Unutilized talk time on sale of prepaid cards not accrue as income in the year of sale

Amount received on sale of prepaid cards to the extent of unutilized talk time did not accrue as income in the year of sale-High Court

ABCAUS Case Law Citation:
ABCAUS 2684 (2018) (12) HC

Important Case Laws Cited/relied upon:
Commissioner of Income-Tax Vs. Dinesh Kumar Goel [2011] 331 ITR 10 (Del)
E.D. Sassoon and Co. Ltd. Vs Commissioner of Income Tax [1954] 26 ITR 27 (SC)
Calcutta Company Ltd. Vs. Commissioner of Income Tax [1959] 37 ITR 1 (SC)
Commissioner of Income Tax Vs. Bilahari Investment (P) Ltd. [2008] 299 ITR 1 (SC),
Commissioner of Income Tax Vs. Nagri Mills Co. Ltd. [1958] 33 ITR 681 (Bom)
J.K. Industries Ltd. and Anr. Vs. Union of India and Ors. [2008] 297 ITR 176 (SC)
Commissioner of Income Tax Vs. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC)

The instant appeals was filed by the Revenue under Section 260A of the Income Tax Act, 1961 (Act) against the order of the Income Tax Appellate Tribunal ( Tribunal ) on the following question of law:

“Whether on the facts and in the circumstances of the case the Tribunal erred in holding that the amount received on sale of prepaid cards to the extent of unutilized talk time did not accrue as income in the year of sale?”

The Tribunal had been restored the matter to the file of the Assessing Officer to verify and ascertain whether there was any revenue leakage.

The respondent assessee company was engaged in the business of providing basic telecom services and had both prepaid and postpaid subscribers.

Postpaid customers were billed on the basis of actual talk time and there is no dispute regarding year of taxability of the postpaid customers. However, the dispute arose on the accounting treatment in respect of prepaid cards.

As per the Revenue, the assessee must account for and include the entire amount paid on the date of purchase of the prepaid card by the subscriber. Date of purchase of the prepaid card would be the date when income had accrued to the respondent-assessee.

The respondent-assessee, however, recognized revenue on prepaid cards on the basis of actual usage. In other words, unutilized amount outstanding on the prepaid card, if any, at the end of the financial year, was carried forward to the next year. The unutilized amount on the prepaid card was treated as advance in the balance-sheet and recognized as a revenue receipt in the subsequent year, when the talk time was actually used or was exhausted when the card lapsed on expiry of the stipulated time.

The assessee submitted that the contention of the Department even if accepted would be revenue neutral, since the addition made in the first year will result in correspondingly reduction in the revenue of the next year and so on and so forth.

The Hon’ble High Court observed that the Tribunal in the impugned order had referred to the difference between receipt of an amount and accrual of income. Every receipt is not income, for income is something which the assessee is legally entitled to appropriate to the exclusion of the giver.

The Hon’ble High Court however, noted that the contention of the Revenue that the prepaid amount once paid and received by the assessee was forgone by the subscriber and accordingly appropriated by the respondent-assessee was substantially correct. At the same time, the payment was an advance and was subject to the assessee providing basic telecom service as promised, failing which the unutilized amount was required to be refunded to the pre-paid subscribers.

The Hon’ble High Court observed that the assessee stated that they had been following the principles of Revenue Recognition as per Accounting Standards. Paragraph 7 of Accounting Standards stipulated that revenue from service transaction can be recognized either by proportionate completion method or by the completed service contract method. Revenue is generally recognized when the service is performed. Proportionate completion method is a recognized accounting method, as per which revenue is recognized proportionately by reference to the performance of each act. This is subject to any evidence that some other method would be better and more appropriate for representing the pattern of performance.

The Hon’ble High Court noted in a case of a coaching institute following mercantile system of accounting, the argument of the Revenue that as per the agreements signed by the students, they were called upon and were required to pay the entire fee upfront for the entire course at the time of admission and, therefore, the assessee had earned full fee at that stage itself was rejected observing and referring to the principle of law laid down by the Hon’ble Supreme Court that fee was debt due at the time of deposit. The fee was paid in advance though services were yet to be rendered. It was held that when the fee was paid in advance it would be in nature of deposit or an advance. Otherwise, it would lead to an anomalous situation not intended in law, as when the amount was received the expenses to be deducted to arrive at the net income were yet to be incurred, and would be incurred in the next financial year.

In other words, principle of matching between the revenue receipt and the expenditure to be incurred was applied.

The Hon’ble High Court noted that the Apex Court had elucidated that revenue recognition was attainable by several methods of accounting. The same result could be attained by any one of the accounting methods. Completed contract method was one such method.

The Hon’ble High Court opined that the appropriation of prepaid amount was contingent upon the assessee company performing its obligation and rendering services to the prepaid customers as per the terms. If the respondent-assessee had failed to perform the services as promised, it would be liable and under an obligation to refund the advance payment recieved under the ordinary law of contract or special enactments, like the Consumer Protection Act. The aforesaid legal position would meet the argument of the Revenue that the prepaid amount received was not liable to be refunded or repaid, whether or not any services were rendered.

The Hon’ble High Court observed that the Hon’ble Supreme Court had emphasized that the accounting standards as framed and followed by the auditors should be respected, for they provide harmonization of concepts and accounting principles and ensure discipline. Accounting methods followed continuously by the assessee for given period of time would ensure revenue neutrality and reflect true and correct income or profits.

The Revenue submitted that in some cases the prepaid cards would have lapsed and the subscribers may not have utilized or availed of services/talk time. Unutilized amount when the prepaid card lapses has to be treated as income or receipt of the respondent-assessee on the date when the card had lapsed. The assessee accepted this position.

The Hon’ble High Court answered the substantial question of law in favour of the assessee and against the Revenue. It was clarified that the Assessing Officer while passing the appeal effect order, would ensure that the unutilized talk time has been accounted for and included in the receipt of the year in which the amount had lapsed and was forgone.

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