Medcare Health Care Ltd, V. DCIT circle 6 (1),

ITA 1504/DEL/2007

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 8065 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 2 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 25-06-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 26-03-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DEEPAK SEHGAL
• Keywords: Depreciation; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `D: NEW DELHI BEFORE SHRI R.P. TOLANI, JM AND SHRI B.C. MEENA , AM I.T.A. NO.1504/DEL OF 2007 ASSESSMENT YEAR: 2003-04 M/S MEDSAVE HEALTHCARE LTD., DCIT, CIRCL E-6(1), F-701 A, LADO SARAI, VS NEW DELHI. BEHIND GOLF COURSE, NEW DELHI. APPELLANT RESPONDENT APPELLANT BY: SHRI SANJAY SOOD RESPONDENT BY: SHRI DEEPAK SEHGAL ORDER PER R.P. TOLANI, JM: THIS IS ASSESSEES APPEAL. FOLLOWING GROUNDS ARE RAISED: 1. WHETHER THE LD. CIT(A) WAS JUSTIFIED BY NOT ALLOWING THE TREATMENT OF TPA FEES (THIRD PARTY INSURANCE) AMOUNTING TO RS.87,64,048/-, REALIZED IN FOURTH QUARTER BUT WHICH PERTAINED TO THE SUBSEQUENT YEAR SERVICE YET TO BE PROVIDED JUST BECAUSE NO SCIENTIFIC METHOD WAS USED. 2. WHETHER THE LD. CIT(A) WAS JUSTIFIED BY NOT ALLOWING THE DEPRECIATION @ 60% ON THE UPS. 2. BRIEF FACTS ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF THIRD PARTY INSURANCE ADMINISTRATION SERVICES (FOR SHORT TPA) AND HAS A NETWORK OF BRANCHES TO CARRY OUT SUCH WORK. ASSESSEE FOLLOWS M ERCANTILE SYSTEM OF ACCOUNTS; ACCORDING TO ASSESSEE A REVENUE COMPATIBL E METHOD IS FOLLOWED FOR 2 REVENUE RECOGNITION. ASSESSEE RAISED INVOICES ON A QUARTERLY BASIS ON THE INSURANCE COMPANIES FOR WHICH IT IS PROVIDING TPA S ERVICES. THE COMPANY IN ITS BOOKS RECOGNIZED TPA FEE AS INCOME ON THE BA SIS OF APPORTIONING 70% IN THE QUARTER IN WHICH THE FEES WAS RECEIVED AND T HE BALANCE 30% IS BOOKED AS INCOME IN THE NEXT THREE QUARTERS. THE AO WAS O F THE OPINION THAT THE FEES SHOULD BE BOOKED AS INCOME IN THE QUARTER IN W HICH IT WAS RECEIVED OR INVOICED AND APPORTIONMENT OVER THE NEXT THREE QUAR TERS WAS NOT CORRECT. APPORTIONMENT OF THE BALANCE 30% IN THE NEXT THREE QUARTERS WAS RESULTING IN SOME OF THE INCOME SPILLING TO THE NEXT PREVIOUS YE AR. THE AO DID NOT ACCEPT THIS ACCOUNTING TREATMENT AND ADDED BACK RS. 87,64,048/- WHICH THE ASSESSEE HAD SHOWN IN THE BALANCE SHEET AS UN-ACCRU ED INCOME. 