Delhi High Court
Deputy Commissioner Of Income Tax vs Curls & Curves India Ltd. on 29 October, 2010
Author: A.K.Sikri
REPORTABLE
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008,
409/2009, 193/2010, 1112/2008 & 598/2010
ITA Nos.1093/2008, 1142/2008, 1204/2008, 1099/2008,
627/2009, 1153/2010
Reserved On: 19th October, 2010
% Pronounced On: 29th October, 2010
1) ITA No.514 of 2006
Commissioner of Income Tax . . . Appellant
through : Ms. Prem Lata Bansal, Advocate
VERSUS
Dinesh Kumar Goel . . .Respondent
through: Mr. C.S. Aggarwal, Sr. Advocate
with Mr. Prakash Kumar,
Advocates.
2) ITA No.439 of 2007
Commissioner of Income Tax . . . Appellant
through : Ms. Prem Lata Bansal, Advocate
VERSUS
Dinesh Kumar Goel . . .Respondent
through: Mr. C.S. Aggarwal, Sr. Advocate
with Mr. Prakash Kumar,
Advocates.
3) ITA No.980 of 2007
Commissioner of Income Tax . . . Appellant
through : Ms. Prem Lata Bansal, Advocate
VERSUS
FIITJEE LTD. . . .Respondent
through: Mr. C.S. Aggarwal, Sr. Advocate
with Mr. Prakash Kumar,
Advocates.
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 1 of 26
4) ITA No.14 of 2008
Commissioner of Income Tax . . . Appellant
through : Ms. Prem Lata Bansal, Advocate
VERSUS
FIITJEE LTD. . . .Respondent
through: Mr. C.S. Aggarwal, Sr. Advocate
with Mr. Prakash Kumar,
Advocates.
5) ITA No.409 of 2009
Commissioner of Income Tax . . . Appellant
through : Ms. Prem Lata Bansal, Advocate
VERSUS
FIITJEE LTD. . . .Respondent
through: Mr. C.S. Aggarwal, Sr. Advocate
with Mr. Prakash Kumar,
Advocates.
6) ITA No.193 of 2010
Commissioner of Income Tax . . . Appellant
through : Ms. Prem Lata Bansal, Advocate
VERSUS
FIITJEE LTD. . . .Respondent
through: Mr. C.S. Aggarwal, Sr. Advocate
with Mr. Prakash Kumar,
Advocates.
7) ITA No.112 of 2008
Commissioner of Income Tax . . . Appellant
through : Ms. Prem Lata Bansal, Advocate
VERSUS
FIITJEE LTD. . . .Respondent
through: Mr. C.S. Aggarwal, Sr. Advocate
with Mr. Prakash Kumar,
Advocates.
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 2 of 26
8) ITA No.598 of 2010
Commissioner of Income Tax . . . Appellant
through : Ms. Prem Lata Bansal, Advocate
VERSUS
FIITJEE LTD. . . .Respondent
through: Mr. C.S. Aggarwal, Sr. Advocate
with Mr. Prakash Kumar,
Advocates.
Reserved On: 20th October, 2010
% Pronounced On: 29th October, 2010
9) ITA No.1093of 2008
Deputy Commissioner of Income Tax . . . Appellant
through : Ms. Suruchi Aggarwal, Advocate
VERSUS
CURLS & CURVES INDIA LTD. . . .Respondent
through: Dr. Rakesh Gupta, Advocate.
10) ITA No.1142 of 2008
Commissioner of Income Tax . . . Appellant
through : Ms. Suruchi Aggarwal, Advocate
VERSUS
Rajni Dargan . . .Respondent
through: Dr. Rakesh Gupta, Advocate.
11) ITA No.1204 of 2008
Commissioner of Income Tax . . . Appellant
through : Ms. Suruchi Aggarwal, Advocate
VERSUS
Rajni Dargan . . .Respondent
through: Dr. Rakesh Gupta, Advocate.
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 3 of 26
12) ITA No.627 of 2009
Commissioner of Income Tax . . . Appellant
through : Ms. Suruchi Aggarwal, Advocate
VERSUS
CURLS & CURVES INDIA LTD. . . .Respondent
through: Dr. Rakesh Gupta, Advocate.
13) ITA No.1153 of 2010
Deputy Commissioner of Income Tax . . . Appellant
through : Ms. Suruchi Aggarwal, Advocate
VERSUS
VLCC Health Care Ltd. . . .Respondent
through: Dr. Rakesh Gupta, Advocate.
14) ITA No.1099 of 2008
Commissioner of Income Tax . . . Appellant
through : Ms. Suruchi Aggarwal, Advocate
VERSUS
Rajni Dargan . . .Respondent
through: Dr. Rakesh Gupta, Advocate.
CORAM :-
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE SURESH KAIT
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J.
1. In all these appeals, similar questions of law are raised. At the
same time, we would like to discuss them separately after stating
the legal principles, which would govern the fate of these appeals.
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
For this purpose, the appeals can be put into two categories. In
the first category, the appeals are, viz., ITA Nos.514/2006,
439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008
and 598/2010 which would be taken together as they belong to
the same assessee. Remaining appeals would be taken together
in the other category, in which the assessees belong to the same
group. We first take up the discussion in respect of ITA No.514 of
2006 and other connected matters wherein the legal proposition
would also be explained.
