Whether when assessee is sanctioned a grant by Govt for operational purposes for a period of five years, entire sum is to be treated as receipt in same year - NO: Delhi HC

THE issues before the Bench are - Whether when the assessee is sanctioned a grant by the Government for operational purposes for a period of five years, the entire sum is to be treated as receipt in the same year; Whether any fault can be found with the assessee compling with the AS-12 Accounting Standards and Whether when inventories amount is reflected in the Annual Report, any addition is warranted in the same regard. And the verdict goes in favour of the assessee.

Facts of the case

A) The assessee is a government undertaking, engaged in providing air services. It received a grant of Rs 35 Cr from the Government to improve its air connectivity in the North-East Region. On receiving the grant, the assessee airline took on lease four ATR-42-320 aircrafts for five years from Ms/ Aviande Transport Regional (ATR). The assessee spread this grant over a period of five years as the lease period of the aircrafts was sixty months. The Assessing Officer disagreed and held that once the assessee had received the grant, and the same could not have been spread over five years, i.e., the lease period, and the entire amount should be brought to tax in one year, i.e., year of receipt itself. The assessee was following mercantile system of accounting and the grant had accrued to the assessee in the period relevant to the present assessment year. Thus, addition of Rs.27.71 crores was made.

The CIT(Appeals) and the Tribunal observed that the Assessing Officer had committed a mistake and his reasoning was erroneous. The grant was in terms of the Memorandum of Understanding and as per the terms of the grant the assessee was to provide 4177 seats per week. This payment of Rs.35 crores was made for operational expenses of four leased aircrafts for 60 months. It was held that the assessee had obtained concessions under the scheme and the progress of the scheme had to be intimated to North-Eastern Council. As the assessee was utilising the said grant over a period of five years, they had followed AS-12 accounting standards. The CIT(Appeals) and the Tribunal held that the said standard recognised that while computing profit and gains, the account should be prepared on systematic and rational basis so as to match the receipt or the grant, with the related cost. AS-12 was in accordance with Section 145 of the Income Tax Act, 1961 and Section 211 of the Companies Act, 1956. The CIT (Appeals) and the tribunal referred to the aforesaid admitted factual matrix and the applicable and relied upon accounting standard, which were prescribed by the Institute of Chartered Accountants. It was held that the accounts of the respondent should give true and fair view of the profit and loss account.

B) The second question related to addition of Rs.534.79 lacs, which was made by the Assessing Officer but again deleted by the first appellate authority and upheld by the tribunal in the impugned order. The Assessing Officer had recorded that in the notes of the Auditor, they had qualified the accounts stating that details of inventories of Rs.534.79 lacs could not be ascertained. The assessee in the reply had stated that the basic records were maintained by the Indian Airlines as per procedure and the reconciliation of the same was done at much later date.

On appeal, the HC held that,

++ the findings recorded by the two appellate authorities is that the standard followed by the assessee was as per accounting standard AS-12 prescribed by the Institute of Chartered Accountants. The said method of accounting cannot be faulted or ignored. It is further recorded that there was no dispute that the grant given to the assessee was based upon operations from which net profit/income had to be arrived at after deducting the expenditure. The grant had to be utilised over five years. They accordingly accepted that amount of Rs.7.29 crores declared by the assessee, out of grant of Rs.35 crores should be treated as income of the year in question. Before us, the counsel for the Revenue has not been able to point out and state, how and why the reasoning can be faulted as the assessee had followed AS-12. Revenue has not disputed before us that the accounting standard, as prescribed by the institute, has been followed. On the first question, therefore, no substantial question of law arises;

++ on the question of reconciliation, we may state that the tribunal has sustained addition of Rs.34.31 lacs. On the question of inventories of Rs.534.79 lacs, the CIT (Appeals) has recorded that this amount was duly reflected in the Annual Report. He has made reference to Schedule IV of the Annual Report where under the head ‘inventories’ full details had been given. It is pointed out that the inventories were maintained by Indian Airlines and the figures given by them have been taken in the books. The Auditor had hedged his report and had stated that they could not ascertain inventories of Rs.534.79 lacs in view of the said factual position, i.e., they had taken the figures given by Indian Airlines and had not examined the accounts/books of Indian Airlines;

++ during the course of the first appellate proceedings, in view of the contention of the appellant, a remand report from the Assessing Officer was called for. The Assessing Officer did not submit the remand report to contest the contention of the assessee. The CIT (Appeals) accordingly recorded that amount of Rs.534.79 lacs was not in dispute. The assessee succeeded. Before tribunal also, the Revenue could not contest the said position as had been recorded in paragraph 10 of the impugned order passed by the tribunal. Therefore, even on the second issue, we do not find any substantial question of law arises for consideration.