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2016 (9) TMI 807 - ITAT HYDERABAD

2016 (9) TMI 807 - ITAT HYDERABAD - TMI - Nature of income - receipt basis OR accrual basis - amounts received by assessee in respective assessment years - Held that:- The amount can not be brought to tax on receipt basis unless the same has accrued to assessee as income. In view of the facts of the case as well as law on the subject, we are in agreement with the order of the CIT(A) in AY. 2006-07, wherein he has correctly analysed the legal and factual position and deleted the amount in that ye .....

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o collect fee from ‘gullible’ students at the time of admission does not arise, as the student were given an option which they may or may not avail. There is also no false hope of providing employment, as the services for employment were rendered with a minimum guarantee of salary, which the students may avail or may not avail. Terms of agreement are very clear as most of the options are given to the student itself and the obligation to render services ends at the end of fourth year or accepting .....

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s even though placed before the Ld. CIT(A), were not correctly appreciated, we are not in a position to approve the order of CIT(A) in AY. 2010-11. We are of the firm opinion that assessee has correctly accounted the incomes in the third and fourth years on accrual basis and as seen from the table of amounts received and amounts offered for tax in respective years, it is the department which is not consistent in its assessment procedure. As can be seen, Revenue has accepted higher amounts offere .....

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SH HIGH COURT ]. In view of the facts stated above and the law on the subject, we are of the opinion that assessee has correctly accounted the incomes in third and fourth year on accrual basis and the amounts cannot be brought to tax on receipt basis, as these are only advances without any obligation to service in the year of receipt. Accordingly, the Revenue’s appeal in AY. 2006-07 is dismissed upholding the order of CIT(A) and assessee’s appeal in AY. 2010-11 is allowed setting aside the order .....

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s no indication as to the reasons why the additions were made. In spite of that, the Ld. CIT(A) dismissed the grounds stating that no submissions were made. We are also unable to verify on what basis these two additions were made by the AO. In the computation statement, assessee itself has added an amount of ₹ 4,02,029/- and returned income at ₹ 59,36,876/- was taken as basis for making the addition. Therefore, further addition of ₹ 1,56,231/- seems to be without any basis. Lik .....

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cord and deciding afresh. Grounds are allowed for statistical purposes. - ITA No. 199/Hyd/2013, 386/Hyd/2014 - Dated:- 1-7-2016 - SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI PARTHA SARTHI CHAUDHURI, JUDICIAL MEMBER For Revenue : Shri K.E. Sunil Babu, DR For Assessee : Shri Y. Ratnakar, AR ORDER Per B. Ramakotaiah, A. M. These two are appeals by Revenue and assessee for AYs. 2006-07 & 2010-11 respectively, which relate to the same issue. Since common issue is involved, these are heard tog .....

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rawing up on the knowledge and experience of its professional team. The MBA programmes are not conducted by assessee, but are conducted by another institute ICFAI. As part of MBA programme, ICFAI offers placement services after the course is completed for which assessee provides services. The fees for the services ₹ 3,300/- per person is collected by ICFAI and was remitted to assessee at the beginning of the course itself. Thus, assessee in AY. 2006-07 had received a sum of ₹ 3,80,85 .....

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of four years from the date of registration. In practice in the first two years, there are no services as the candidates undergo MBA programme and assessee undertakes to provide placements to the successful students of programmes within three months from the receipt of completion certificates from the registered students. Since assessee s obligation to provide placement commences after the completion of two years course for which the candidate got registered, assessee accounted the income in thi .....

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50% of the receipts in each year. Thus, even though assessee received ₹ 3.80 Crores during the period 01-04-2005 to 31-03-2006 income of ₹ 1,90,42,500/- was offered for the first time in account year 2007-08 relevant for AY. 2008-09. Assessee follows Mercantile System of Accounting and has consistently recognised the income in the same manner. In the assessment for the AY. 2006-07, AO was of the opinion that assessee has received amount of ₹ 3,80,85,000/- and the same was not .....

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red an amount of ₹ 2,23,55,000/- in AY. 2012-13 alongwith 50% of the amount received in AY. 2009-10. The AO, while accepting the amounts offered by assessee pertaining to receipts in earlier years, further brought to tax the amount of ₹ 4,47,10,000/- in AY. 2010-11 on the basis of the receipts for the same reasons considered in AY. 2006-07. 4. In appeal for AY. 2006-07, on the basis of detailed submissions of assessee both on facts and on law, the Ld. CIT(A) remanded the matter to AO .....

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ome of the Clauses of the Memorandum of Understanding entered on 1-4-2005 by the appellant with ICFAI are extracted below for the sake of clarity: "2. A student enrolling for a long distance course with ICFAI or its sponsored university is given the option to avail the placement support rendered by the Second Party, subject to terms of Registration framed by both parties by mutual consent. The charges for such placement support are collected by ICFAI at time of enrolment to the course. Ther .....

