Amount Received In Advance For Services To Be Treated As Income Of Assessee, Chargeable Under Income Tax: Madras High Court

The Division Bench of Justices R. Suresh Kumar and C. Saravanan observed that “if “Accounting Standards” are properly applied by an assessee, the “accounting income” for the payment of income tax will be available. However, if an assessee fails to adopt “Accounting Standards” properly for computation of income, the discretion is vested with the Assessing Officer under Section 145(3) of the Income Tax Act, 1961.”

In this case, the assessee/ respondent, a manufacturer of lifts, also provided annual maintenance services. During FY 2008-2009, it received money in advance for these services under Annual Maintenance Contracts. In its books, it recorded this income as a current liability and did not include it in taxable income for AY 2009-10. The Assessing Officer disallowed the same in the assessment order. The said decision was affirmed by the Assistant Commissioner of Income Tax, Chennai.

The Assessee had filed an appeal to the Appellate Tribunal which was allowed. The Department has challenged the order passed by the Appellate Tribunal before the Madras High Court.

The Department submitted that since the amount has been received in advance, it is to be taxed in the year in which, it is received irrespective of the fact whether services were to be provided over a period of time which may spill over to the succeeding financial year. The amount received towards Annual Maintenance Charges was to be treated as total income of the assessee and was chargeable to tax under Section 4 read with Section 5 of Income Tax Act, 1961.

The assessee submitted that the assessee has been followed the practice of treating the income on accrual basis and therefore, there is no justification in the stand of the Department to alter the account practice with a view to augment tax in the same year and its receipt during the Assessment Year 2009-2010.

The bench looked into the Accounting Standards (AS) 9 and observed that if there is no doubt regarding the consideration that will be derived from rendering the service, performance of service shall be regarded as having been achieved as per Paragraph 12 of the Accounting Standards (AS) 9. Since, the receipt of the amounts is in advance, it leaves no uncertainty regarding rendering of the service in future. Therefore, it an income of the assessee at the time of its receipt.

The bench thus opined that if the amount is received in advance, it is a revenue that is to be recognized as income immediately in the books of accounts. Further, the amount paid to the assessee is not refundable. It may be quite different, if the there is scope for refund of the amounts to the customer based on the terms of Agreement between the parties involved.

“There is also no dispute that the amount was collected by the Income Tax Department in advance towards Annual Maintenance Charges (AMC). The advance is a revenue in its hands at the time of its receipt. It is taxable in the year of its collection, as is contended by the Income Tax Department. Further, there is no uncertainty in the amount of consideration derived for rendering of service and the amount is nonrefundable”, added the bench.

In view of the above, the bench allowed the appeal.

Counsel for Appellant/ Department: V. Pushpa

Counsel for Respondent/ Assessee: R. Vijayaraghavan

Case Title: The Commissioner of Income Tax, Chennai v. M/s. Johnson Lifts Pvt. Ltd.

Citation: 2024 LiveLaw (Mad) 435

Case Number: T.C.A.No.54 of 2015

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