TMI Blog2019 (3) TMI 1536X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and the position after such amendment is not and cannot be subject of decision in this appeal. The fact that value of services recognised for the purpose of levy of service tax is not relevant in the context of computation of total income for the purpose of levy of income tax under the Act. The concept of value of service for the purpose of levy of service tax and total income for the purpose of levy of income tax are different and are determined on relevant statutory provisions applicable. Income recognition of which was postponed by the Assessee by following AS-9 cannot be regarded as income in the year in which it is offered to tax by the Assessee, because the law is well settled that same income cannot be taxed twice. The burden will however be on the Assessee to show as to how the income offered in a later assessment year was income which was not recognised in earlier Assessment year by reason of application of AS-9. - Decided against assessee. - ITA No.1068/Bang/2016 - - - Dated:- 8-2-2019 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER For The Appellant : Shri Shashishekar Chaugule, CA For The Respondent : Shri R.N. Siddapp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed service contract method. The Assessee explained that in order to record revenue in an accounting period, it creates a journal entry to record them as accrued revenue. Accrued revenue is a sale that has been recognized by the seller, but which has not yet been billed to the customer. This concept is used in businesses where revenue recognition would otherwise be unreasonably delayed. The concept of accrued revenue is required in order to properly match revenues with expenses. The absence of accrued revenue would tend to show excessively low initial revenue levels and low profits for a business, which does not properly indicate the true value of the organization. Also, recognizing accrued revenue tends to result in much lumpier revenue and profit recognition, since revenues would only be recorded at the longer intervals when the invoices are issued. The Assessee submitted that accrued revenue concept is quite common in the services industries, since billings may be delayed for several months, until the end of a project or on designated milestone billing dates. 4. Since submission made before CIT(A) was a fresh submission supported by reasons never presented before the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e records revenues for a particular agreement on accrual basis but such entry is only provisional. When actual invoice is raised as per the agreement with the customer (which may be monthly, quarterly or half-yearly) a second entry reversing the recognition of revenue on accrual basis is passed. Thereafter, a third entry is passed recognizing revenue based on actual invoice raised on the customers and this is the actual revenue recognised in the books of accounts. The first entry and the second entry of reversal of the first entry are purely for Management reporting purposes. It has also been explained that the income reported for income tax purposes is also the value of services declared as per the return filed for levy of service tax. 9. It is clear from the submissions made before CIT(A) and also the affidavit of the Director that there was accrual of income as per the mercantile system of accounting when the first entry is passed. The second and third entry are explained as entries which are passed in tune with Accounting Standard-9 (AS-9) issued by Institute of Chartered Accountants of India (ICAI). AS-9 deals with accounting standards for recognition of income. The followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance. (ii) Completed service contract method-Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable. 9. Effect of Uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection. 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration that will be derived from rendering the service. 10. The main plea of the Assessee is that in tune with paragraph-12 of AS-9, in a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. In a mercantile system of accounting revenue is recognised on accrual basis when the agreement to render service is entered into with the party for the whole value of services. Accomplishment of work is irrelevant under the mercantile system of accounting. When due to cancellation or modification of agreement to render takes place then and only then a reversal of entries under the mercantile system of accounting is possible. In the case of the Assessee no such modification of the agreement to render service with the clients exists. The Assessee on his own recognises revenue only when bills are raised on the customer. Doing so might be well in tune with AS-9 which is more concerned with the true and fair view of the state of affairs of the business of the Assessee, but that would not be in tune with the mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause bills were not raised on the customers for value of services which had already accrued. The fact that bills were not raised does not stop accrual of income under the mercantile system of accounting. Therefore the claim of the Assessee which is purely based on AS-9 is not sustainable and the action of the revenue authorities in making the impugned addition was justified. We however wish to make it clear that the aforesaid observations will hold good only for AY upto AY 2012-13 because Sec.145 of the Act has undergone some statutory amendments and the position after such amendment is not and cannot be subject of decision in this appeal. The fact that value of services recognised for the purpose of levy of service tax is not relevant in the context of computation of total income for the purpose of levy of income tax under the Act. The concept of value of service for the purpose of levy of service tax and total income for the purpose of levy of income tax are different and are determined on relevant statutory provisions applicable. 14. We however wish to make it clear that the income recognition of which was postponed by the Assessee by following AS-9 cannot be regarded as in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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