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all eligible students opting for the scheme. The second party has a right to review the fee. 5. All the agreed terms and conditions by both parties for the placement scheme shall be stipulated in the application form titled "Alchemist (Special Placement Scheme) Regulations, 2005. A copy of the agreed terms of the scheme is enclosed hereto and shall form part of this MOU. The contents of the Regulations shall govern the mutual rights and obligations of both parties and also the obligations .....

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periodically by mutual consent. 8. The second party should maintain all the placement records of the students of the first party and shall provide the record from time to time to the first party as and when required or demanded." 7.1 It is also equally important to browse through some important Clauses of Alchemist (Special Placement Scheme) Regulations, 2005, which have been extracted below: "A.0503 The scheme is available only for the benefit of the registered students on optional ba .....

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application from the registered student. A.0512 The student shall be entitled to claim refund of the prescribed fee so long as the service provider does not render any placement service in respect of such student within the time specified in Regulation A. 0508(2). The obligation to render the service on the part of the service provider shall commence only upon the completion of the study by the student in accordance with the rules of the university and within the validity period." 7.2 It i .....

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is observed that the enrolment of students to the courses offered by ICFAI University takes place throughout the year four times and according to one's own convenience, the students can enrol into any of the above programs throughout the year i.e., June 30th, September 30th, December 3pt and March, 3pt. Thus, as per their enrolment, the students are eligible to write the examinations during January, April, July and October if enrolment is done in June, September, December and March respectiv .....

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eme) Regulations, 2005. The two agreements speak about the obligations of the appellant as also the entitlement of claim for refund by the students in case of nonfulfillment of the conditions by the appellant. Keeping in view the special feature of enrolment process involved in a year i.e., four times a year for the above courses through distance learning mode, absolutely there would not be any kind of activity rather obligation on the part of the appellant to search for a prospective employer e .....

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oduction of 'program completion certificate'. 7.3 The scheme of the Income Tax Act is to charge Income Tax on "total income of the assessee in the relevant previous year". For income to be taxable, there has to be accrual of income in the first place. As has been held in the case of E.D. Sassoon & Co. Ltd. v. CIT[1954] 26 ITR 27 (SC)], accrual of income takes place when the assessee acquires a right to receive the income. The income can be said to have accrued to him though .....

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e may said to have accrued at a particular point of time, it must have ripened into a debt at that moment, i.e., the assessee should have acquired a right to receive payment at that moment, though the receipt itself may take place later. The date of accrual, on the other hand, depends upon the nature and terms of the statute or agreement which gives rise to the right income is said to be received when it reaches the assessee, whereas when the right to receive income becomes vested in the assesse .....

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ty Ltd. [1998] 234 ITR 105/[1997] 95 Taxman 579 (Punj. & Har.) held that the money received from the buyers could not be treated to be income, unless right to appropriate it towards the services had accrued or arisen. So long as the right did not exist, the money received from the buyers remained advance money. The Court further held that deposits or advances received by the assessee became trading receipts when the assessee became entitled to appropriate the same to its income "at the .....

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bunal has laid down significant guiding principles on 'accrual concept' in the light of conflicting decisions and interpreted various Supreme. Court decisions to arrive at the conclusion. 7.6 The absence of entries in the books of account, or the way in which entries are made in the books of account is not determinative of the question whether the assessee has earned any profits or suffered any loss. However, books of account cannot be disregarded where the accounts are correctly made in .....

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cialties of the situation. It was observed that where the assessee was maintaining the accounts correctly in accordance with the principles of accountancy as applicable and the revenue authorities could not show that the same was repugnant to any provision of the Act, the books of account could not be disregarded. 7.7 In the present appellant's case, though the Special Placement Fee was received in full, yet the appellant had not become richer as there was a corresponding liability on the ap .....

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od, unless there is evidence that some other method better represents the pattern of performance. The tax authority had no right to tinker with the accounts of the taxpayer if the method of accounting was systematically followed and was in accordance with the AS and the method followed by the taxpayer was not irrational, but was sanctified by usage. In the present case, the Assessing Officer could not rebut the claim of the appellant by verifying the books of account and show that any portion of .....

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not made out a case for revenue and hence the method adopted by the appellant for taxing 50% each of the advance in the assessment years 2008-09 and 2009-10 is as per the Accounting Standards followed by the appellant and need not be interfered with . 5. Revenue is aggrieved on the above order and raised the following grounds: 2. The learned CIT(Appeals) erred in deleting the additions holding that the special placement fees of ₹ 3,80,85,000/- is only an advance and the same cannot be tax .....

