1990 (5) TMI 91 - AT - Income Tax

Summary

Issues Involved:
1. Accrual of income from one-time service charges.
2. Method of accounting for service charges over multiple years.
3. Assessment year for income recognition.

Detailed Analysis:

1. Accrual of Income from One-Time Service Charges:
The central issue was whether the entire amount of Rs. 3.78 lakhs, being one-time service charges on the disbursement of a loan of Rs. 3.78 crores, accrued to the assessee during the accounting year and should be treated as income for that year. The IAC(Asst.) held that the entire amount accrued during the accounting year, making it liable to be treated as income for the year under consideration. However, the assessee contended that the service charges were for services rendered over a period of eleven years, and thus only 1/11th of the amount should be recognized as income for the year.

2. Method of Accounting for Service Charges Over Multiple Years:
The assessee argued that the method of accounting it followed, which recognized 1/11th of the service charges each year, was in line with accepted accountancy standards. The Comptroller and Auditor General initially raised objections but subsequently accepted this method. The Tribunal reviewed the principles of accounting standards set by the Institute of Chartered Accountants of India (ICAI), specifically the "Proportionate Completion Method" and the "Completed Service Contract Method," which support recognizing revenue over the period services are performed.

3. Assessment Year for Income Recognition:
The CIT(A) held that the entire amount of Rs. 3.78 lakhs should be assessed as income for the earlier assessment year 1982-83, as the STUs had accepted the liability in March 1982. However, the Tribunal found that the actual demand for service charges was made in July 1982, and the STUs accepted the liability only thereafter. Therefore, it concluded that the income did not accrue in March 1982 but spread over the eleven years during which the services were rendered.

Conclusion:
The Tribunal allowed the appeal, directing the IAC(Asst.) to compute the assessee's income based on the method of accounting it regularly followed. The Tribunal emphasized that the method was recognized by ICAI and consistently applied by the assessee. It held that only a proportionate income, as accounted for by the assessee over the period of years during which services were rendered, should be assessed for the year.

Final Judgment:
The appeal was allowed, and the IAC(Asst.) was directed to delete the additions made in the assessee's income and compute it based on the proportionate method of accounting followed by the assessee.