2013 (6) TMI 944 - AT - Income Tax

Computation of income - assessee company engaged in the business of developing intellectual property in advanced personal communication and networking - only objection of the assessee appears to be that during the year under consideration the assessee devised a computer machine which was a model one subject to approval of the customer - HELD THAT - So-called modeling devised by the customer is on the orders placed by the customer after paying the project advance. Even in the subsequent assessment year though the model was approved the assessee could not start its work and the project could not be completed. Still the assessee recognized 50% of the project advance as income. This Tribunal is of the considered opinion that the project work started when the assessee started working on the modeling on the basis of the orders placed by the customer on payment of project advance. Therefore as per the regular method of accounting adopted by the assessee part of the project cost has to be recognized as income as has been done for the assessment year 2005-06. Therefore this Tribunal do not find any infirmity in the order of the lower authority. Accordingly the same is confirmed. Disallowance of unabsorbed loss and depreciation - AO disallowed he unabsorbed loss and deprecation on the ground that no income has been returned from the business of earlier years - HELD THAT - For allowing the unabsorbed depreciation and loss it is not necessary to have income. What is necessary is whether the assessee carried on the business activity during the year under consideration. It is also necessary to examine whether the assessee has filed the return of income within the prescribed time and the loss and depreciation was determined as required under the Income-tax Act. This aspect was not examined by the lower authorities. The materials available on record do not indicate whether the assessee has filed the return of income within the specified time and whether the loss and depreciation was quantified during the relevant assessment year onwards. Therefore this Tribunal is of the considered opinion that the assessing officer has to reconsider the matter in the light of the statutory provisions. Appeal of the assessee is partly allowed for statistical purpose.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Tribunal considered two core legal issues in this appeal:

(a) Whether the assessing officer was justified in computing income of Rs.11,02,395 by recognizing 50% of the project advance as income for the assessment year 2004-05, despite the assessee declaring a loss and contending that the project was still in the development phase;

(b) Whether the assessing officer was correct in disallowing the unabsorbed loss and depreciation claimed by the assessee on the ground that no income had been returned from the business in earlier years.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Recognition of Income from Project Advance

Relevant legal framework and precedents: The matter primarily involves principles of income recognition under the Income-tax Act, particularly relating to the stage of completion of a project and the method of accounting adopted by the assessee. The regular method of accounting and the timing of income recognition based on project progress are central to the issue. Although no specific precedents were cited, the principles of revenue recognition and matching income with the completion of contractual obligations are implicit.

Court's interpretation and reasoning: The Tribunal examined the nature of the project, which involved developing intellectual property in advanced personal communication and networking, specifically a high-performance computing machine. The assessee contended that during the year under consideration, only a model was devised, which was subject to customer approval and various uncertainties, and that the actual software development had not yet commenced. The assessee argued that income recognition should be deferred until the project progresses beyond the modeling stage.

The assessing officer, however, noted that the project was nearing completion and treated 50% of the project advance as income for the year 2004-05, consistent with the assessee's own recognition of 50% of the advance as income in the subsequent assessment year 2005-06, despite the project not being completed then.

The Tribunal found that the so-called model was developed pursuant to an order placed by the customer after payment of the advance, indicating that the project work had commenced. It held that the project work effectively started with the modeling based on the customer's order and advance payment. Consequently, the Tribunal opined that income recognition in respect of part of the project advance was justified and in accordance with the regular method of accounting adopted by the assessee.

Key evidence and findings: The Tribunal relied on the fact that the customer had placed orders and paid advances, the project was monitored by the contractor, and the assessee itself recognized part of the advance as income in the subsequent year. The Tribunal also noted the absence of any contractual specification of total consideration and the unique, unprecedented nature of the project.

Application of law to facts: The Tribunal applied the principle that income should be recognized in accordance with the stage of completion of the project and the accounting method regularly followed. Since the project had progressed beyond mere conceptualization to modeling based on customer orders and advances, partial income recognition was warranted.

Treatment of competing arguments: The assessee's argument that the project was still uncertain and in early stages was considered but rejected on the basis that the advance payment and order placement indicated commencement of work and entitlement to recognize income. The assessing officer's approach was upheld as consistent and reasonable.

Conclusions: The Tribunal confirmed the assessing officer's order recognizing 50% of the project advance as income for the year 2004-05, finding no infirmity in the approach adopted.

Issue (b): Disallowance of Unabsorbed Loss and Depreciation

Relevant legal framework and precedents: The issue concerns the allowability of unabsorbed loss and depreciation under the Income-tax Act. It is well-established that the carry forward and set off of losses and depreciation are permissible if the business is carried on during the relevant assessment year, irrespective of whether income is returned. The conditions include timely filing of returns and proper quantification of losses and depreciation.

Court's interpretation and reasoning: The assessing officer disallowed the unabsorbed loss and depreciation on the ground that no income had been returned from the business in earlier years. The Tribunal observed that the assessing officer had not examined whether the assessee had carried on business during the year or whether the return of income was filed within the prescribed time. The Tribunal emphasized that the mere absence of income does not preclude allowance of unabsorbed loss and depreciation.

Key evidence and findings: The record did not indicate whether the assessee had filed returns within the prescribed time or whether the loss and depreciation had been properly quantified. This lack of examination by the lower authorities was noted.

Application of law to facts: The Tribunal held that the assessing officer must reconsider the issue in light of statutory provisions, including whether the business was carried on, whether returns were timely filed, and whether losses and depreciation were determined as per law.

Treatment of competing arguments: The Tribunal did not accept the assessing officer's approach of disallowance solely on the absence of income and remitted the matter for fresh consideration, thereby ensuring procedural fairness and adherence to statutory requirements.

Conclusions: The Tribunal set aside the lower authorities' orders on this issue and remitted the matter to the assessing officer for fresh adjudication in accordance with law, after affording the assessee an opportunity of hearing.

3. SIGNIFICANT HOLDINGS

The Tribunal held that partial recognition of project advance as income is justified when the project work has commenced based on customer orders and advance payments, even if the project is not fully completed. It stated:

"The project work started when the assessee started working on the modeling on the basis of the orders placed by the customer on payment of project advance. Therefore, as per the regular method of accounting adopted by the assessee, part of the project cost has to be recognized as income as has been done for the assessment year 2005-06."

Regarding unabsorbed loss and depreciation, the Tribunal emphasized that:

"For allowing the unabsorbed depreciation and loss, it is not necessary to have income. What is necessary is whether the assessee carried on the business activity during the year under consideration. It is also necessary to examine whether the assessee has filed the return of income within the prescribed time and the loss and depreciation was determined as required under the Income-tax Act."

The Tribunal remitted the issue of unabsorbed loss and depreciation to the assessing officer for reconsideration in light of these principles.

Final determinations:

(i) The income computation by recognizing 50% of the project advance as income for assessment year 2004-05 was upheld;

(ii) The disallowance of unabsorbed loss and depreciation was set aside, and the matter was remitted for fresh consideration.