3. AGGRIEVED ASSESSEE PREFERRED FIRST APPEAL WHERE THE ADDITION WAS CONFIRMED BY FOLLOWING OBSERVATIONS: I HAVE CONSIDERED THE MATTER. THE MOST IMPORTANT QUESTION TO BE LOOKED INTO IS WHETHER THE RECEIPT FROM THE INSURANCE COMPANY WAS BY WAY OF AN ADVANCE OR WAS PAYMENT OF FEES WHICH WAS NON- REFUNDABLE INCOME IN THE HANDS OF THE ASSESSEE. HERE, ATTENTION IS INVITED TO THE BOMBAY HIGH COURT DECISION IN THE CASE OF CIT VS SHAH CONSTRUCTION CO. LTD., 237 ITR 814. IN THAT CASE, THE ASSESSEE WAS A CONTRACTOR AND HAD TAKEN UP CONTRACT WORKING THE MIDDLE EAST. AGAINST SUCH CONTRACT, ADVANCE WAS RECEIVED BY THE ASSESSEE WHICH HAD TO BE ADJUSTED AGAINST RUNNING BILLS SUBMITTED FROM TIME TO TIME. THE COURT HELD THAT 3 THE ADVANCE RECEIVED COULD NOT BE TREATED AS INCOME TILL IT WAS ADJUSTED AGAINST THE RUNNING BILLS. I HAVE CITED THIS CASE TO BRING OUT THE FAC T THAT THE ASSESSEES CASE IS ENTIRELY DIFFERENT. TH E ASSESSEE IS NOT RECEIVING ADVANCE AND THERE IS NO SYSTEM OF RUNNING BILLS. THE QUARTERLY INVOICES THAT IT RAISES ARE FULL AND FINAL PAYMENT IN RESPEC T OF SERVICES RENDERED BY IT. AS TO THE ARGUMENT THAT IT MAY HAVE TO PROVIDE SERVICES IN THE NEXT THREE QUARTERS FOR THE PAYMENT RECEIVED IN THIS QUARTER, IT MAY BE POINTED OUT THAT THE QUESTION OF RENDERING SERVICES IN FUTURE FOR PAYMENT RECEIVED IN THE PRESENT IS AT BEST A POSSIBILITY AND IS CONTINGENT IN NATURE. MOREOVER, A BETTER ACCOUNTING TREATMENT WOULD PERHAPS BE TO PROVIDE FOR POSSIBLE EXPENDITURE AFTER ARRIVING AT THE FIGURE OF SUCH POSSIBLE EXPENDITURE USING A SCIENTIFIC METHOD. THE ASSESSEE HAS DONE THE OPPOSITE AND IS NOT CREDITING PART OF THE INCOME ON THE GROUND THAT THERE MAY BE FUTURE POSSIBLE EXPENDITURE RELATING TO THE INCOME RECEIVED NOW. THE BASIS OF APPORTIONMENT IN THE RATIO OF 70 : 30 ALSO DOES NOT HAVE ANY SCIENTIFIC BASIS. IN VIEW OF THESE FACTS, I HOLD THAT THE AO WAS CORRECT IN TAXING THE FEES RELATING TO THE QUARTERS OF THE PREVIOUS YEAR IN QUESTION IN THE SAID PREVIOUS ITSELF AND NOT ALLOWING ANY APPORTIONMENT TO THE SUCCEEDING PREVIOUS YEAR. AS A RESULT, THE ADDITION OF RS.87.64 LACS IS CONFIRMED. 4. AGGRIEVED ASSESSEE IS BEFORE US. THE LD. AR STA TED THAT THE ASSESSEE WAS FOLLOWING SUCH AN ACCOUNTING PRACTICE BECAUSE O F THE UNCERTAINTIES INVOLVED IN EXPENDITURE FOR PROVIDING PROFESSIONAL SERVICES VIS--VIS ISSUE OF CARDS, PAMPHLETS AND EXAMINATION OF CLAIMS. IT WAS STATED THAT IF THE WHOLE FEE RECEIVED IS RECOGNIZED AS INCOME IN THE FIRST Q UARTER, THEN WHATEVER 4 EXPENSE IS INCURRED IN THE SECOND, THIRD AND FOURTH QUARTER MAY CAUSE A PROBLEM AS TO WHICH INCOME THIS EXPENDITURE LIKE HE AD DATA ENTRY EXPENSES AND OTHER MATERIAL SENT TO CUSTOMERS WAS INCURRED F OR THE WHOLE YEAR AND SINCE THE RISK HAD TO BE COVERED FOR THE WHOLE YEAR , THE REMAINING 30% WAS APPORTIONED OVER THE NEXT THREE QUARTERS. IT WAS