ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 1 of 26 REPORTABLE * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093/2008, 1142/2008, 1204/2008, 1099/2008, 627/2009, 1153/2010 Reserved On: 19th October, 2010 % Pronounced On: 29th October, 2010 1) ITA No.514 of 2006 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate VERSUS Dinesh Kumar Goel . . .Respondent through: Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar, Advocates. 2) ITA No.439 of 2007 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate VERSUS Dinesh Kumar Goel . . .Respondent through: Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar, Advocates. 3) ITA No.980 of 2007 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate VERSUS FIITJEE LTD. . . .Respondent through: Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar, Advocates. ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 2 of 26 4) ITA No.14 of 2008 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate VERSUS FIITJEE LTD. . . .Respondent through: Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar, Advocates. 5) ITA No.409 of 2009 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate VERSUS FIITJEE LTD. . . .Respondent through: Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar, Advocates. 6) ITA No.193 of 2010 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate VERSUS FIITJEE LTD. . . .Respondent through: Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar, Advocates. 7) ITA No.112 of 2008 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate VERSUS FIITJEE LTD. . . .Respondent through: Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar, Advocates. ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 3 of 26 8) ITA No.598 of 2010 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate VERSUS FIITJEE LTD. . . .Respondent through: Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash Kumar, Advocates. Reserved On: 20th October, 2010 % Pronounced On: 29th October, 2010 9) ITA No.1093of 2008 Deputy Commissioner of Income Tax . . . Appellant through : Ms. Suruchi Aggarwal, Advocate VERSUS CURLS & CURVES INDIA LTD. . . .Respondent through: Dr. Rakesh Gupta, Advocate. 10) ITA No.1142 of 2008 Commissioner of Income Tax . . . Appellant through : Ms. Suruchi Aggarwal, Advocate VERSUS Rajni Dargan . . .Respondent through: Dr. Rakesh Gupta, Advocate. 11) ITA No.1204 of 2008 Commissioner of Income Tax . . . Appellant through : Ms. Suruchi Aggarwal, Advocate VERSUS Rajni Dargan . . .Respondent through: Dr. Rakesh Gupta, Advocate. ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 4 of 26 12) ITA No.627 of 2009 Commissioner of Income Tax . . . Appellant through : Ms. Suruchi Aggarwal, Advocate VERSUS CURLS & CURVES INDIA LTD. . . .Respondent through: Dr. Rakesh Gupta, Advocate. 13) ITA No.1153 of 2010 Deputy Commissioner of Income Tax . . . Appellant through : Ms. Suruchi Aggarwal, Advocate VERSUS VLCC Health Care Ltd. . . .Respondent through: Dr. Rakesh Gupta, Advocate. 14) ITA No.1099 of 2008 Commissioner of Income Tax . . . Appellant through : Ms. Suruchi Aggarwal, Advocate VERSUS Rajni Dargan . . .Respondent through: Dr. Rakesh Gupta, Advocate. CORAM :- HON’BLE MR. JUSTICE A.K. SIKRI HON’BLE MR. JUSTICE SURESH KAIT 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? A.K. SIKRI, J. 1. In all these appeals, similar questions of law are raised. At the same time, we would like to discuss them separately after stating the legal principles, which would govern the fate of these appeals. ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 5 of 26 For this purpose, the appeals can be put into two categories. In the first category, the appeals are, viz., ITA Nos.514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 and 598/2010 which would be taken together as they belong to the same assessee. Remaining appeals would be taken together in the other category, in which the assessees belong to the same group. We first take up the discussion in respect of ITA No.514 of 2006 and other connected matters wherein the legal proposition would also be explained. ITA Nos.514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 and 598/2010 2. The assessee in these cases running an institute under the name M/s FIITJEE and is the sole proprietor of these concerns. M/s FIITJEE is a coaching institute where students are admitted for getting coaching and preparing them for appearing in entrance examination conducted by engineering institutes. The assessee is following mercantile method of accounting. From these students, total fee of the entire course, which may be of two years duration, is initially taken at the time of admission of the students. 3. For the assessment year in question, i.e., 1997-98, the assessee filed his return on 29.10.1997 declaring the total income of `3,42,620. This return was processed under Section 143 (1) (a) of the Income Tax Act (hereinafter referred to as „the Act‟) on 01.01.1998 at the aforesaid income. Thereafter, notice under Section 143(2) of the Act was issued to the assessee on 26.10.1998. It so happened that a couple of months before, i.e., on 18.08.1998, a search operation was carried out at the business ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 6 of 26 and residential premises of the assessee by the Income Tax Authorities. Thereafter, the assessee filed a revised return of income on 31.03.1999 declaring a loss of `58,39,070. 4. One of the items of income shown in the return was tuition fees. In the original return filed by the assessee on 29.10.1997, he had shown the income from tuition fee at `1,99,70,106. In the revised return, however, he claimed deduction to the tune of `55,45,834 from the aforesaid amount stating that “fees received in Financial Year 1996-97 to be carried forward to 1997-98 as it was related to Financial Year 1997-98”. This claim on the basis that receipt of the tuition fee from the students did not belong to Financial Year 1996-97 alone as part of the fee, which was taken in advance related to Financial Year 1997-98 as well. On this premise, it was stated that the deduction to this extent be allowed in this year, which would be shown as receipt in the next year. The Assessing Officer (AO) did not permit this deduction on the premise that when the assessee was following mercantile method of accounting, income becomes taxable whenever it falls due, irrespective of the fact that when the same is actually received by the assessee. He took note of the fact that as per the brochure issued by M/s FIITJEE, students were required to deposit the fees for the whole module of course at the time of registration itself. From this, he concluded that “fees becomes due at the time of `55,45,834 was due during the Financial Year 1996-97”. 