ITA Nos.514/2006, 439/2007, 980/2007, 14/2008, 409/2009,
193/2010, 1112/2008 and 598/2010
2. The assessee in these cases running an institute under the name
M/s FIITJEE and is the sole proprietor of these concerns. M/s
FIITJEE is a coaching institute where students are admitted for
getting coaching and preparing them for appearing in entrance
examination conducted by engineering institutes. The assessee is
following mercantile method of accounting. From these students,
total fee of the entire course, which may be of two years duration,
is initially taken at the time of admission of the students.
3. For the assessment year in question, i.e., 1997-98, the assessee
filed his return on 29.10.1997 declaring the total income of
`3,42,620. This return was processed under Section 143 (1) (a) of
the Income Tax Act (hereinafter referred to as „the Act‟) on
01.01.1998 at the aforesaid income. Thereafter, notice under
Section 143(2) of the Act was issued to the assessee on
26.10.1998. It so happened that a couple of months before, i.e.,
on 18.08.1998, a search operation was carried out at the business
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
and residential premises of the assessee by the Income Tax
Authorities. Thereafter, the assessee filed a revised return of
income on 31.03.1999 declaring a loss of `58,39,070.
4. One of the items of income shown in the return was tuition fees.
In the original return filed by the assessee on 29.10.1997, he had
shown the income from tuition fee at `1,99,70,106. In the revised
return, however, he claimed deduction to the tune of `55,45,834
from the aforesaid amount stating that "fees received in Financial
Year 1996-97 to be carried forward to 1997-98 as it was related to
Financial Year 1997-98". This claim on the basis that receipt of
the tuition fee from the students did not belong to Financial Year
1996-97 alone as part of the fee, which was taken in advance
related to Financial Year 1997-98 as well. On this premise, it was
stated that the deduction to this extent be allowed in this year,
which would be shown as receipt in the next year. The Assessing
Officer (AO) did not permit this deduction on the premise that
when the assessee was following mercantile method of
accounting, income becomes taxable whenever it falls due,
irrespective of the fact that when the same is actually received by
the assessee. He took note of the fact that as per the brochure
issued by M/s FIITJEE, students were required to deposit the fees
for the whole module of course at the time of registration itself.
From this, he concluded that "fees becomes due at the time of
`55,45,834 was due during the Financial Year 1996-97".
5. Since in these appeals, we are concerned with this issue alone,
other aspects of the assessment order are not taken note of.
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
6. The assessee preferred appeal before the CIT(A) and submitted
that the aforesaid amount of `55,45,834, though received in
Financial Year 1996-97, it was only a „deposit‟ made by the
students which was taken as advance money in the hands of the
assessee and had not accrued in that year, but was accrued to in
the next year. It was also submitted that even when the money
had been received, the services against this money is yet to be
rendered/provided by the assessee to these students, which was
to be done in the Assessment Year 1998-99 and therefore, receipt
of this amount could not be treated as „income‟ in the hands of the
assessee in the Assessment Year in question. This contention of
the assessee impressed the CIT (A) and by accepting the same,
the CIT (A) deleted the addition. The following discussion in the
order of the CIT (A) needs to be extracted, which depicts the
amount of the CIT (A) and the reasons for arriving at the aforesaid
conclusion:
"I agree with the AR that the receipt was without acquiring
the right to receive it as income, as services had yet to be
rendered and it would be in the nature of advance. Only
when the services were rendered, it will become income in
the hands of the appellant. In case of Calcutta C. Ltd. Vs.
CIT 37 ITR 1 the assessee dealt in land and property and
carried on land developing business. The whole
development was not carried out when the plot was sold.
The appellant credited Rs.43,692 and also estimated
Rs.24,809 as the expenditure for development to be carried
out. There was no actual disbursement of the expenditure.
It was held by the Hon‟ble Supreme Court that
"inasmuch as the liability which had thus accrued
during the accounting year was to be discharged
at a future date, the amount to be expended in
the discharge of that liability would have to be
estimated in order that in the mercantile system
of accounting, the amount could be debited
before it is actually disbursed.
In case of E.D. Sasson & Co. Ltd. Vs. CIT (supra) it was held
that if income has accrued to the assessee, it is certainly by
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
him in the sense that he has contributed to its production
and the parenthood of the income can be traced to hm.
But in order that the income can be said to have accrued to
or earned by the assessee it is not only necessary that the
assessee must have contributed to its accruing or arising
by rendering services or otherwise. Unless and until his
contribution or parenthood is effective in bringing into
existence a debit or a right to receive the payment, it
cannot be said that any income has accrued to him. The
AO has pointed out that the students had to pay the
amount before the course started in lumpsum but it does
not detract from the fact that the receipt by the appellant
has not yet become income since services are yet to be
rendered. Otherwise the estimated expenditure for
services to be rendered will have to be allowed as held by
the Hon‟ble Supreme Court on (sic. in) Calcutta Co. Ltd.