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ing as under: 7. The information on record is carefully considered. Institute of Chartered Financial Analysts of India (ICFAI), Tripura, is conducting Distance Learning Programme for the courses, namely MS(Finance), MBA and MCA. Duration of these courses is generally for two years. At the time of admission if the student desires to enroll himself with the assessee for its services in securing the employment then the student has to register with the assessee by paying certain fee which generally .....

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and was offering 50% in the 3rd year and 50% in the 4th year of receipt. The assessee was asked to produce the names and addresses of the students enrolled, type of services rendered, names and addresses of at least few students who were employed through him, did any of the student sought for refund, number of students placed for employment during the last 2-3 years, their names and addresses. Out of more than 13,000 students from whom the fee was collected, he could not give names and addresse .....

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the amounts collected from each one of them was only of few thousand rupees, none of them seem to have lodged any complaint with the Police. Further, as noted in the assessment order though some of the students have tried to contact the assessee either for services or for refund of money, there is no response from the assessee. The entire affairs of the assessee clearly prove that it is only a mechanism to collect the money from gullible students without rendering any services to anyone of them .....

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acts and circumstances of the case, I am of the opinion that no services were rendered by the assessee at any point of time either in the present year or in the earlier years. So the question of postponing the tax liability to the subsequent years on the ground that the liability to render services arises later, has no basis at all. In any case, there is absolutely no ground to offer 50% of the receipts in 3rd year and balance 50% n the 4th year. Even going by what the assessee is saying, the en .....

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ar of receipt. There is one more issue also in AY. 2010-11 which will be adjudicated in the later part of the order. 8. Ld. Counsel referring to the Paper Books placed on record in respective years and detailed submissions made before the Ld. CIT(A) and also referring to the sequence of events in the respective assessment proceedings over the period of time, submitted that assessee is consistently offering the incomes from AY. 2006-07 to 2013-14. The details of which are as under: Details of spe .....

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012-13 - 81,00,000 2,23,55,000 3,04,55,000 1-4-2012 to 31-3-2013 2013-14 - NIL Because the entire sum of of ₹ 2,23,55,000 refunded as services were discontinued Referring to the above chart, it was submitted that in the first year i.e., AY. 2006-07, assessee received ₹ 3.80 Crores which was offered to Income tax in AYs. 2008-09 and 2009-10 as the services were rendered during those years. Like-wise, the receipt in AY. 2007-08 were offered in AYs. 2009-10 and 2010-11. AO in AY. 2006-0 .....

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sed u/s. 143(3), assessee s incomes offered out of the receipts in accounting year 2008-09 and 2009-10. That is part of 50% of receipts received in AY. 2009-10 relevant for AY. 2010-11 were accepted. Ld. Counsel also brought to our notice that 50% of the amount was refunded to the parties in FY. 201213 relevant for AY. 2013-14, which was also accepted by the AO. It was submitted that only 50% of the amount brought to tax in AY. 2010-11 has accrued to assessee and offered in AY. 2012-13. 8.1. Com .....

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ther submitted that Ld. CIT(A) in AY. 2010-11 has passed certain adverse comments which are not warranted, on the facts of the case as the CIT(A) misunderstood the scheme. It was submitted that assessee was not conducting the MBA programmes and they are not students of assessee. The services for placement will arise only after the end of course with ICFAI and there are provisions for refund of the amounts during the period. In fact, assessee discontinued the services in AY. 2013-14 and entire am .....

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from the order of CIT(A) in AY. 2006-07, on which Revenue is aggrieved. 10. We have considered the rival contentions and perused the entire record of assessee and Paper Books placed on record. As seen from the scheme of SPS, the basic facts which are necessary for consideration of the issue and are not in dispute are as under: i. The duration of the Long Distance Training Programme conducted by ICFAI is 24 months or 2 years; ii. The students who joined the course in asst. year 2006-07 will be q .....

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on within 30 days from the date on which Programme Completion Certificate was issued by ICFAI for availing placement service. (A502(13), A508(1), A0502(8); vi. It is only after making the application by registered student after completion of the course that the obligation to render the service on the part of the assessee commences. A508(2); vii. The period during which the placement service has to be rendered falls after 24 months and will expire before the end of 48 months from the date of regi .....

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iples. The agreement under the scheme of SPS including application for registrations are very clear that the services for placement scheme are to be rendered after completion of the course by the students which generally takes about 24 months. Thus, the amount collected in the first year along with admission of the students in the course for the ICFAI will be considered as an advance amount as far as assessee is concerned, because in the first two years, no services are to be rendered. The schem .....