5. Since in these appeals, we are concerned with this issue alone, other aspects of the assessment order are not taken note of. ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 7 of 26 6. The assessee preferred appeal before the CIT(A) and submitted that the aforesaid amount of `55,45,834, though received in Financial Year 1996-97, it was only a „deposit‟ made by the students which was taken as advance money in the hands of the assessee and had not accrued in that year, but was accrued to in the next year. It was also submitted that even when the money had been received, the services against this money is yet to be rendered/provided by the assessee to these students, which was to be done in the Assessment Year 1998-99 and therefore, receipt of this amount could not be treated as „income‟ in the hands of the assessee in the Assessment Year in question. This contention of the assessee impressed the CIT (A) and by accepting the same, the CIT (A) deleted the addition. The following discussion in the order of the CIT (A) needs to be extracted, which depicts the amount of the CIT (A) and the reasons for arriving at the aforesaid conclusion: “I agree with the AR that the receipt was without acquiring the right to receive it as income, as services had yet to be rendered and it would be in the nature of advance. Only when the services were rendered, it will become income in the hands of the appellant. In case of Calcutta C. Ltd. Vs. CIT 37 ITR 1 the assessee dealt in land and property and carried on land developing business. The whole development was not carried out when the plot was sold. The appellant credited Rs.43,692 and also estimated Rs.24,809 as the expenditure for development to be carried out. There was no actual disbursement of the expenditure. It was held by the Hon‟ble Supreme Court that “inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date, the amount to be expended in the discharge of that liability would have to be estimated in order that in the mercantile system of accounting, the amount could be debited before it is actually disbursed. In case of E.D. Sasson & Co. Ltd. Vs. CIT (supra) it was held that if income has accrued to the assessee, it is certainly by ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 8 of 26 him in the sense that he has contributed to its production and the parenthood of the income can be traced to hm. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise. Unless and until his contribution or parenthood is effective in bringing into existence a debit or a right to receive the payment, it cannot be said that any income has accrued to him. The AO has pointed out that the students had to pay the amount before the course started in lumpsum but it does not detract from the fact that the receipt by the appellant has not yet become income since services are yet to be rendered. Otherwise the estimated expenditure for services to be rendered will have to be allowed as held by the Hon‟ble Supreme Court on (sic. in) Calcutta Co. Ltd. (supra). I agree with the AR that in regard to the amount of `55,45,384 the services were yet to be rendered and hence it could only be treated as an advance and it had not yet become the income of the appellant. The action of the appellant omitting the above amount is therefore upheld.” 7. It was now the turn of the Department to feel aggrieved by this part of order of the CIT (A). The Department accordingly approached the next higher forum, i.e., the Income Tax Appellate Tribunal (hereinafter referred to as „the Tribunal‟) and filed the appeal challenging the aforesaid deletion of addition made by the AO. The Department was, however, unable to convince the Tribunal. 8. After indepth deliberations, the Tribunal has found favour with the order of the CIT (A) and affirming the same, the appeal of the Department has been dismissed by the Tribunal. The Tribunal, in the process, noted one additional fact, viz., the Consumer Forum, Chandigarh had decided a case filed by the student for refund of unexpired period fee when he had left the course after few months of joining the institute. It was held that since the services were not rendered for the second year for which fee had already be paid in advance, the assessee should refund one year‟s fee to the said ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 9 of 26 student (this decision of the Consumer Court, Chandigarh has been upheld by the Supreme Court as well). The Tribunal, thus, observed as under: “8……………Any receipt by an assessee without acquiring the right to receive it as income would be only in the nature of an advance and cannot partake of the character of income unless the services are rendered or required part of the contract is performed. The fee received a the time of admission of a student cannot be said to be non- refundable in as much if no service of coaching is provided to the student, the assessee is statutorily liable to refund the amount under the Consumer Protection Act, 1986” 9. Still not satisfied, the Department has come up to this Court by filing the instant appeals, which have been admitted on the following question of law: “Whether ITAT was legally correct in holding that fee received by the respondent assessee at the time of admission of the students is an “advance” and no “income” accrued to the assessee for purposes of the Income Tax Act, 1961?” 10. During the course of arguments before us, counsel for both the parties were at ad idem to the extent that the case was governed by the principles laid down by the Supreme Court in the case of E.D. Sasson & Co. Ltd (supra). Their discord is on the applicability of the principles to that judgment of the facts of this case. We may, therefore, first state the principle of law laid down by the Supreme Court in the aforesaid judgment. 