(supra). I agree with the AR that in regard to the amount of
`55,45,384 the services were yet to be rendered and hence
it could only be treated as an advance and it had not yet
become the income of the appellant. The action of the
appellant omitting the above amount is therefore upheld."
7. It was now the turn of the Department to feel aggrieved by this
part of order of the CIT (A). The Department accordingly
approached the next higher forum, i.e., the Income Tax Appellate
Tribunal (hereinafter referred to as „the Tribunal‟) and filed the
appeal challenging the aforesaid deletion of addition made by the
AO. The Department was, however, unable to convince the
Tribunal.
8. After indepth deliberations, the Tribunal has found favour with the
order of the CIT (A) and affirming the same, the appeal of the
Department has been dismissed by the Tribunal. The Tribunal, in
the process, noted one additional fact, viz., the Consumer Forum,
Chandigarh had decided a case filed by the student for refund of
unexpired period fee when he had left the course after few months
of joining the institute. It was held that since the services were not
rendered for the second year for which fee had already be paid in
advance, the assessee should refund one year‟s fee to the said
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
student (this decision of the Consumer Court, Chandigarh has
been upheld by the Supreme Court as well). The Tribunal, thus,
observed as under:
"8...............Any receipt by an assessee without acquiring
the right to receive it as income would be only in the
nature of an advance and cannot partake of the character
of income unless the services are rendered or required part
of the contract is performed. The fee received a the time
of admission of a student cannot be said to be non-
refundable in as much if no service of coaching is provided
to the student, the assessee is statutorily liable to refund
the amount under the Consumer Protection Act, 1986"
9. Still not satisfied, the Department has come up to this Court by
filing the instant appeals, which have been admitted on the
following question of law:
"Whether ITAT was legally correct in holding that fee
received by the respondent assessee at the time of
admission of the students is an "advance" and no "income"
accrued to the assessee for purposes of the Income Tax
Act, 1961?"
10. During the course of arguments before us, counsel for both the
parties were at ad idem to the extent that the case was governed
by the principles laid down by the Supreme Court in the case of
E.D. Sasson & Co. Ltd (supra). Their discord is on the
applicability of the principles to that judgment of the facts of this
case. We may, therefore, first state the principle of law laid down
by the Supreme Court in the aforesaid judgment.
11. Section 5 of the Act gives the „scope of total income‟. Sub-Section
(1) thereof, with which we are concerned, reads as under:
"(1) Subject to the provisions of this Act, the total income
of any previous year of a person who is a resident includes
all income from whatever source derived which - (a) Is
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
received or is deemed to be received in India in such year
by or on behalf of such person; or
(b) Accrues or arises or is deemed to accrue or arise to him
in India during such year; or
(c) Accrues or arises to him outside India during such
year."
As is clear from reading of Clause (b) above, even when the
income accrues or arises or is deemed to accrue or arise to the
assessee in India during previous year, that 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 aforesaid
provision. What is the relevant yardstick is the time of accrual or
arisal for the purpose of its taxation, viz., in order to be
chargeable, the income should accrue or arise to the assessee
during the previous year. If income has accrued or arisen, even if
actual receipt of the amount is not there, it would be chargeable
to tax in the said year. Though the amount may be received later
in the succeeding year, the income would be said to accrue or
arise if there is a debt owed to the assessee by somebody at that
moment. From this, it follows that there must be the "right to
receive the income on a particular date, so as to bring
about a creditor and debtor relationship on the relevant
date". The Court further explained that a right to receive a
particular sum under the agreement would not be sufficient unless
the right accrued by rendering of services and not by promising
for services and where the right to receive is interior to rendering
of service, the income, therefore, would accrue on rendering of
services. Following discussion in this judgment would
demonstrate the principle which we have highlighted above:
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
"37. Mukerji J. has defined these terms in Rogers Pyatt
Shellac & Co. v. Secretary of State for India 1 I.T.C. 363 :
"Now what is income? The term is nowhere
defined in the Act......... In the absence of a
statutory definition we must take its ordinary
dictionary meaning - 'that which comes in as the
periodical produce of one's work, business, lands
or investments (considered in reference to its
amount and commonly expressed in terms of
money); annual or periodical receipts accruing to
a person or corporation" (Oxford Dictionary). The
word clearly implies the ideal of receipt, actual or
constructive. The policy of the Act is to make the
amount taxable when it is paid or received either
actually or constructively. 'Accrues,' 'arises' and
'is received' are three distinct terms. So far as
receiving of income is concerned there can be no
difficulty; it conveys a clear and definite meaning,
and I can think of no expression which makes its
meaning plainer than the word 'receiving' itself.
