In a major relief to M/s Sun Direct TV Pvt Ltd., the Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that the subscription monies received in advance by the Company shall be treated as deferred income and offered to tax on day to day basis which is correct methodology of revenue recognition under mercantile system of accounting.
The assessee is providing DTH services in India. During assessment proceedings, it transpired that the assessee receives subscription amount on quarterly / half-yearly / annual basis and credit the same to ‘deferred income account’. From this account, the revenue earned, for each day, are transferred to subscription account which is offered to tax by way of credit to Profit & Loss Account.
The Assessing Officer noted that the assessee received money from the channels subscribers but considered the same as deferred revenue expenditure which was not correct in view of the fact that the was no obligation for assessee to refund the subscription money. Therefore, the receipts were to be taxed on receipt basis.
The Tribunal bench comprising Shri V. Durga Rao, Judicial Member and Shri Manoj Kumar Aggarwal, AM observed that the method of accounting has consistently been followed by the assessee since commencement of business in AY 2008-09. The said method is also in line with the requirement of AS-9 issued by ICAI. The assessee follows the same treatment to input costs.
“The cardinal principal of taxing the income under mercantile basis of accounting is that the income should have accrued to the assessee. Mere advances could not be brought to tax. The amount lying in ‘deferred income account’, in The assessee receives subscription income from various customers in advance which would be on quarterly / half-yearly or annual basis based on the needs of the subscribers,” the Tribunal said.
Dismissing the appeal filed by the department against the order of the CIT(A), the Tribunal added that “Mere advances could not be brought to tax. The amount lying in ‘deferred income account’, in assessee’s case, is nothing but advances received for rendering services in future period. Unless these receipts are held to be taxable under the statute, the same could not be brought to tax since only those incomes could be taxed which has accrued to the assessee during the year. In assessee’s case, these are unearned revenue and mere advances. The income would accrue to the assessee in future. To clothed the same as the income of the assessee during this year, is bereft of any merits. The argument that the money is never refunded to the subscribers, is not much germane to the issue since the subscription money paid by the subscribers is governed by the contractual terms between the assessee and the subscribers. Nevertheless, the said fact would not alter the position that this income was nothing but mere advances for rendering of services in future. Therefore, the impugned order could not be faulted with.”
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