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DCIT, Circle-II (1) , New Delhi Versus IFS Solutions India P. Ltd.

2016 (4) TMI 471 - ITAT DELHI

Addition on account of change in the accounting method of the company - Held that:- As from an incorrect and flawed accounting Policy Company has now adopted a sound accounting policy. Secondly, when in subsequent years, the revenue itself has accepted the changed accounting policy of the company on period basis. The assessee being company which is required to maintain its books of accounts in accordance with section 209 of The Companies Act, 1956 on accrual basis. The principle of accrual is vi .....

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es of those bills only to explain the accounting of the Annual maintenance Income. Further the comparative chart was verified by CIT (A) was to know about any leakage of revenue. Hence, we are of the view that the accounting policy followed by the company is bonafide and consistent with the accounting standard 9 of ICAI on 'Revenue Recognition', Income Tax Act as correct profit would be deduced on following this policy and section 209 of The Companies Act, 1956. Therefore, we confirm the order o .....

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provision was of ₹ 38,43,660/- only. This amount tallies with the statement submitted by the assessee. We have perused statement where the details of sales invoice, date of invoice, party wise amount payable and a product wise bifurcation, amount of sales, name of the supplier, date of payment made to supplier was available. In view of this, we are of the opinion that the liability provided by the assessee is quantified, crystallized and not based on estimates. Hence, we do not see any rea .....

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s to the service provider. Therefore, the commission is based on sales effected by the company. CIT (A) also considered that a sale of ₹ 1,28,36,798/-has been booked and commission at the rate of 18% calculated and is payable in terms of that particular agreement, therefore, there is a crystallized liability and was not a contingent liability and the fact of payment of commission at the rate of 18% on sales is available with the assessing officer and commission expenditure exactly matches .....

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- ITA No. 1529/De1/2011 - Dated:- 10-3-2016 - SHRI H.S.SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Mr. S.K. Saini, CA For The Revenue : Mr. T Vasanthan, Sr. DR ORDER PER PRASHANT MAHARISHI, A. M. 1. This appeal filed by the Department against the order dated 24.01.2011 of learned Commissioner of Income-tax (Appeals)-XJII, New Delhi for the Assessment Year 2006-07. 2. The following grounds of appeal has been raised by the revenue:- "1. On the fact .....

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10,6231-on account of provision for commission. " 3. This appeal is filed on 21 st of March 2011 by the Revenue. First time this appeal was fixed for hearing on 30105/2011. Subsequent to that, hearing up to 05/05/2015 matter was adjourned at the request of the assessee. On the next date of hearing on 05/05/2015, it was adjourned at the request of the Learned DR. Subsequently, on 15/12/2015 an adjournment request was moved by Revenue stating that Ld. CIT (A) has admitted additional evidence .....

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3rd of March 2016. On 3rd of March 2016 on request of the DR this matter was further adjourned to 7/03/2016. On 7/3/2016, due to paucity of time and prolonged hearing of other matters, this matter was adjourned with the consent of both the parties to next day, i.e. 8/3/2016. However on 8/3/2016, Learned DR submitted an application for adjournment of hearing stating that an additional ground which was required to be filed by the Assessing officer has not so far been filed and therefore the matter .....

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e of Assessing officer for raising the additional grounds on six times however there is no response from the office of the AO. Hence we presume reasonably that in his own wisdom, CIT and Assessing officer both are not of the opinion that this ground is required to be raised either in absence of any additional evidence or on the issues involved in the appeal. Any way additional ground is not raised till the date of hearing of the appeal. Further as this matter is pertaining to A Y 2006-07 and iss .....

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nt of various software program and providing ERP solutions. The company filed its return of income on 15th of December 2006, declaring total income of ₹ 8328649/-. Assessment under section 143(3) ofthe Act has been passed by the assessing officer on 24th of November 2008. 5. The 15tground of appeal is against the deletion of addition of ₹ 6298812, made by assessee officer on account of change in the accounting method of the company. Till now the company was recognizing revenue from a .....

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t has reduced substantially and the original accounting policy is consistently followed by the assessee, therefore change in the method of accounting is not bonafide. Hence, he made an addition of ₹ 6298812 to the income of the assessee. Assessee being aggrieved with the order of AO preferred an appeal before CIT (A). Learned CIT (A) deleted the addition because accounting standard 9 on revenue recognition issued by lCAI this change has become essential. It was also observed by CIT (A) tha .....