The words 'accrue' and 'arise' also are not defined
in the Act. The ordinary dictionary meanings of
these works have got to be taken as the
meanings attaching to them. 'Accruing' is
synonymous with 'arising' in the sense of
springing as a nature growth or result. The three
expressions 'accrues,' 'arises' and 'is received'
having been used in the section, strictly speaking
'accrues' should not be taken as synonymous with
'arises' but in the distinct sense of growing up by
way of addition or increase or as an accession or
advantage; while the word 'arises' means comes
into existence or notice or presents itself. The
former connotes the idea of a growth or
accumulation and the latter of the growth or
accumulation with a tangible shape so as to be
receivable. It is difficult to say that this distinction
has been throughout maintained in the Act and
perhaps the two words seem to denote the same
idea or ideas very similar, and the difference only
lies in this that one is more appropriate than the
other when applied to particular cases. It is clear,
however, as pointed out by Fry L.J. in Colquhoun
v. Brooks (1888) 21 Q.B.D. 52 , [this part of the
decision not having been affected by the reversal
of the decision by the House of Lords (1889) 14
App. Cas. 493 that both the words are used in
contradistinction to the word "receive" and
indicate a right to receive. They represent a stage
anterior to the point of time when the income
becomes receivable and connote a character of
the income which is more or less inchoate.
One other matter need be referred to in
connection with the section. What is sought to be
taxed must be income and it cannot be taxed
unless it has arrived at a stage when it can be
called 'income.'"
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
38. The observations of Lord Justice Fry quoted above by
Mr. Mukerji J. were made in Colquhoun v. Brooks (1888) 21
Q.B.D. 52 while construing the provisions of 16 and 17
Victoria Chapter 34 section 2 schedule 'D'. The words to be
construed there were 'profits or gains, arising or accruing,'
and it was observed by Lord Justice Fry at page 59 :
"In the first place, I would observe that the tax is
in respect of 'profits or gains arising or accruing.' I
cannot read those words as meaning 'received
by.' If the enactments were limited to profits and
gains 'received by' the person to be charged, that
limitation would apply as much to all Her
Majesty's subjects as to foreigners residing in this
county. The result would be that no Income-tax
would be payable upon profits which accrued but
which were not actually received, although profits
might have been earned in the kingdom and
might have accrued in the kingdom. I think,
therefore, that the words 'arising or accruing' are
general words descriptive of a right to receive
profits."
39. To the same effect are the observations of
Satyanarayana Rao J. in Commissioner of Income-tax,
Madras v. Anamallais Timber Trust Ltd.
[1950]18ITR333(Mad) and Mukherjea J. in Commissioner of
Income-tax, Bombay v. Ahmedbhai Umarbhai & Co.,
Bombay [1950]181ITR472(SC) where this passage from the
Judgment of Mukerji J. in Rogers Pyatt Shellac & Co. v.
Secretary of State for India 1 I.T.C. 363 , is approved and
adopted. It is clear therefore that income may accrue to an
assessee without the actual receipt of the same. If the
assessee acquires a right to receive the income, the income
can be said to have accrued to him though it may be
received later on its being ascertained. The basic
conception is that he must have acquired a right to receive
the income. There must be a debt owed to him by
somebody. There must be as is otherwise expresses
debitum in presenti, solvendum in future; See W. S. Try Ltd.
v. Johnson (Inspector of Taxes) [1946]1 A.E.R. 532 , and
Webb v. Stenton and Others, Garnishees 11 Q.B.D. 518 .
Unless and until there is created in favour of the assessee a
debt due by somebody it cannot be said that he has
acquired a right to receive the income or that income had
accrued to him."
12. Ms. Prem Lata Bansal, learned counsel for the Revenue,
emphatically submitted that the effect that the moment
agreement (s) with students were signed and they were called
upon to pay the fee, right to receive the fee had been acquired by
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
the assessee. It was for this reason that every student admitted
to the course is under obligation to pay the entire fee for the
whole course at the time of admission itself. Thus, it conferred
upon the assessee „right to receive the money‟ in the form of fee
at that stage and the conditions of Section 5 of the Act were
fulfilled, as it would be inferred that the income has accrued. She
submitted that there was a distinction between the executor
contract and executed contract and even if the contract was not
executed at that time in the sense that the services are yet to be
provided, the money received would be the income at the hands
of the assessee. In support of her argument, she referred to the
judgment of the Madras High Court in the case of
Lakshminarayana Films Vs. Commissioner of Income Tax
[244 ITR 344 (AP)] and particularly impressed upon the
following discussion:
"7. We have considered the rival submissions made by the
assessee as well as the Revenue. The fact remains that the
assessee had leased out the dubbing rights of its abovesaid
picture for Tamil and Malayalam to Jay Films and Cine Link
Service by agreements dated May 25, 1974, and August 27,
1974, respectively. It is equally not in dispute that the
assessee had shown an income of Rs. 25,80,000 in the
return presented by the assessee for the relevant
assessment year regarding the sale of Telugu version of the
above-said picture. A perusal of the agreement dated
August 27, 1974, by Sri Lakshminarayana Films,
represented by its partner, Sri N.S. Moorthi, with Jay Films,
represented by its managing partner, Sri A.T. Abraham,
would disclose that Jay Films had agreed to pay royalty of
Rs. 45,000 for acquiring Malayalam dubbing rights of the
abovesaid film and Sri Lakshminarayana Films had agreed
to lease out the abovesaid Malayalam dubbing rights of the
abovesaid picture for the abovesaid royalty of Rs. 45,000
on August 27, 1974. It is also evident from a perusal of the
abovesaid agreement that a sum of Rs. 10,000 was paid by
demand draft dated June 21, 1974, Rs. 7,500 was paid by
cheque dated June 26, 1974, Rs. 7,500 was paid by cheque
dated July 26, 1974 and Rs. 7,500 was paid by cheque
dated August 27, 1974, which the assessee had
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
acknowledged. Another sum of Rs. 7,500 was also agreed
to be paid by cheque on or before August 27, 1974, the
date of the agreement. There was a balance of Rs. 5,000 on
the date of agreement, which Jay Films had agreed to pay
at the time of taking delivery of the prints from the
assessee. If the abovesaid facts contained in the agreement
dated August 27, 1974, are considered, it is evident that
the assessee had already received a sum of Rs. 40,000 out
of Rs. 45,000 and agreed to receive the balance amount of
Rs. 5,000 at the time of delivery of the prints. It is also
evident from one of the clauses of the agreement that the
agreement with the abovesaid method of payment was
offered by Jay Films and the said offer was accepted by the
assessee on August 27, 1974, itself. Therefore, there was
offer and acceptance and the same was completed on the
date of the agreement dated August 27, 1974, so far as the
dubbing rights of the abovesaid picture in Malayalam.