11. Section 5 of the Act gives the „scope of total income‟. Sub-Section (1) thereof, with which we are concerned, reads as under: “(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which - (a) Is ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 10 of 26 received or is deemed to be received in India in such year by or on behalf of such person; or (b) Accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) Accrues or arises to him outside India during such year.” As is clear from reading of Clause (b) above, even when the income accrues or arises or is deemed to accrue or arise to the assessee in India during previous year, that is to be taxed in that year. It is important, therefore, that receipt of a particular amount in the relevant year should be an “income” under the aforesaid provision. What is the relevant yardstick is the time of accrual or arisal for the purpose of its taxation, viz., in order to be chargeable, the income should accrue or arise to the assessee during the previous year. If income has accrued or arisen, even if actual receipt of the amount is not there, it would be chargeable to tax in the said year. Though the amount may be received later in the succeeding year, the income would be said to accrue or arise if there is a debt owed to the assessee by somebody at that moment. From this, it follows that there must be the “right to receive the income on a particular date, so as to bring about a creditor and debtor relationship on the relevant date”. The Court further explained that a right to receive a particular sum under the agreement would not be sufficient unless the right accrued by rendering of services and not by promising for services and where the right to receive is interior to rendering of service, the income, therefore, would accrue on rendering of services. Following discussion in this judgment would demonstrate the principle which we have highlighted above: ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 11 of 26 “37. Mukerji J. has defined these terms in Rogers Pyatt Shellac & Co. v. Secretary of State for India 1 I.T.C. 363 : "Now what is income? The term is nowhere defined in the Act......... In the absence of a statutory definition we must take its ordinary dictionary meaning - 'that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation" (Oxford Dictionary). The word clearly implies the ideal of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. 'Accrues,' 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these works have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a nature growth or result. The three expressions 'accrues,' 'arises' and 'is received' having been used in the section, strictly speaking 'accrues' should not be taken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry L.J. in Colquhoun v. Brooks (1888) 21 Q.B.D. 52 , [this part of the decision not having been affected by the reversal of the decision by the House of Lords (1889) 14 App. Cas. 493 that both the words are used in contradistinction to the word "receive" and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate. One other matter need be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income.'" ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 12 of 26 38. The observations of Lord Justice Fry quoted above by Mr. Mukerji J. were made in Colquhoun v. Brooks (1888) 21 Q.B.D. 52 while construing the provisions of 16 and 17 Victoria Chapter 34 section 2 schedule 'D'. The words to be construed there were 'profits or gains, arising or accruing,' and it was observed by Lord Justice Fry at page 59 : "In the first place, I would observe that the tax is in respect of 'profits or gains arising or accruing.' I cannot read those words as meaning 'received by.' If the enactments were limited to profits and gains 'received by' the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this county. The result would be that no Income-tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words 'arising or accruing' are general words descriptive of a right to receive profits." 39. To the same effect are the observations of Satyanarayana Rao J. in Commissioner of Income-tax, Madras v. Anamallais Timber Trust Ltd. [1950]18ITR333(Mad) and Mukherjea J. in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay [1950]181ITR472(SC) where this passage from the Judgment of Mukerji J. in Rogers Pyatt Shellac & Co. v. Secretary of State for India 1 I.T.C. 363 , is approved and adopted. It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expresses debitum in presenti, solvendum in future; See W. S. Try Ltd. v. Johnson (Inspector of Taxes) [1946]1 A.E.R. 532 , and Webb v. Stenton and Others, Garnishees 11 Q.B.D. 518 . Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income had accrued to him.” 12. Ms. Prem Lata Bansal, learned counsel for the Revenue, emphatically submitted that the effect that the moment agreement (s) with students were signed and they were called upon to pay the fee, right to receive the fee had been acquired by ITA Nos. 514/2006, 439/2007, 980/2007, 14/2008, 409/2009, 193/2010, 1112/2008 & 598/2010 ITA Nos.1093, 1204 /2008, 627/2009, 1153/2010 & 1099/2008 Page 13 of 26 the assessee. It was for this reason that every student admitted to the course is under obligation to pay the entire fee for the whole course at the time of admission itself. Thus, it conferred upon the assessee „right to receive the money‟ in the form of fee at that stage and the conditions of Section 5 of the Act were fulfilled, as it would be inferred that the income has accrued. She submitted that there was a distinction between the executor contract and executed contract and even if the contract was not executed at that time in the sense that the services are yet to be provided, the money received would be the income at the hands of the assessee. In support of her argument, she referred to the judgment of the Madras High Court in the case of Lakshminarayana Films Vs. Commissioner of Income Tax [244 ITR 344 (AP)] and particularly impressed upon the following discussion: “7. We have considered the rival submissions made by the assessee as well as the Revenue. The fact remains that the assessee had leased out the dubbing rights of its abovesaid picture for Tamil and Malayalam to Jay Films and Cine Link Service by agreements dated May 25, 1974, and August 27, 1974, respectively. It is equally not in dispute that the assessee had shown an income of Rs. 25,80,000 in the return