INCOME TAX ACT, 1961

Section 145

Accounting method - Revenue recognition - Assessee engaged in IT-enabled services recognized lesser revenue as against bills raised on service recepients -

Assessee is a firm engaged in providing IT-Enabled Services declared lesser receipts against bill value. Assessee's case was that restricted claims was the condition imposed on assessee under the clause 'Terms of Payment' of work orders and there were different payment schedules for three principal types of work involved, i.e., Bulk Data entry, Biometric entry and LRVR printing. AO took the view that as per accrual system of accounting, assessee ought to have recognized full value of bill raised as revenue for the year and not only the amounts received as per terms of payment specified in work orders. AO also stated that assessee had claimed credit of TDS which was deducted on entire bill amount and, therefore, assessee should recognize entire bill amount as revenue. AO took recourse to the 'Matching Principle' of revenue recognition to argue that once expenses incurred for entire work have been claimed, it was incumbent upon assessee to recognize entire bill amount as revenue and not a specified percentage. Consequently, AO made addition on account of suppressed work receipts.Held: On perusal of contract entered into between assessee and M/s. ECIL & BIL, it was apparent that revenue became due to assessee only after bills riased by assessee were certified by supervisors appointed by M/s. ECIL and BIC Ltd and till the bill was certified by designated officers of M/s. ECIL and BIL, assessee could not make claim on income and it could not be said that income/revenue has accrued to the assessee authorized supervisors only certified 80%, 50% or further 20, 30, and 10% of the bill raised by assessee depending upon whether work done pertained to data entry, biometric entry or LRVR card printing. Although assessee could claim only what was certified, 100% of the bill value has to be mentioned on face of bill as per normal billing practice followed in assessee's line of business. Also, assessee had booked all the expenditure against income received in the year and not booked entire expenses incurred against contract receipt shown in 26AS statement and it was not disputed by AO that entire contract receipt shown in 26AS statement had not been received during concerned assessment year. Thus, in view of modus operandi of bill raising in line of assessee's business, assessee had claimed higher TDS in compelling circumstances and under the given totality of facts and circumstances of case, it would be appropriate to levy an appropriate rate of net profit on differential amount between bill raised by assessee and the amount claimed by it and compute profit element embedded in these gross receipts.

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