Simply because the assessee has not received the balance
of Rs. 5,000 which was to be paid to the assessee at the
time of the delivery of the print, it cannot be said that there
was no conclusion of the contract by offer and acceptance
on August 27, 1974, since the offer of Jay Films was
accepted by the assessee on August 27, 1974, itself by
postponing the payment of Rs. 5,000 to the time of delivery
of the print.
8. The Revenue has brought to the notice of this court the
decision of Union of India v. Chaman Lal Loona and Co., :
[1957]1SCR1039 , wherein the apex court was pleased to
hold as follows (head note) :
"The distinction between the two classes of contracts,
where the consideration is either executed or
executory is that an executed consideration consists of
an act for a promise. It is the act which forms the
consideration. No contract is formed unless and until
the act is performed, e.g., the payment for a railway
ticket, but the act stipulated for exhausts the
consideration, so that any subsequent promise,
without further consideration, is merely a nudum
pactum. In an executed consideration the liability is
outstanding on one side only ; it is a present as
opposed to a future consideration. In an executory
consideration the liability is outstanding on both sides.
It is in fact a promise for a promise, one promise is
bought by the other. The contract is concluded as soon
as the promises are exchanged. In mercantile
contracts this is by the most common variety. In other-
words, a contract becomes binding on the exchange of
valid promises, one being the consideration for the
other. It is clear, therefore, that there is nothing to
prevent one of the parties from carrying out his
promise at once, i.e., performing his part of the
contract whereas the other party who provides the
consideration for the act of or detriment to the first
may not carry out his part of the bargain
simultaneously with the first party."
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
13. She also referred to the judgment of the Jodhpur Bench of the
Rajasthan High Court in the case of Suraj Prakash Soni Vs.
Assistant Commissioner of Income Tax [303 ITR 366] which
is to the same effect.
14. Mr. C.S. Aggarwal, learned Senior Counsel for the assessee, on the
other hand, submitted that the two authorities below, viz., CIT (A)
as well as the Tribunal had considered the facts of the case at
greater detail and had rightly opined that till the services were
rendered, there was no right to receive the fee. He argued that
the amount that the tuition fee which pertained to the Financial
Year 1996-97 was only a „deposit and advance‟ and not an
income at the hands of the assessee, as the services against the
said advance were yet to be provided, which could be rendered by
the assessee only in the year 1996-97 and therefore, income qua
those receipts would accrue only in that year. He also
emphasized the matching concept highlighted by the Tribunal as
well as by the CIT (A) submitting that these were only receipts and
the taxable income would be only after deduction of expenses,
which were to be incurred by the assessee for rendering the
services and that happened only in the succeeding year, i.e.,
Financial Year 1996-97. Further, he also submitted that the
Department was taking a wrong view that the fee was non-
refundable and irrecoverable, which contention was proved to be
wrong in view of the judgment of the Consumer Court,
Chandigarh.
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
15. After considering the respective submissions, we are not in a
position to take a view different from what is taken by the Tribunal
in the instant case. In the facts of this case, it is apparent that at
the time of admission, the students are required to deposit the
whole fee of the entire course, but that would only remain a
„deposit‟ or „advance‟ and it cannot be said that this fee had
become „due‟ at the time of deposit. Fee is charged in advance
for the entire course, presumably because of the reason that there
should not be any default in making the said by the students
during the period of course. Interestingly, the AO in his
assessment order has himself stated that "students were
required to deposit the fee for the whole module of course
at the time of registration itself". The AO has used the
expression „deposit'. In the very next breadth, he draws the
conclusion that this would mean that the fee had become „due‟.
Thus, the AO knew the significance of the expression „deposit‟
viz-a-viz „due‟, though he committed the mistake in treating the
said deposit as the fee becoming due. When we applies the
principles of law laid down in E.D. Sasson & Co. Ltd (supra)
and Calcutta C. Ltd. (supra), it becomes apparent that the fee
was not due at the time of deposit. The services in respect of
Financial Year 1997-98, for which also the payment was taken in
advance were yet to be rendered. Therefore, applying the
principle in the case of Calcutta C. Ltd. (supra), this could only
be treated as advance otherwise it would lead to an anomaly
situation, highly derogatory to the assessee, which is not intended
in law, viz., even when the very amount received, expenses are to
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
be deducted to arrive at the net income and those expenses are
yet to be incurred (which may be incurred in the next financial
year), the entire receipts become income which would be exigible
to much higher tax. It is for this reason, the following principle
was enunciated by the Supreme Court in Calcutta C. Ltd.
