1990 (5) TMI 84 - AT - Income Tax

Summary

Issues Involved:
1. Accrual of Income
2. Method of Accounting
3. Assessment Year Appropriateness

Detailed Analysis:

1. Accrual of Income:
The primary issue revolves around whether the one-time service charges of Rs. 3.78 lakhs accrued to the assessee during the accounting year ending 31-3-1982 or should be spread over the eleven years during which services are rendered. The Income-tax Appellate Tribunal (ITAT) held that the responsibility of the assessee-corporation did not end with the disbursement of loans. The services for which the one-time service charges were collected extended over a period of eleven years, including the collection of instalments from STUs and repayment to LIC. Thus, the income could not be said to have accrued in full during the year of disbursement.

2. Method of Accounting:
The assessee argued that it followed the "proportionate completion method," a recognized accounting method where revenue is recognized as services are performed over time. The ITAT noted that the method of accounting followed by the assessee is consistent with the accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI). The Tribunal emphasized that the method of accounting regularly followed by the assessee should be taken into account, as per Section 145 of the Income-tax Act. The Tribunal referenced the case of Sakura Electronics (P.) Ltd., where a similar issue was considered, and it was held that the proportionate completion method was appropriate for recognizing income over the period services are rendered.

3. Assessment Year Appropriateness:
The CIT(A) had directed that the entire amount of Rs. 3.78 lakhs should be assessed as income for the earlier assessment year 1982-83, based on the mercantile system of accounting. However, the ITAT disagreed, noting that the debit notes for the service charges were issued only in July 1982 and were accepted by the STUs thereafter. Therefore, the income could not be said to have accrued in the earlier assessment year. The Tribunal concluded that the CIT(A) was incorrect in holding that the income arose in the earlier assessment year.

Conclusion:
The ITAT allowed the appeal, directing the IAC (Assessment) to compute the assessee's income based on the proportionate completion method of accounting followed by the assessee. The Tribunal emphasized that the method of accounting was recognized and accepted by the ICAI and that it appropriately reflected the income over the period services were rendered. The additions made to the assessee's income for the year under consideration were to be deleted.