or not any services were rendered. - Decided in favour of assessee.
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