(supra):
"The expression "profits or gains" in section 10(1) of the
Income-tax Act has to be understood in its commercial
sense and there can be no computation of such profits and
gains until the expenditure which is necessary for the
purpose of earning the receipts is deducted therefrom -
whether the expenditure is actually incurred or the liability
in respect thereof has accrued even though it may have to
be discharged at some future date."
16. We may also, at this stage, usefully refer to another judgment of
the Apex Court in the case of Commissioner of Income Tax,
Bombay City II Vs. Shri Goverdhan Ltd. [69 ITR 675] in the
following terms:
"It is, however, well-established that the income may
accrue to an assessee without actual receipt of the same
and if the assessee acquires a right to receive the income,
the income can be said to have accrued to him though it
may be received later on, on its being ascertained. The
legal position is that a liability depending upon a
contingency is not a debt in praesenti or in futuro till the
contingency happens. But if it is a debt the fact that the
amount has to be ascertained does not make it any the less
a debt if the liability is certain and what remains is only a
quantification of the amount: debitum in praesenti,
solvendum in futuro."
17. The judgments cited by the learned counsel for the Revenue do
not concern the issue, which we are dealing with these appeals.
18. We, thus, answer the question in the affirmative and as a
consequence, dismiss these appeals.
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
ITA Nos.1093/2008, 1142/2008, 1204/2008, 627/2009,
1153/2010 & 1099/2008
19. In all these appeals, the assessees which belong to the same
group, are in the same business activities, viz., beauty and
slimming which operates under the brand name of VLCC. They
have various centres in Delhi and outside. Clients come to them
spanning over a period of time and attend different sessions for
beauty treatments and/or for the purposes of weight loss, etc. The
clients pay entire fee in advance for a beauty and slimming
package. The assessees have given many franchisees for which
purpose MoUs are executed with Joint Venture Partners (JVP).
These MoUs, laid down various terms regarding investment in
machinery, interior, rent of the place, franchisee fee, etc. The
centres are managed by the assessee and operating surplus is
calculated every month which is then distributed between the
assessee and the JVP in the ratio 60:40 or 50:50. The sales of the
centre are included in the accounts of the assessee. Part of the
sale on which services remain to render and which is to be
rendered in the succeeding year, those sales are shown as
"unexecuted packages" at the end of the year by the assessee. It
means that the assessee treats the said receipt for which services
yet to be rendered and are going to be rendered in the next
Assessment Year as advance and is not shown as income exigible
to tax.
20. The question, thus, remains the same, viz., whether the sale of
unexecuted packages is an income accrued/arising in the financial
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year in which it is received or it belongs to the next year, i.e.,
whether there was right to receive this amount when the
agreement is signed. Therefore, we are of the opinion that the
circumstances in which the advance fee is charged for the services
to be rendered are almost the same as in the case of M/s. FIITJEE
noted above. When the question of application of principle of law
arises, there is hardly any difference between the two, which
would persuade us as to take a view what is taken in the aforesaid
cases of M/s. FIITJEE. We would, however, like to give some
additional reasons in support of our conclusion. These are based
on the submissions made by the learned counsel for the assessee,
Dr. Rakesh Gupta, which have also appealed to us.
21. Section 145 of the Act deals with the method of accounting and
states that in case of business income, inter alia, the same is to be
computed in accordance with the cash or mercantile system of the
company. Sub-section (2) thereof authorizes the Central
Government to notify in the Official Gazette from time to time
accounting standards to be followed by any class of assessees or
in respect of any class of income. Central 211 of the Companies
Act, on the other hand, prescribes the form and contents of
balance sheet and profit and loss account, which are to be
maintained by the companies under the said Act. Sub-section (2)
castes a duty on a company to give true and fair view of a profit
and loss of a company for the financial year in its profit and loss
accounts. Sub-section (3A) adheres to the accounting standards
for preparing profit and loss balance sheet. Sub-section (3C)
defines "accounting standards as under:
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
"(3C) For the purposes of this section, the expression
"accounting standards" means the standards of accounting
recommended by the Institute of Chartered Accountants of
India constituted under the Chartered Accountants Act,
1949 as may be prescribed by the Central Government in
consultation with the National Advisory Committee on
Accounting Standards established under sub-section (1) of
section 210A :
Provided that the standard of accounting specified by the
Institute of Chartered Accountants of India shall be deemed
to be the Accounting Standards until the accounting
standards are prescribed by the Central Government under
this sub-section."
22. A conjoint reading of the aforesaid provisions of the Income Tax
Act and the Companies Act shows that those assessees, which are
companies and showing income, inter alia, under the head
"business or profession" have to follow the accounting standards
prescribed. The Government of India has notified accounting
standards in exercise of its power under Section 145(2) of the Act,
which are dated 29.05.1996. Accounting Standard - I relates to
the disclosure of accounting policy and puts an obligation on the
assessee to disclose all significant accounting policies adopted in
the preparation and presentation of financial stages. Para 6
thereof denies certain expression which accrued in Paras 1 to 5.