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asis, even though, in the earlier three assessment years, i.e., AYs. 2007-08, 2008-09 and 2009-10, assessee s method of accounting was accepted and incomes offered which are more than receipts during the year were accepted as such. There is no consistency in the departmental stand as far as assessment procedure is concerned. 11. Be that as it may, as far as the taxability of income is concerned, one has to examine the determination of accrual of income. For this, the terms and conditions of the .....

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as income although some of the services have not been performed during the year. The matter was carried on in appeal and the Tribunal held that to the extent to which the services are not performed, the amounts received cannot be taxed as income. Following portion of the head note at pages 295 and 296 are extracted below: "The assessee, an advocate, received certain amounts for services to be performed over a period of time. The amount received from the client in respect of the services ren .....

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e could not maintain the books on the hybrid system and took the entire advance as income and made an addition of ₹ 4,89,397. On appeal, the Commissioner(Appeals) held that in respect of retainer fees, the same system had to be followed as for other professional receipts and the principles of res judicata would not apply to income tax proceedings. On appeal by the assessee : Held, allowing the appeal, that the income only, to the extent of the amount pertaining to services rendered vested .....

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l in the assessment years 2008-09 and 2009-10. Until that point of time these amounts do not vest in the appellant as its income. It is merely a deposit or advance and does not partake the character of income . 12.1. Assessee also relied on the decision of CIT Vs. Dinesh Kumar Goel [331 ITR 10] (Delhi). In this case, the assessee collected ₹ 1,99,70,106 towards tuition fees. This tuition fees relate to the financial years 1996-97 and 1997-98. The entire amount was collected in advance at t .....

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e rendered. Relevant portion of the head note at pages 10 and 12 is extracted below: U/s. 5(1)(b) of the Income tax Act, 1961 when the income accrues or arises or is deemed to accrue or arise to the assessee in India during the previous year, it is to be taxed in that year. It is important, therefore, that receipt of a particular amount in the relevant year should be an 'income' under the provision. The relevant yardstock is the time of accrual or arisal for the purpose of taxation viz. .....

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uld accrue on the rendering of services." "Held, dismissing the appeals, that though at the time of admission, the students were required to deposit the whole fee for the entire course, that was only a deposit or advance and it could not be said that this fee had become due at the time of deposit. The fee was charged in advance for the entire course, presumably because there should not be any default by the students during the period of course. The fee was not due at the time of deposi .....

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rendered could it be taken as income. The court held that the receipts were not income as the services were yet to be performed. The relevant portion of the head note at page-12 is extracted below: The assesses were in the beauty and slimming business having various centres in Delhi and outside. Clients paid the entire fee in advance for a beauty and slimming package. Part of the sales on which services remained to be rendered in the succeeding year, were shown as 'unexecuted packages' .....

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he amount was charged in advance because there should not be any default in payment by the students at a later point of time. The amount was received under agreement in the assessment year 2006-07 with a promise that upon completion of their course after two years, the appellant would render placement services to the students. Therefore, the receipt of money is anterior to the rendering of services. It therefore does not become the income in the hands of the appellant until the placement of serv .....

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d. CIT(A) misunderstood the entire scheme. First of all, the fee was not collected from gullible students by assessee, as the admission was taken in the ICFAI in the distinct learning programme. As a part of the curriculum services of placement were also offered, which is optional. Therefore, there is no compulsion on the part of the student to avail the placement services. Secondly, the mechanism to collect fee from gullible students at the time of admission does not arise, as the student were .....

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. CIT [306 ITR 414] and decision of Hon'ble Supreme Court in the case of Sumati Dayal Vs. CIT [214 ITR 801] regarding human probability does not arise on the facts of the case, as the terms and conditions of the service are very clear and this issue was analysed by the CIT(A) in AY. 2006-07 itself as early as 30-11-2012 in his order for AY. 2006-07. Ld. CIT(A) in AY. 2010-11 did not even make any comment why it has to be deferred from the earlier order and why a different stand is taken on t .....

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assessee has correctly accounted the incomes in the third and fourth years on accrual basis and as seen from the table of amounts received and amounts offered for tax in respective years, it is the department which is not consistent in its assessment procedure. As can be seen, Revenue has accepted higher amounts offered than the receipts (advances) in the interregnum period without disturbing in AYs 2007-08, 2008-09 and 2009-10 and also accepting offered incomes in AY. 2011-12 and 2012-13. Asse .....

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is and the amounts cannot be brought to tax on receipt basis, as these are only advances without any obligation to service in the year of receipt. Accordingly, the Revenue s appeal in AY. 2006-07 is dismissed upholding the order of CIT(A) and assessee s appeal in AY. 2010-11 is allowed setting aside the order of CIT(A) in that year on the issue. 15. There is another ground in AY. 2010-11 on the issue of addition made towards excess provision of gratuity and EL encashment. As seen from the assess .....

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