Section 5 – Non-refundable security deposits received by the assessee from landline subscribers and also activation fees received from them are in respect of services rendered by the assessee over the period in which the connection is in use and therefore are taxable over estimated customer churn period and not in the year of receipt.
Facts:
In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee has received Rs. 3,46,00,000 as non-refundable security deposits from land line customers. He noticed that the assessee has not regarded this amount as a revenue receipt but has amortised the same over estimated period of customer’s relationship, as derived from estimated customer churn period, in accordance with Generally Accepted Accounting Policies. For this treatment, the assessee had relied upon the exposure draft of technical guide on revenue recognition for telecommunication operators, as issued by ICAI. He also noted that the activation fees were also accounted on similar basis and direct activation cost was also deferred and amortised over the same period as activation revenue.
The AO was of the view that there is no specific recommendation in the said exposure draft with regard to non-refundable security deposit and that the activation fees cannot be treated as in parity with non-refundable security deposit since activation fees, according to him, were in the nature of joining fees for being eligible to use the services. He, charged to tax the entire amount of nonrefundable security deposits received by the assessee during the previous year. Aggrieved the assessee raised an objection before the DRP but without any success.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held :
Non-refundable security deposit received from landline subscribers was in respect of services rendered by the assessee over the period in which the connection would be in use, and, therefore, its being amortized over the estimated customer churn period is in accordance with generally accepted accounting principles in as much as it would indeed present a distorted picture of financial affairs when entire amount of non-refundable security deposit is treated as income relatable to the year in which it is received.
It noted that this practice has consistently been followed by the assessee and Revenue had accepted the same in other years. The Tribunal noted that the Supreme Court has in the case of CIT vs. Excel Industries Ltd. (358 ITR 295)(SC) reiterated that it would be inappropriate to allow reconsideration of an issue for a subsequent year when the same fundamental aspect permeates in the different assessment years.
The Tribunal deleted the addition made by the AO. This ground of appeal filed by the assessee was allowed.
