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TMI Blog1990 (5) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the agreement entered into by the assessee with the LIC, to which the beneficiary corporations are also made parties, the assessee had to utilise the loan received by it for financing to various STUs by way of hire purchase arrangements, purchase of bus chassis etc. In terms of the agreement the assessee distributed the loan to various STUs for their use and benefit. The STUs are to repay the loan amount borrowed by them according to an agreed basis over a period of ten years. The Board of Directors of the assessee-corporation, decided by a resolution passed by them on 9-3-1981, to treat the loan taken through LTC as an arranged credit on which the assessee shall avail of 1 per cent of its face value as service charges as a one-time charge, recoverable from the STUs. In terms of this resolution, the assessee issued in July 1982 debit notes to various STUs in respect of the one-time service charges payable by them. The STUs also in their turn have accepted their liability to pay such one-time service charges to the assessee-corporation. While preparing the profit and loss account for this year, the assessee had accounted for 1/11th of the above-one-time service charges as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. On appeal before the CIT(A), it was claimed by the assessee that it was not correct to say that one-time service charges represented income of one year as the services to be rendered by the assessee extended over a period of eleven years. As such it was claimed that only 1/11th of the above income was liable to be taxed in this year. In any case it was contended that when the assessee firm maintained its accounts regularly on that basis, it was not correct for the IAC(Assessment) to reject such a method of accounting followed by it and treat the entire amount of service charges as accruing to it during the accounting year relevant to the assessment year under consideration. The CIT(A) however, rejected the assessee's contention. He was of the view that the entire amount of the one-time service charges of Rs. 3.78 lakhs should be assessed as the assessee's income for the earlier assessment year 1982-83. As the assessee is following mercantile system of accounting, it must account for its income as soon as it obtains the right to receive the same and as soon as the debt is credited in its favour. For coming to the above conclusion the CIT(A) relied on the decisions of the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 crores was disbursed in March 1982, the responsibility of the assessee-corporation did not end with disbursement of such loans. Under the terms of agreement, the assessee was responsible to repay the loan after collecting the same from various STUs. They have to issue reminders from time to time to the STUs, collect the dues within due dates and pay it to the LIC. Thus the services to be rendered by the assessee to STUs for which it charged 1 per cent service charges as spread over a period of eleven years. Though it is true that the assessee in the meeting of its Board of Directors held on 9-3-1981 passed a resolution to the effect that it shall avail of 1 per cent of the face value of the LIC loan by way of service charges as one-time charge recoverable from the STUs, it only records the decision taken by it to charge such service charges. Actually the debit notes charging the above amounts as service charges were issued only in July 1982 to various STUs and it is only thereafter that they were paid or adjusted by the various STUs. As the assessee claimed service charges from STUs and they accepted such liability after July 1982, it cannot be said that any income by way of ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 6. The assessee claims to have followed the proportionate completion method, on the basis of which a proportionate amount of service charges received over a period of years is accounted for in each year. Though it is true that income will accrue in the year in which the assessee obtains a right to receive the amount, it does not mean that an amount which is received during the year will automatically be treated as having accrued as income in favour of the assessee. While computing the assessee's income, normally the method of accounting followed by it has to be taken into account. The assessee, taking into account the fact that services are to be performed by it over a period of eleven years, has accounted for a proportionate amount of the one-time service charges as its income of this year. Similar proportionate amounts were admitted for other years also. The method of accounting followed by it is accepted as one of the standard methods of accounting and is also recognised by the ICAI. Thus is cannot be said that the method of accounting followed by the assessee is not a recognised method of accounting on the basis of which the correct amount of profits and pins of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue, there would be a distortion of the true profits of the previous year. in the circumstances, the accounting practice adopted by the assessee was correct and did not require any interference. We set aside the orders of the authorities below and direct the ITO to accept the method of accounting followed by the assessee. " The above decision of the Tribunal, in our opinion, completely supports the assessee's case. The fact that the Comptroller and Auditor General of India had raised a preliminary objection regarding the method of accounting of service charges and finally accepted the assessee's position shows that the method of accounting followed by it is correct. 8. The CIT(A) is also not correct in holding that the income of Rs. 3.78 lakhs by way of service charges arises for the earlier assessment year. Though the Board of Directors of the company had, passed a resolution on 9-3-1981, the debit notes in terms of such resolution were issued only in July 1982 and it is only thereafter the STUs have accepted the liability and paid the amount. Thus it cannot be said that any portion of the said income had accrued to the assessee in the earlier assessment year. 9. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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