Clause (b) whereof spells out the definition of accrual in the
following manner:
"(b) "Accrual" refers to the assumption that revenues and
costs are accrued that is, recognized as they are
earned or incurred (and not as money is received or
paid) and recorded in the financial statements of the
period to which they relate;"
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
From the above, that the term „accrual‟ relates to revenues
earned or cost incurred. Two things follow from this, viz., unless
the revenue is earned, it is not accrued. Likewise, the expenses
unless are incurred, cost in respect thereof cannot be treated as
accrued. Secondly, it recognizes the matching concept, viz.,
receipts are to be matched income to arrive at the net income,
which would then be exigible to tax. In the case of
Commissioner of Income Tax Vs. Woodward Governor India
(P) Ltd. [312 ITR 214], the Supreme Court, albeit, in other
context, explained this concept. The principle laid down would be
relevant even for our purpose and therefore, we extract the same:
"14. In the case of M.P. Financial Corporation v. CIT
reported in 165 ITR 765 the Madhya Pradesh High Court has
held that the expression "expenditure" as used in Section
37 may, in the circumstances of a particular case, cover an
amount which is a "loss" even though the said amount has
not gone out from the pocket of the assessee. This view of
the Madhya Pradesh High Court has been approved by this
Court in the case of Madras Industrial Investment
Corporation Ltd. v. CIT reported in [1997]225ITR802(SC)
. According to the Law and Practice of Income Tax by Kanga
and Palkhivala, Section 37(1) is a residuary section
extending the allowance to items of business expenditure
not covered by Sections 30 to 36. This Section, according to
the learned Author, covers cases of business expenditure
only, and not of business losses which are, however,
deductible on ordinary principles of commercial accounting.
(see page 617 of the eighth edition). It is this principle
which attracts the provisions of Section 145. That section
recognizes the rights of a trader to adopt either the cash
system or the mercantile system of accounting. The
quantum of allowances permitted to be deducted under
diverse heads under Sections 30 to 43C from the income,
profits and gains of a business would differ according to the
system adopted. This is made clear by defining the word
"paid" in Section 43(2), which is used in several Sections 30
to 43C, as meaning actually paid or incurred according to
the method of accounting upon the basis on which profits
or gains are computed under Section 28/29. That is why in
deciding the question as to whether the word "expenditure"
in Section 37(1) includes the word "loss" one has to read
Section 37(1) with Section 28, Section 29 and Section
145(1). One more principle needs to be kept in mind.
Accounts regularly maintained in the course of business are
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
to be taken as correct unless there are strong and sufficient
reasons to indicate that they are unreliable. One more
aspect needs to be highlighted. Under Section 28(i), one
needs to decide the profits and gains of any business which
is carried on by the assessee during the previous year.
Therefore, one has to take into account stock-in-trade for
determination of profits. The 1961 Act makes no provision
with regard to valuation of stock. But the ordinary principle
of commercial accounting requires that in the P&L account
the value of the stock-in- trade at the beginning and at the
end of the year should be entered at cost or market price,
whichever is the lower. This is how business profits arising
during the year needs to be computed. This is one more
reason for reading Section 37(1) with Section 145. For
valuing the closing stock at the end of a particular year, the
value prevailing on the last date is relevant. This is because
profits/loss is embedded in the closing stock. While
anticipated loss is taken into account, anticipated profit in
the shape of appreciated value of the closing stock is not
brought into account, as no prudent trader would care to
show increase profits before actual realization. This is the
theory underlying the Rule that closing stock is to be valued
at cost or market price, whichever is the lower. As profits
for income-tax purposes are to be computed in accordance
with ordinary principles of commercial accounting, unless,
such principles stand superseded or modified by legislative
enactments, unrealized profits in the shape of appreciated
value of goods remaining unsold at the end of the
accounting year and carried over to the following years
account in a continuing business are not brought to the
charge as a matter of practice, though, as stated above,
loss due to fall in the price below cost is allowed even
though such loss has not been realized actually. At this
stage, we need to emphasise once again that the above
system of commercial accounting can be superseded or
modified by legislative enactment. This is where Section
145(2) comes into play. Under that section, the Central
Government is empowered to notify from time to time the
Accounting Standards to be followed by any class of
assessees or in respect of any class of income. Accordingly,
under Section 209 of the Companies Act, mercantile system
of accounting is made mandatory for companies. In other
words, accounting standard which is continuously adopted
by an assessee can be superseded or modified by
Legislative intervention. However, but for such intervention
or in cases falling under Section 145(3), the method of
accounting undertaken by the assessee continuously is
supreme. In the present batch of cases, there is no finding
given by the AO on the correctness or completeness of the
accounts of the assessee. Equally, there is no finding given
by the AO stating that the assessee has not complied with
the accounting standards."
