INCOME TAX ACT, 1961

Section 145

Accounting method - Revenue recognition - Assessee had not followed this matching principle while apportioning the income over the period of 21 years by not apportioning the expenditure over a period of 21 years -

Assessee was in the business of processing preservation and storage of stem cells from umbilical cord and menstrual blood, charges three types of fees from the customers. It received enrollment fee from a customer which was offered as revenue immediately upon enrollment of the customers. Assessee also received preservation, extraction and sample collection fee and such fees was recognized as revenue upon rendition of such services. The assessee received storage fee being fee charged towards storage of the stem cells for the contracted period and the same was recognized as revenue uniformly over the contracted period of storage. Assessee entered into storage agreement with the customers either as annual plan or 21 year plan or life time plan. Income pertaining to annual plan was accounted based on number of months in a fiscal year. Storage fee received for 21 year plan was recognized as revenue over the contracted period on straight line basis apportioned based on number of months. Storage fee received for life time plan has been recognized similar to that of 21 years, except with the variation of duration of 100 years as against 21 years. AO opined that assessee has deferred revenue pertaining to storage fee received in advance for the assessment year 2016-17 amounting to Rs. 89,56,39,966 without deferring corresponding expenditure. Therefore, AO made addition towards storage fee received in advance amounting to Rs. 89,56,39,966. Held: Principle of matching postulates that expenditure corresponding to the income recognized should also be accounted for. But in the instant case from the analysis of Profit and Loss account it was clear that assessee had not followed this matching principle while apportioning the income over the period of 21 years by not apportioning the expenditure over a period of 21 years. Undoubtedly, this resulted in the distortion of the profit or loss for the period and, therefore, accounting policy of recognization of income adopted by assessee did not give true picture of profit or loss for the period. Therefore, addition made towards storage fee received in advance was sustainable.

Relied :Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC) : 1997 TaxPub(DT) 1304 (SC).

REFERRED :

FAVOUR : Against the assessee

A.Y. : 2016-17

INCOME TAX ACT, 1961

Section 35(2AB)

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