Case Law Details
ACIT Vs Suryanarayana Iyer (ITAT Chennai)
ITAT Chennai held that although the assessee company was following the mercantile system of accounting, only real income could be brought to tax. Hypothetical income cannot be taxed. Hence, appeal of revenue dismissed.
Facts- The assessee is an individual who derives income providing legal assistance to lawyers, through his sole proprietary-ship business in the name and style of “Cyber Law Journal”. The RoI was selected for scrutiny and the AO noted that the assessee had entered into an agreement with M/s.Lexis Nexis Butterworths India on 19.05.2011 for providing judgments of various Courts/Tribunals. And for the said service, the assessee was to receive total compensation of Rs.10,49,86,877/- and out of which, the assessee has received only Rs.7,35,00,000/- in AY 2012-13 and during the relevant AY 2013-14, the assessee didn’t receive the balance amount of Rs.3,14,86,877/- but received only Rs.1,13,09,280/-.
AO was of the view that as per the agreement between the assessee and M/s. Lexis Nexis for the services rendered, the assessee ought to have received Rs.3,14,86,877/- and since the assessee has only offered Rs.1,13,09,280/- during the year under consideration from M/s. Lexis Nexis, the balance amount of Rs.2,01,77,597/- needs to be added by the AO as income accrued to the assessee since it was following mercantile system of accounting and added it.
CIT(A) deleted the addition. Being aggrieved, revenue has preferred the present appeal.
Conclusion- Held that although the assessee company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the representative suits filed by the consumers which were decreed by the court and ultimately, after various proceedings which took place, the assessee- company had not been able to realize the enhanced charges. Since no real income having accrued, it was held that the amount due on enhancement was not assessable to Income Tax.
Held that we don’t find any infirmity in the impugned order of the Ld.CIT(A) deleting the addition of Rs.2,01,77,597/-and we confirm the same and dismiss the appeal of the Revenue.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This is an appeal preferred by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in short “the Ld.CIT(A)”), Delhi, dated 21.03.2024 for the Assessment Year (hereinafter in short “AY”) 2013-14.
2. The main grievance of the Revenue is against the action of the Ld.CIT(A) deleting the addition of Rs.2,01,77,597/- made by the AO.
3. The brief facts are that the assessee is an individual who derives income providing legal assistance to lawyers, through his sole proprietary-ship business in the name and style of “Cyber Law Journal”, apart from income from house property and other source; and he filed his return of income (RoI) for AY 2013-14 on 30.09.2013 admitting taxable income of Rs.51,14,000/-. Later, the RoI was selected for scrutiny and the AO noted that the assessee had entered into an agreement with M/s.Lexis Nexis Butterworths India (hereinafter in short “M/s. Lexis Nexis” or M/s LN) on 19.05.2011 for providing judgments of various Courts/Tribunals. And for the said service, the assessee was to receive total compensation of Rs.10,49,86,877/- and out of which, the assessee has received only Rs.7,35,00,000/- in AY 2012-13 and during the relevant AY 2013-14, the assessee didn’t receive the balance amount of Rs.3,14,86,877/- but received only Rs.1,13,09,280/-. The AO was of the view that as per the agreement between the assessee and M/s. Lexis Nexis for the services rendered, the assessee ought to have received Rs.3,14,86,877/- and since the assessee has only offered Rs.1,13,09,280/- during the year under consideration from M/s. Lexis Nexis, the balance amount of Rs.2,01,77,597/- needs to be added by the AO as income accrued to the assessee since it was following mercantile system of accounting and added it.
4. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) who was pleased to delete the addition by holding as under:
8.1 According to the AO, as LN has not cancelled the contract/agreement with the appellant, the provisions of the said agreement dated 19.05.2011 are applicable to the appellant and as per the said agreement, the appellant was to receive Rs.3,14,86,877/- and out of the same the appellant had only offered Rs.1,13,09,208/- the AO made the addition on accrual basis of the balance amount of Rs.2,01,77,597/-. The AO further held that the appellant had even raised the invoice on LN for the entire amount of Rs.3,14,86,877/- as per the agreement.
