Income: Accrual of: Section 5(1)(b) and section 145 of Income-tax Act, 1961: A.Y. 1997-1998: Coaching Classes; Fees for full course received in advance : Services to be rendered in next year: Mercantile system: Income not recognised unless services render

[CIT v. Dinesh Kumar Goel, 331 ITR 10 (Del.)]

The assessee running coaching classes followed mercantile
system of accounting. Total fees for the entire course, which may be of two
years duration was taken in advance at the time of admission of the students.
For the A.Y. 1997-1998, the assessee claimed that the fees received in the
relevant year were to be carried forward to the next assessment year as they
related to the next financial year. The Assessing Officer rejected the claim on
the ground that the assessee was following the mercantile system of accounting.
The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) The relevant yardstick for the purpose of taxation is
the time of accrual or arisal. In order to be chargeable, the income should
accrue or arise to the assessee during the previous year. Unless the revenue
is earned, it is not accrued; likewise, unless the expenses are incurred, cost
in respect thereof cannot be treated as accrued. Under Accounting Standard 9,
revenue is recognised only when the services are actually rendered. If the
services are rendered partially, revenue is to be shown proportionate with the
degree of completion of services.

(ii) Though at the time of admission, the students were
required to deposit the whole fee for the entire course, that was only a
deposit or advance and it could not be said that this fee has become due at
the time of deposit.

(iii) The fee was charged in advance for the entire course,
presumably because there should not be any default by the students during the
period of course. The fee was not due at the time of deposit. Services in
respect of financial year 1997-98, for which also the payment was taken in
advance were yet to be rendered.”