F URTHER EMPHASIZED THAT IF THE METHOD ADOPTED BY AO IS FOLLOWED THEN THAT RESU LTS INTO DISTORTED RESULTS INASMUCH AS THE INCOME QUA WHICH EXPENSES ARE INCUR RED IN THE NEXT YEAR REMAINS TAXED IN THE YEAR IN QUESTION WITHOUT FOLLO WING THE MATCHING PRINCIPLES. IN THE NEXT YEAR AGAIN, THE ASSESSEE W ILL FACE A PROBLEM THAT THE EXPENSES RELATABLE TO INCOME OF PRIOR YEAR HAVE BEE N DEBITED IN THIS YEAR. IT WAS FURTHER CONTENDED THAT CIT(A) IS CONSCIOUS OF T HIS DIFFICULTY INASMUCH AS HE HAS POINTED OUT THAT THE BETTER ACCOUNTING TR EATMENT WOULD BE TO PROVIDE FOR POSSIBLE EXPENDITURE USING A SCIENTIFIC METHOD. IT WAS, THEREFORE, PLEADED THAT CIT(A) IN PRINCIPLE HAS HELD THAT MATC HING PRINCIPLE SHOULD BE APPLIED TO ASSESSEES CASE AND FAILED TO REALIZE TH E NUANCES OF ACCOUNTS, THEREFORE, THE METHOD FOLLOWED BY ASSESSEE IN RECOG NIZING INCOME BASED ON THE SERVICES TO BE RENDERED IS JUSTIFIED AND SHOULD BE UPHELD. 5. APROPOS SECOND GROUND REGARDING RATE OF DEPRECIA TION ON UNINTERRUPTED POWER SUPPLY (UPS), CIT(A) HAS HELD I T TO BE A VOLTAGE STABILIZER AND CAN BE UTILIZED AS COMPUTER AND HAS NOT ALLOWED THE ASSESSEES 5 CLAIM THAT IT WAS AN INTEGRAL PART OF THE COMPUTER. HOWEVER, THE CORRECT POSITION IS CORRECT RATE OF DEPRECIATION AS PRESCRI BED BY APPENDIX I UNDER THE HEAD E, WHICH READS AS UNDER: E. ELECTRICAL EQUIPMENT : (A) SHUNT CAPACITORS AND SYNCHRONOUS CONDENSER SYST EMS (B) AUTOMATIC POWER CUT OFF DEVICES (RELAYS) MOUNTE D ON INDIVIDUAL MOTORS (C) AUTOMATIC VOLTAGE CONTROLLER (D) POWER FACTOR CONTROLLER FOR AC MOTORS] (E) SOLID STATE DEVICES FOR CONTROLLING MOTOR SPEED S (F) THERMALLY ENERGY EFFICIENT STENTERS (WHICH REQU IRE 800 OR LESS KILOCALORIES OF HEAT TO EVAPORATE ONE KILOGRAM OF WATER. IT WAS CONTENDED THAT EVEN IF UPS IS HELD TO BE NOT AN INTEGRAL PART OF COMPUTER, THE SAME COMES WITHIN THE PARAMETERS OF AUTOMATIC VOLTAGE CONTROLLER, THE CORRECT RATE OF DEPRECIATION IS 80 %, THEREFORE, THE SAME BEING A LEGAL CLAIM MAY BE ALLOWED. 6. LEARNED DR, ON THE OTHER HAND, VEHEMENTLY ARGUES THAT CIT(A) HAS RIGHTLY HELD INASMUCH AS THE TPA FEE RECEIVABLE BY ASSESSEE IS NOT ONLY ACCRUED BUT RECEIVED BY THE ASSESSEE IN THE YEAR IT SELF, AS PER MERCANTILE PRINCIPLE, ONCE THE REVENUE IS ACCRUED, IT BECOMES INCOME IRRESPECTIVE OF THE FACT WHETHER ASSESSEE HAS INCURRED CORRESPONDING EX PENDITURE OR NOT. ASSESSEES CASE IS MORE GRAVE AS THE FEE IS NOT ONL Y ACCRUED BUT IN FACT 6 RECEIVED BY THE ASSESSEE WHICH HAS NOT BEEN DISPUTE D. THEREFORE, THE INCOME HAVING BEEN ACCRUED TO AND RECEIVED BY ASSES SEE HAS TO BE HELD AS INCOME OF THE ASSESSEE. ORDERS OF LOWER AUTHORITIE S WERE RELIED ON. 7. APROPOS SECOND GROUND I.E. DEPRECIATION, LEARNED DR RELIED ON THE ORDER OF CIT(A). 