8.2 On the other hand, the contention of the appellant is that the payment during the impugned AY by the LN to the appellant was on the basis of review and acceptance of data portion of the licensed material. In AY 2012-13, the appellant had raised an invoice of Rs.8,40,10,500/- on 14.06.2011 which was duly accounted in the books of the appellant and even TDS was deducted on the said amount u/s.194J of the Act. However, in the impugned AY it was pleaded that the appellant raised invoice on the basis of number of judgments which were inspected and accepted by LN. 47,122 Judgments submitted by the appellant were inspected and accepted by LN and the appellant raised invoice for only those judgments at the rate of Rs.240 per judgment and total amount of invoice came to Rs.1,31,59,478/- on which LN even deducted tax u/s.194J of the Act. The appellant filed even Form 26AS to show that the LN had paid to the appellant only Rs.1,31,59,478/-. It was further submitted for the differential income of Rs.2,01,77,597/-, which was taxed by the AO, the income never accrued to the appellant as LN never accepted the data submitted by the appellant. Reliance was placed on the decision of Hon’ble Supreme Court in the case of Ashokbhal Chimanbhai vs. CIT 56 ITR 42 & CIT vs. Goverdhan Ltd. 69 ITR 675. Here the contention of the appellant is that income may accrue or arise to the appellant if he acquires a right to receive the same. In the instant case, the income relating to the unaccepted data never accrue to the appellant and hence, cannot be taxed.
8.3. I have gone through the submissions and Form No.26AS furnished by the appellant. LN has paid Rs.1,13,09,280/- to the appellant which was subjected to TDS u/s.194J of the Act. Thus, amount of income which has accrued to the appellant is Rs.1,13,09,280/-. The income accrues to the appellant only when it becomes a liability of the other party (LN). The fact that the LN has not deducted the tax on any amount over and above Rs.1,13,09,280/-, no other income has accrued to the appellant though there is a provision in the agreement but the appellant has been able to prove that the provision in the agreement is subjective in nature and comes into play only if entire data submitted by the appellant is inspected and accepted by LN. As LN has accepted only 47,122 judgments for which the appellant has invoiced and the same has been accepted by LN, there is no further scope for addition only on the basis of provision in the agreement. Accordingly, the addition of Rs.2,01,77,597/- made by the AO stands deleted. Ground No.2 is allowed.
5. Aggrieved, the Revenue is in appeal before this Tribunal.
6. We have heard both the parties and perused the material available on record. The assessee is the sole proprietor of “Cyber Law Journal” which provides legal assistance to lawyers and other similar professionals and business houses by way of publication of case laws. For the AY 201314, he filed his RoI on 30.09.2013 admitting taxable income of Rs.51,14,000/-, and the same was processed u/s.143(1) and later selected for scrutiny. The AO noted that assessee has entered into an agreement with M/S.LEXISNEXIS INDIA, on 19.05.2011 for providing/ sale of copies of judgments rendered by various Courts/Tribunal. As per the said agreement, according to the AO, the total compensation receivable is Rs. 10,49,86,877 + applicable taxes. However, he noted that the actual compensation (Sale Consideration) paid for First Year (Financial Year 2011-12) was to the tune of Rs.7,35,00,000/- and for second Year (Financial Year 2012-13) was only Rs.1,13,09,208/-, thus total was only Rs.8.48,09,208/-. According to the AO, the balance sale-consideration of Rs.2,01,77,597 (10,49,86,877- 8,48,09,208) has not been offered for taxation by the assessee in relation to the AY2013-14 (FY 2012-13). When confronted by the AO, the assessee submitted that the balance amount of sale consideration of Rs,2,01,77,597/- neither accrued nor received or receivable, as the contract has been terminated already and the assessee had delivered all the judgments to the satisfaction of the customer M/s Lexis Nexis only to the extent of amount credited in the profit and loss account i.e. Rs.1,13,09,208/-. However, the AO didn’t agree and was of the view that (i) the entire balance consideration of Rs.3,14,86,877/- accrued to the assessee for the AY 2013-14 but the assessee has admitted an amount of Rs.1,13,09,208 only; and that (ii) M/s. Lexis Nexis, the customer has not terminated the agreement; and that (iii) the dispute in regard to review/rejection/acceptance has not been referred to any Arbitrator as contemplated in the agreement; and that the (iv) Agreement does not contain any stipulation of total number of judgments to be delivered towards the payment of one-time fee of Rs.10,49,86,877 and (v) also the invoice raised by the Appellant dated 14.11.2011 also did not contain the number of judgments delivered. On the aforesaid reasons, the AO rejected the assessee’s contention and added Rs.2,01,77,597/-. On appeal, the Ld.CIT(A) deleted the addition made by the AO as noted (supra).
7. In the instant case, the terms and conditions concerning the grant of license, delivery of licensed materials, the compensation payable etc., are contained in the License agreement between the parties dated 19.05.2011. Clause 2 of the Agreement deals with delivery of licensed materials and Clause 4 deals with compensation which clauses are relevant for adjudication of the issue before us and it would be gainful to reproduce Clause 4 which reads as under:
4. COMPENSATION
4.1. As payment in full for the perpetual license granted to LN and its Affiliates, including LexisNexis, for their use of the Licensed Materials and for Licensor’s obligations under this Agreement, LN will pay to Licensor a one-time fee of up to INR 10, 49, 86, 877 (Ten Crore forty nine lakhs eighty-six thousand, eight hundred seventy seven Indian Rupees) (“One-Time Fee”) and the taxes thereon as specified herein, payable as set out below.
