TMI Blog2014 (6) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... artaking character of income - If an assessee may be required to refund the amount then it cannot be treated as assessee’s income in that particular year - unless the assessee can exercise his entire rights over a particular receipt, it cannot be said that income has accrued in his favour - No other person should have any charge over that receipt. The dominion over the amount should be of assessee. The amount will be accrued to the assessee only on rendering of services - receipt by itself is not sufficient to attract tax, but, it is only receipt as “income”, which can attract tax - receipt in advance amount come within the provisions of section 4 or 5 of the IT Act - Every receipt cannot be treated as income in the hands of the assessee, but, it is only when it bears the character of assessee’s income at the time when it reaches the hands of the assessee that it becomes exigible to tax – Relying upon CIT Vs. Tollygunge Club Ltd. [1977 (3) TMI 1 - SUPREME Court] - the assessee received the fee in advance for which no service was rendered in the assessment under consideration and it cannot be held as taxable in the hands of the assessee in the year of receipt even though such inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance for the F.Y.s 2008-09 to 2010-11 of Rs. 36,45,308/- for each year. 2.1 However, on the going through the details furnished by the assessee as well as the letter dated 23.10.2007 of Country Club (India) R and A corporate Consultants India P Ltd A.Y. 2008-09 Ltd., who had appointed the appellant as consultant for the next three financial years, the Assessing Officer found that it had been no where mentioned that the income will be spread over a period of three financial years. Rather, the letter dated 23.7.2010 from them simply mentioned that the appellant had been retained as a Consultant for the next three financial years, i.e. 2008-09 to 2010-11, and that it was to be paid retainership fees at the rate of 0.22% of the gross amount during the period of such retainership. He observed that the said letter despite stating that the appellant had been appointed as a consultant for the next 3 financial years, no where mentioned that the income will be spread over of a three financial years. Accordingly, the Assessing Officer treated the difference in gross receipts amounting to Rs. 1,04,94,192/ - as income of the appellant for the assessment year 2008-09 only. Aggrieved by the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the services and not before that. She maintained that the appellant is duty bound to incur expenditure in the subsequent years and the advances are demanded and received from the clients against future expenditure. She maintained that till such time the services are not rendered, the amount would remain as an advance, which is required to be refunded to the clients. Therefore, the income accrues only when the same arises to the appellant on rendering of services by incurring the necessary costs in the subsequent years. It was maintained that this practice was followed by all professional establishments in line with the Accountant Standard-9 of ICAI It was argued that no part of the retainer income accrued in the A.Y.s 2008-09 as the appellant was still to render the services and the amounts had been received with a view to incur the expenditure incurred in future. She averred that the Assessing Officer did not dispute that the advance retainer fee had been offered to tax by the appellant in the subsequent years, though he contended that the same was taxable in the year of receipt. 3.3 The appellant relied on the decision in the case of Dinesh Kumar Goel and Ors. ITA No. 51 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 250 crores, the appellant helped the Country Club India Ltd. raised Rs. 486.041 crores. It is seen that in terms of the above appointment letter, the appellant raised a bill for professional charges for raising Rs. 486.041 crores @ 0.275%, which came to Rs. 1,50,18,184/ -. The appellant was also entitled to receive the retainer ship fees in advance soon after the receipt of the funds. Accordingly, a bill for retainer ship fees @ 0.225% of Rs. 486.041 crores was also raised for Rs. 1,22,87,605/- It is the contention of the appellant that since it had been appointed retainer for the next 3 financial years, the amount of Rs. 1,22,87,605/ - was to be apportioned over 3 years. However, the CIT(A) was of the view that such contention of retainership fees were paid with reference to the funds mobilized of Rs. 486.041 crores only. Neither the appointment letter, nor the TDS certificates issued by M/s. Country Club India Ltd. indicates that any part of the amount so paid was in the nature of advance. On the other hand, the appointment letter clearly mentioned that fees paid at each stage would be non refundable. The CIT(A) held that in the absence of any specific stipulation regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f advance as income of the year. It is submitted that the appellant's income accrues only on the performance of services and not at the time of appointment or receipt of any amount as advance or otherwise. He contended that there is no evidence brought on record by the Assessing officer to show that the advance bill amount is in the character of income against services performed in the asst year 2008-09 itself. 