23. We may refer to the judgment of the Supreme Court in the case of
Commissioner of Income Tax, Chennai Vs. Bilahari
Investment (P) Ltd. [299 ITR 1] wherein the Supreme Court has
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
taken various judgments where the matching concept is defined
and explained. We may refer to the passage extracted by the
Supreme Court from its judgment in the case of J.K. Industries
Vs. Union of India reported in [2007] 13 SCALE 204 in the
following terms:
"82. Matching Concept is based on the accounting period
concept. The paramount object of running a business is to
earn profit. In order to ascertain the profit made by the
business during a period, it is necessary that "revenues" of
the period should be matched with the costs (expenses) of
that period. In other words, income made by the business
during a period can be measured only with the revenue
earned during a period is compared with the expenditure
incurred for earning that revenue. However, in cases of
mergers and acquisitions, companies sometimes undertake
to defer revenue expenditure over future years which
brings in the concept of Deferred Tax Accounting.
Therefore, today it cannot be said that the concept of
accrual is limited to one year.
83. It is a principle of recognizing costs (expenses) against
revenues or against the relevant time period in order to
determine the periodic income. This principle is an
important component of accrual basis of accounting. As
stated above, the object of AS 22 is to reconcile the
matching principle with the Fair Valuation Principles. It may
be noted that recognition, measurement and disclosure of
various items of income, expenses, assets and liabilities is
done only by Accounting Standards and not by provisions of
the Companies Act."
24. Even the Institute of Chartered Accountant of India (ICAI) has laid
down accounting standards which the companies are supposed to
follow. We are concerned Accounting Standard (AS) 9. Relevant
portion whereof is extracted below:
"Introduction
1. This Statement deals with the bases for recognition
of revenue in the statement of profit and loss of an
enterprise. The Statement is concerned with the
recognition of revenue arising in the course of
ordinary activities of the enterprise from
- the rendering of services, and
- the use by others of enterprise resources yielding
interest, royalties and dividends.
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xxx xxx xxx
Definitions
4.3 Proportionate completion method is a method of
accounting which recognizes revenue in the
statement of profit and loss proportionately with
the degree of completion of services under a
contract.
xxx xxx xxx
Explanation
7. Rendering of Services
7.1 Revenue from service transactions is usually
recognized as the service is performed, either by the
proportionate completion method or by the completed
service contract method.
(i) Proportionate completion method -
Performance consists of the execution of more
than one act. Revenue is recognized
proportionately by reference to the
performance of each act. The revenue
recognized under this method would 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 recognized on a straight 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 recognized when the sole or final
act takes place and the service becomes
chargeable.
(emphasis supplied)"
25. Reading of the aforesaid (AS) 9 makes it clear that revenue is
recognized only when the services are actually rendered. If the
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
services are rendered partially, revenue is to be shown
proportionate with the degree of completion of the services. This
really clinches the issue in favour of the assessee.
26. Though our discussion on the issue is complete, the parting
comments need to be made. The receipts relate to the
unexecuted packages, which are not shown in the instant year
would be shown in the succeeding year. Rate of tax in respect of
companies remains the same in all these years. Therefore, the
Revenue does not lose anything, as it would receive the tax on
this income in the succeeding year. Still issues are raised and
much outcry is made for nothing.
27. In a decision rendered about 50 years ago, the Bombay High
Court, speaking through Chief Justice Tendolkar in Commissioner
of Income Tax, Delhi, Ajmer, Rajasthan and Madhya
Pradesh Vs. Nagri Mills Co. Ltd. [33 ITR 681] observed as
under:
"We have often wondered why the Income tax authorities, in a
matter such as this where the deduction is obviously a
permissible deduction under the income tax Act, raise disputes as
to the year in which the deduction should be allowed. The
question as to the year in which a deduction is allowable may be
material when the rate of tax chargeable on the assessee in two
different years is different; but in the case of income of a
company, tax is attracted at a uniform rate, and whether the
deduction in respect of bonus was granted in the assessment
year 1952-53 or in the assessment year corresponding to the
accounting year 1952, that is in the assessment year 1953-54,
should be a matter of no consequence to the Department; and
one should have thought that the Department would not fritter
away its energies in fighting matters of this kind. But, obviously,
judging from the references that come up to us every now and
then, the Department appears to delight in raising points of this
character which do not affect the taxability of the assessee or the
tax that the Department is likely to collect from him whether in
one year or the other."
28. In this Court, in its decision dated 06.05.2008 in ITR No.229 of
1988 entitled Commissioner of Income Tax Vs. M/s. Vishnu
ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010
Industrial Gases P. Ltd. had quoted the aforesaid passage and
thereafter remarked that the situation does not seem to have
changed over the last fifty years and the Revenue continue to
agitate the question whether tax is leviable in a particular year or
in some other year. Alas! The aforesaid words of wisdom of
Bombay High Court reminded to the Revenue Authorities more
than two years ago again have not made any dent on the psyche
of the Revenue.
29. In these circumstances, we are constrained to dismiss all these
appeals with costs quantified at `10,000/- in each appeal. The
entire cost shall be paid within a period of two weeks to the
Library Fund of the Delhi High Court Bar Association.
(A.K. SIKRI)
JUDGE
(SURESH KAIT)
JUDGE
OCTOBER 29, 2010
pmc
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