8. IN REPLY, LEARNED COUNSEL FOR THE ASSESSEE CONTE NDS THAT CIT(A) WAS CONSCIOUS OF THE FACT THAT A CORRESPONDING EXPENDIT URE RELATABLE TO DEFERRED PART OF TPA FEE HAS TO BE INCURRED BY THE ASSESSEE AND ON SCIENTIFIC METHOD SHOULD HAVE BEEN ALLOWED TO ASSESSEE. HAVING OBSER VED SO, CIT(A) SHOULD HAVE DIRECTED AO CORRESPONDING EXPENDITURE TO THE A SSESSEE. THE CIT(A)S ORDER BRINGS THE ASSESSEE IN A DIFFICULT SITUATION WHERE HIS OBSERVATIONS ARE NOT CLOTHED INTO FINDINGS AND CONCLUSIONS. THEREFO RE, AN ALTERNATE CLAIM WAS MADE THAT IN THE EVENTUALITY OF REJECTING THE ASSES SEES GROUND CORRESPONDING EXPENDITURE SHOULD BE ALLOWED AS OBSERVED BY CIT(A) . 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. APROPOS FIRST ISSUE, WE FIND MERIT IN THE ARGUMENT OF LEARNED DR, THE TPA FEE NOT ONLY ACCRUED TO THE ASSESSEE BUT IS IN FACT RECEIVED BY IT, WHICH HAS NOT BEEN DISPUTED, THEREFORE, THE ENTIRE TPA RECEIVED BY THE ASSESSEE UNEQUIVOCALLY BECOMES THE INCOME OF THE AS SESSEE ON THE MERCANTILE SYSTEM FOR THE YEAR IN QUESTION. HOWEVE R, WE FIND MERIT IN THE 7 ALTERNATE ARGUMENT OF LEARNED COUNSEL, WHICH IS OBS ERVED BY LEARNED CIT(A) ALSO. THEREFORE, WE SET ASIDE THE ISSUE BACK TO TH E FILE OF AO TO WORK OUT THE CORRESPONDING EXPENSES ADOPTED IN THE NEXT YEAR AND TO ALLOW THE CLAIM OF THE ASSESSEE IN THIS YEAR AND GIVE CONSEQUENT EFFEC T IN SUBSEQUENT YEARS. THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTI CAL PURPOSES ON THESE TERMS. 10. APROPOS SECOND ISSUE, WE ARE OF THE VIEW THAT U PS IS NOT AN INTEGRAL PART OF THE COMPUTER. HOWEVER, WE FIND MERIT IN TH E ARGUMENT OF LEARNED COUNSEL THAT THE CORRECT RATE OF DEPRECIATION AS PR ESCRIBED BY APPENDIX I IS 80% AS THE UPS COMES WITHIN THE PURVIEW OF AUTOMAT IC VOLTAGE CONTROLLER. IN OUR VIEW, CORRECT RATE OF DEPRECIATION TO BE ALL OWABLE TO ASSESSEE IS 80%. HOWEVER, SINCE THE ASSESSEE HAS CLAIMED ONLY 60% AN D WE CANNOT GO ABOVE THE CLAIM OF THE ASSESSEE, THEREFORE, IT WILL BE RE STRICTED TO THE ASSESSEES CLAIM WHICH HAS BEEN PLEADED BY LEARNED DR ALSO. IN VIEW OF THESE OBSERVATIONS, GROUND NO.2 OF THE ASSESSEE IS ALLOWE D ON THESE TERMS. 11. ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATIST ICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH JUNE, 2009. (B.C. MEENA) (R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 25 TH JUNE, 2009 VIJAY 8 COPY TO: 1. APPELLANT 2. RESPONDENT. 3. CIT 4. CIT(A)-IX, NEW DELHI. 5. DR ASSISTANT REGISTRAR