4.2. LN shall pay the one-time fee as follows:
(a) Upon LN’s completion of its review of the Enhanced Data portion of the Licensed Materials under Section 2 above and related acceptance of such Enhanced Data portion of the Licensed Materials as provided in that Section, Licensor will – using the form of invoice set out on Schedule C – invoice LN for a portion of the One-Time Fee equal to INR 7, 35, 00, 000 (Seven Crore thirty five lakhs Indian Rupees) plus applicable Service Tax (10.3%) and VAT (4%). LN shall, within 24 hours after its receipt of such invoice from Licensor (issued as provided in Section 2.6 above) for fees due from LN for Licensed Materials (that have been accepted by LN) and related taxes, pay the amount so invoiced. Payment shall be sent to Licensor via electronic funds transfer at its account set forth under Banking Information specified above.
(b) Upon LN’s completion of its review of the Subsequent Data portion of the Licensed Materials under Section 2 above and related acceptance of such Subsequent Data portion of the Licensed Materials as provided in that Section, Licensor will – using the form of invoice set out on Schedule C invoice LN for a portion of the One-Time Fee equal to INR 240 (two Hundred forty Indian Rupees) per judgment delivered plus applicable Service Tax (10.3%) and VAT (4%). LN shall, within two weeks after its receipt of such invoice from Licensor (issued as provided in Section 2.6 above) for fees due from LN for Licensed Materials (that have been accepted by LN) and related taxes, pay the amount so invoiced. Payment shall be sent to Licensor via electronic funds transfer at its account set forth under Banking Information specified above.
(c) The total aggregate amount payable by LN under Sections 4.2(a) and 4.2(b) above before taxes shall not exceed the amount specified in Section 4.1 regardless of the total number of judgments or data delivered to ог accepted by LN.
8. And as noted Clause 2 deals with Delivery of Licensed materials involves the following steps:
i) The Licensed materials shall be delivered to LN in two sets immediately on execution of the Agreement dated 19.05.2011 in the presence of LN representatives as Initial Delivery of a portion of “Enhance Data” portion of the Licensed materials (Both Enhanced data and In-Process Data) to an LN designated Laptop and
ii) Licensor shall transfer within 150 days after the effective date, all additional data (other than that covered by para 3.4 (i) above) to an LN designated Laptop. From the above it can be seen that Initial Delivery referred to in Para 3. 4(1) is concerned with delivery of “Enhanced Data” more fully described in Schedule A to the Agreement under reference and subsequently “Subsequently Delivered Data” referred to in Para 3.4 (ii) is concerned with the collective delivery of additional Enhanced Data and the “In-Process Data” more fully described in Schedule A to the abovementioned Agreement.
iii) The licensed materials covered by sub-clause i) and ii) above are to be loaded in a laptop in the format and in compliance with the specifications set out in Schedule B to the above referred Agreements between the parties.
iv) The next step is for LN to carry out inspection by performing tests of the licensed materials on the laptop to satisfy itself with respect to all aspects of the Licensed materials including quality, quantity, completeness, format, consisting in the matter of description, etc., compliance with specifications/requirements set out in schedule B to agreement under reference.
v) Communicating to Licensor acceptance and/or rejection of Licensed Materials in the prescribed form (Schedule D to the Agreement under reference) after completion of inspection.
Clause 2.4 emphasises that LN should provide its acceptance and/or rejection to the Licensor in writing after its review duly stating the reasons for rejection.
9. And the next step is for the Licensor (assessee) to-
1) Raise the invoice for the accepted materials in the prescribed form on LN for the fee due as per Clause 4 dealing with “Compensation” in the Agreement
2) Deliver the laptop with such portion of the licensed materials loaded thereon for LN to retain as it may determine and send to LN immediately on receipt of LN’s notice of Acceptance by electronic transmission via FTP to such server, FTP Site or URL as specified by LN a complete second copy of such portion of Licensed Materials
The compensation or consideration for the grant of perpetual license to LN and its affiliates for the use of licensed materials and for Licensor’s obligations under the Agreement dated 19.05.2011 is one-time fee of Rs.10,49,86,877/- plus applicable taxes payable as follows-
a) For enhanced data portion of the licensed materials payable on completion of review and acceptance by LN- Rs. 7,35,00,000+taxes
b) For Subsequent Data Portion of the Licensed materials payable on completion of review and acceptance by LN- Rs.240 per judgment + taxes.