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ubmitted that the CIT (A) has admitted new evidence as per page No.6 of the appeal order of CIT (A) wherein as per reply dated 13/05/2010 certain bills of annual maintenance contracts and comparative statement of revenue was taken on record by CIT (A) without giving an opportunity of hearing to the Assessing officer. Therefore, he stated that the order of the order of the assessing officer may be upheld. Against this Ld. authorized representative of the assessee submitted that that the method of .....

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accounting standard issued by Institute of chartered Accountants of India. He submitted that the assessing officer has misunderstood the wall change in accounting policy recorded by the assessee in the balance sheet of the company. He further submitted that the evidence submitted by the assessee before CIT ((A) are not additional evidence but copies of the bills to whose that revenue is recognized on time basis with illustration. The comparative income and expenditure statement was submitted to .....

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time period for which the annual contract is in force. Therefore, now there is a certainty of offering income to the revenue. Otherwise if the income is offered at the time of raising of the bills as it was done till now, it gives lot of discretion to the assessee to offer this income for taxation at its sweet will. We are of the view that that the change in the method of accounting is more appropriate and in is in consonance with the accounting standard 9 issued by the ICAI. It was provided in .....

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be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognised on a straight line basis over the specific period unless there is evidence that so some other method better represents the pattern of performance. On query by the bench about the subsequent years Learned AR submitted that that the revenue has accepted thi .....

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Therefore, we are of the opinion that from an incorrect and flawed accounting Policy Company has now adopted a sound accounting policy. Secondly, when in subsequent years, the revenue itself has accepted the changed accounting policy of the company on period basis. The assessee being company which is required to maintain its books of accounts in accordance with section 209 of The Companies Act, 1956 on accrual basis. The principle of accrual is violated if the revenue is recognized at the time o .....

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of the Annual maintenance Income. Further the comparative chart was verified by CIT (A) was to know about any leakage of revenue. Hence, we are of the view that the accounting policy followed by the company is bonafide and consistent with the accounting standard 9 of ICAI on 'Revenue Recognition', Income Tax Act as correct profit would be deduced on following this policy and section 209 of The Companies Act, 1956. Therefore, we confirm the order of CIT (A) in deleting the addition ofRs. .....

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; 6154283/- a sum of ₹ 2310623/- has been reversed. However, the assessing officer held that the provision for license purchase are being made without any basis and made an addition of ₹ 6154283/-. Against this, assessee preferred an appeal before CrT (A) who in turn deleted the addition. The CIT appeal was of the view that the provision for license purchase expenses is a crystallized liability and is not based on estimated. Against this order revenue is in appeal. 9. Learned DR reli .....

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ssessee for the purpose of license fees is on sound basis supported by evidences then it is to be allowed to the assessee. On query by the bench, Ld. AR was asked to show how the purchase provision is made. In response to that he submitted a statement which was before lower authorities, wherein details of the provision of ₹ 6154283/- and the details of reversal from that account of ₹ 2310623/- was available which was a wrong accounting entry. Therefore actual provision was of ₹ .....

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he disallowance of this amount. In the result we confirm the finding of the CIT (A) while deleting the addition of ₹ 6154283/- being provision for license purchases in the result ground No.2 of the appeal is dismissed. 11. The 3rdground of appeal is against deletion of addition of ₹ 2310623/- on account of provision for commission. The brief facts about this ground of appeal are that assessee has made a provision of ₹ 2310623/- on account of commission. During the course of ass .....

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(A) has admitted additional evidence without giving an opportunity to the assessing officer to verify those details and therefore the order is invalid. 13. Ld. AR submitted that that to procure Business Company entered into an agreement with one company and as per the terms of memorandum of understanding with that company assessee company was liable to pay 18% of the software sales as commission. This commercial transaction is followed by the company since assessment year 2003 - 2004 onwards an .....

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as per the existing agreement with the party. Learned AR relied on the order ofCIT (A) stated that after verification of the all the details disallowance is deleted which is on the same facts and circumstances and the evidences furnished before the AO. He contended that there is no evidence which has been submitted by the assessee before CIT (A) which was not available before the assessing officer. He further submitted that the detail of the commission was already there. The amount of commission .....

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