6.2 The learned AR submitted that as per section 145 of Income Tax Act,1961 ,the income is to be determined as per the accounting standards notified by the Central Government. The notified Accounting Standard-1 relating to Disclosure of Accounting Policies provides that revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate . The appellant had incurred the costs for rendering the services in the subsequent years and on the matching principle, the revenue is to be recognized only to the extent earned during the year. 6.3 The AR relied on the relevant extract of Accounting standard 9, which is as follows: Paragraph 7. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acks, notes to accounts and 3 CDs for the asst years 2009-10 to 2011-12 are placed at pages 16 to 52 of the paper book as proof that the advance retainer fee is recognized as income in the subsequent years. 6.7 On the issue of absence of non refundable clause it is submitted that it will be incorporated only to safeguard the interest of the appellant in an extreme situation. It cannot be said that the advance fees is non refundable even without rendering of services. The same appointment letter also clearly brings out the services to be rendered by the appellant and no professional entity can survive without rendering the services and is not permitted to have unfettered discretion to deny refund of any advances. Hence it is submitted that the non refundable clause has no role to play in this case, as the appellant had discharged all the duties agreed upon in the subsequent years in terms of the letter of appointment. 6.8 The learned AR relied on the following case laws for the preposition that the amount received by the assessee is only an advance for AY 2008-09: 1. M/s News Today (P) Ltd-ITA no 586/HYO/2011 dated 31/10/2011 and ITA No 2511 Hyd 12013 dated 26-09-2013 (ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvance for the services to be rendered in future are not liable to tax in the year of receipt. 8. DDIT (IntI) Vs Sepco Electro Power Construction Corpn Ltd 126 TT J 539 Bilaspur Mobilization advance received by assessee was merely in nature of advance till rendering of services. 9. Comp-u-Learn Tech (I) Ltd Vs DCIT ITA No.672/H/01 dt.04.04.2002: The assessee's method of crediting the Profit Loss account with fee actually earned in the year and showing the unearned portion of fees collected as advance receipt is up held. 6.9. In the light of the above submissions, it is prayed that the addition made by the Assessing Officer, and confirmed by the First Appellate Authority, may be deleted. 7. The learned DR, on the other hand, relied upon the orders of the revenue authorities. 8. We have considered the rival submissions and perused the record of the case. Section 4 deals with charge of income-tax. As per sub-section(2) of section 4, in respect of income chargeable under sub-section (1), income tax is to be deducted in advance. Income tax is to be charged at the rate or rates fixed for the year by the annual Finance Act. Under this section, the subject of charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of 3 years beginning 1st April, 2008. Fee relating to raising of funds is credited in the P L A/c as income earned. Since the retainer fee is payable in advance soon after the receipt of funds, the assessee raised an advance bill on 17/01/2008 for Rs. 1,09,35,925/- exclusive of service tax. As the bill raised on Country Club, is an advance bill, the assessee prorated the retainer fee over the subsequent 3 relevant years as Rs. 36,45,308/- for 2008-09, Rs. 36,45,308/- for 2009-10 and Rs. 36,45,309/- for 2010-11 and accordingly credited its profit loss account as well as offered the same as part of taxable income in its returns of income for each of the years, which fact has not been disputed by the AO. 8.2 Country Club issued a TDS certificate dated 10/10/2008 for Rs. 30,93,746/- on a gross fee of Rs. 2,73,05,789/- towards a) Fee for raising of funds Rs. 1,33,66,130/- plus applicable service tax of Rs. 16,52,054/- aggregating to Rs. 1,50,18,184/- and b) Advance retainer fee of Rs. 1,09,35,925/- plus applicable service tax of Rs. 13,51,680/- aggregating to Rs. 1,22,87,605/-. The assessee however claimed TDS credit only to the extent of Rs. 20,24,394/- consistent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of advance is received towards future services for which costs are required to be incurred in the future, and following the matching principle so well laid out under accounting convention, the assessee has postponed the recognition of the income into the subsequent three years, namely, 2008-09, 2009-10 and 2010-11. 8.6 As seen from the facts of the case, the assessee received the fee in advance as stipulated in the MoU entered by the assessee placed in the paper book at pages 58 59, which is as follows: I. The fees payable to you by the company would be 0.275% of the gross amount raised by way of the Offering (GDR, FCCBs, ADR, QIP, Preferential Allotment etc.,) to be paid as under: Milestone In cash (Rs. in lakhs) On finalization of Information Memorandum 10.00 On Bid/Issue of funds 10.00 On receipt of funds Balance* * to be arrived at depending upon gross amount raised. II. You shall act as a Retainer for the next three financial years i.e. 2008-09, 2009-10 and 2010-11. You shall be paid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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