10. And it is noted that the assessee has raised an Invoice for Rs.8,40,10,500 on 14.06.2011 which was duly paid and accounted in relation to the earlier Assessment Year 2012-13 and accordingly, M/s. Lexis Nexis has also deducted tax at source under section 194J from the payment made to the assessee. In the relevant AY 2013-14, the assessee raised Invoice during the financial year 2012-13 for the delivery of 47,122 judgments which were duly inspected and accepted by M/s. Lexis Nexis as per Clause 4.2(b) of the agreement and accordingly an invoice for an amount of Rs.1,31,59,478/- including taxes was raised by the assessee @ Rs.240 per judgment. The said invoice was also duly paid during the year after deduction of tax at source under section 194J of the Act. From the foregoing facts it is clear that the right to receive the income accruing under the Agreement arose only after inspection/review & acceptance of the materials by M/s. Lexis Nexis as stipulated under Cluase 4.2(b) of the agreement. Until, the conditions stipulated in clause 4.2(b) are satisfied the income embedded in the relevant agreement is only a hypothetical income.
11. On the aforesaid facts, the Ld.CIT(A) deleted the additions by rightly appreciating the contention of the assessee in the light of the terms and conditions of the agreement between the assessee and M/s. Lexis Nexis dated 19.05.2011 and rightly determined that only Rs.1,13,09,280/- accrued to the assessee during the relevant Assessment Year 2013-14. The Ld.CIT(A) rightly appreciated that clause 4.2(a) provided for payment of Rs.7,35,00,000/- as one-time fee for Enhanced Data which was paid to the assessee in previous year (AY 2012-13) whereas for the relevant AY 2013-14, only on satisfaction of conditions under clause 4.2 (b) payment of one-time fee for the subsequent data of Rs.240/- per judgment delivered to the satisfaction of M/s. Lexis Nexis. The assessee received Rs.1,13,09,280/- for 47,122 judgments after inspection/review & acceptance of the materials by M/s. Lexis Nexis. Therefore, the Ld.CIT(A) corrected the error of the AO based on terms of clause 4.2(a) instead of Clause 4.2(b). Moreover, the Ld.AR has filed the copy of the M/s. Lexis Nexis letter dated 27.03.2012, wherein, in no uncertain terms it was stated by it that the subsequent data that has been provided by assessee didn’t meet the requirement of the agreement, including the specification in Schedule-B and as such payment is not due Considering the discussion supra, we concur with the Ld CIT(A) that the AO erred in concluding that Rs.2,01,77,597/- accrued to the assessee in the facts of the case. And it is well settled that income can be said to accrue only when the assessee acquires a right to receive that income [C.IT V. Ashok Bhai-56 ITR 42 (SC)] and such accrual may depend on the agreements which may give rise to such rights. The Ld. AR cited the decision in Godhra Electricity Co. Ltd. v. CIT [1997]225 ITR 7461 wherein the Hon’ble Supreme Court reiterated the concept of ‘real income’, emphasizing that even under the mercantile system, a mere claim by the assessee is not sufficient to make income accrue on the basis of ‘hypothetical income’ – the income must actually become due. In the said case the Hon’ble Supreme Court inter alia examined the cash system and mercantile system of accounting in the context of ‘hypothetical income’.
Considering the facts before it, the Court said that although the assessee company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the representative suits filed by the consumers which were decreed by the court and ultimately, after various proceedings which took place, the assessee- company had not been able to realize the enhanced charges. Since no real income having accrued, it was held that the amount due on enhancement was not assessable to Income Tax. In a subsequent decision rendered in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315, the Hon’ble Supreme Court, following its earlier decision in Godhra Electricity Co. Ltd.’s case (supra) affirmed the decision of the Patna High Court wherein it was held that the entry in the books of account shown as income from Hindustan Steel Ltd. for the 8 locomotives supplied by the assessee-company to them could not be brought to tax as income since this entry reflected ‘hypothetical income’ and only the real income could be brought to tax. In CIT v. Modi Rubber Ltd. [1998] 230 ITR 817, following the decisions of the Supreme Court in Godhra Electricity Co. Ltd’s. case (supra) and Shoorji Vallabhdas &Co’s. case (supra), held that a mere unilateral act of the assessee debiting the books of account, the liability for payment whereof was not accepted or agreed to by the debtor, did not amount to income accrued to the assessee.
12. In the light of the discussion, we don’t find any infirmity in the impugned order of the Ld.CIT(A) deleting the addition of Rs.2,01,77,597/-and we confirm the same and dismiss the appeal of the Revenue.
13. In the result, appeal filed by the Revenue is dismissed.
Order pronounced on the 09th day of October, 2024, in Chennai.
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