| SooperKanoon Citation | sooperkanoon.com/68335 |
| Court | Income Tax Appellate Tribunal ITAT Ahmedabad |
| Decided On | Jan-23-1996 |
| Reported in | (1996)58ITD251(Ahd.) |
| Appellant | Noble Institute (Education) (P.) |
| Respondent | Assistant Commissioner of |
2. The first ground of this appeal of the assessee related to addition of Rs. 1,58,568 on account of being uncollected fees by the assessee company from the students, made by Assessing Officer (hereinafter referred to as the Assessing Officer) and confirmed by the CIT (A) in the following facts and circumstances.
3. The assessee, Noble Institute Private Ltd. is like many other coaching institutes being run in the Ahmedabad City and other towns for imparting coaching to students after their school times. The assessee company is running coaching classes for students of class X to XII for different subjects relating to Science, Mathematics etc. It appears from the record that the assessee was running as many as 5 branches in the previous year concerning to assessment year 1990-91 in which as stated by ID. counsel for assessee, there were five thousand students.
The modus operandi of the assessee is that any student who desires to get coaching in Science/Mathematics subject or in any other subject, approaches the assessee and fills up admission form (copy of admission from appearing on paper book) giving out his name, address and details of the subjects in which he wants to be coached in Rs. 100 is charged as provisional admission fees and before classes start and mostly in the vacation period of students, the assessee-company calculates the amount of fees to be charged from that student and whole of the fees is realised before he is allowed to join the classes. It is also the case of the assessee that some students are not in a position to pay the whole of the amount of the fees at one time and then they are allowed the payment through installments after making such prayer through application for installments and after result of the scrutiny that prayer is reasonable one.
4. In the year under consideration, the assessee filed a return of income showing receipts of Rs. 38,04,737 as against receipts of Rs. 33,75,903 in the immediate preceding year. On scrutiny the Assessing Officer observed that the assessee had not charged fees for the full term from many of the students and that amount of such unpaid/uncharged fees came of Rs. 1,58,565. The Assessing Officer called upon the assessee as to why this amount should not be added to the total income, then the assessee submitted that many students deposited initial fee Rs. 100 seeking admission at the time of start of the session but did not pursue the coaching further and sometimes the students who had been given benefit of paying coaching fees through installments did not complete the coaching for full term and thus that amount remained unpaid. The assessee company further mentioned that it has got its internal control system to check the students who are not coming forward to pay the unpaid amount of fees and still some remain as many students did not turn up. The Assessing Officer considered these submissions but he rejected the same on the main ground that assessee company did not maintain any attendance register nor any other record to show as to which student did not attend the classes for whole of the year or part thereof and made the said addition of Rs. 1,58,565. The assessee came in appeal.
5. The contention of the assessee before the CIT (A) was the same as before Assessing Officer. It was pleaded that taking attendance was not in the interest of the students and the institute as that will lead to the wastage of time. The assessee further gave out the working adopted by the assessee company to check that all the students who were attending the classes, have paid up the due fees. It was also the case of the assessee that it was not possible for assessee to pursue the balance of unpaid fees when student (s) quit classes in the middle of the year or did not turn up after seeking provisional admission by depositing Rs. 100 only. The ld. CIT (A) considered those submissions and rejected by observing that assessee was following mercantile system of accounting and the amount of fees was settled as soon as the students enrolled themselves for coaching and that amount of fees and does fall in the category of the accrual of income of assessee. The assessee had all rights to realise all those amounts as students were bound to pay the full amount to the institute. He had also rejected the plea of the assessee that students sometime failed to turn up after depositing of Rs. 100 as fee or quit classes in the middle of the session on the same ground that amount of entire fees became due to the assessee, the moment the students filled up the admission form.
Ultimately the assessees appeal was rejected confirming the said addition. The assessee came in appeal before the Tribunal.
6. The ld. counsel for the assessee had taken us through the working of the assessee institute and tried to point out that main basis for Assessing Officer for making the addition was that the assessee company was not maintaining any attendance register or any other record so as to reveal as to which student did not attend the classes for whole or part of the year. In this connection it was pointed out that taking attendance is not mandatory as in the schools where it is statutory requirement. Secondly, coaching classes are conducted for 2-2.30 hours consisting of 3-4 periods being attended by 60-75 students and if each of the coach starts taking attendance he will waste 10-15 minutes of the students in each classes. It will also be wastage of time of the institute as teachers as being paid by it on the hourly basis and further the period of coaching classes have to be extended. Sometimes students themselves or on account of domestic requirement opt to remain off from the coaching classes. He further pointed out that students used to quit coaching classes on different grounds as sometimes they were not able to clear the examination in which they appeared or sometimes they switched over from Science Stream to Commerce or Arts or moved out of the city or their school teacher was able to force from them to go for tuition with him or they went to other coaching institute. The contention of the ld. counsel was that no doubt attendance register was not being maintained for the solid grounds mentioned above but still assessee company was vigilant by adopting internal checking system to see that each student who joined coaching classes paid the due fees. The system consists of issuing yellow cards to those students who get provisional admission and pay Rs. 100. If a student pays the whole of the amount then said identity card is replaced by green card and light red cards are issued to those students who use to pay the amount through installments and that card was also being replaced, the moment the amount of installment is paid up. The ld. counsel pointed out further that assessee company had deployed its own staff for frequent and instant checking of identity cards before or after the classes and those students who have not paid up to date are not permitted to attend the classes. The ld. counsel has given out the break up of Rs. 1,58,565 which has been added to the total income as under :- According to him the assessee had shown Rs. 15,800 realised from those students who have not turned up after filling of admission form and depositing Rs. 100 and further received Rs. 56,514 out of those students who had left the classes in the middle of session leaving the unpaid balances which was to be paid by them through installments.
There were so many causes in which students had paid up the whole of the amount and did not attend the classes and still assessee had shown that amount of fees as its receipts. On the basis of all these facts the contention of the assessee was that these were not actual receipt of the assessee as the same were neither receivable not due from the students and there was no legal right to the assessee to recover the said amount from the said amount.
7. The ld. counsel further pointed out that it is not the case of revenue that said amount has been realised by the assessee and not shown by it in the books but the main case is that it was due to the assessee and not realised. The contention of the ld. counsel was that this basis was not correct as unless and until the assessee was not having any right to realise that amount nor the same accrued to him then such amounts cannot be treated as the real income of the assessee even though assessee may be following mercantile system of accounting.
8. Coming to the legal position, the ld. counsel placed reliance on the decision of the Bombay High Court in the case of H. M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 in which their lordships have laid down the true test regarding the principles of real income in the following words :- "The two rules that income-tax is annual in its structure, meaning thereby that for computation each year is a distinct self-contained unit, and the other that the income to be taxed is the real income of the assessee are not incompatible or irreconcilable; they permit of harmonious application.
The principle of real income to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language." The contention of the ld. counsel is that this decision of Honble Bombay High Court is binding as at that time Gujarat High Court was not in existence. According to him in examining any transaction, the Court should have more regard to the reality and situation of the case and in the case in hand the circumstances is such that assessee is in the field of business competition as so many institutions are being run. He lured the students to the institute by offering even discount of 5% in the total amount of fees. The students are simply filling up the admission form and that itself will not be giving any right to the assessee to recover the amount. Further the amount to be recovered from the students will be petty and even the expenses for this recovery shall be quite high. If any legal process is adopted, it will bring bad name to the institutes and in future most of the students will be scared from the name of the institute itself and it all shows that business expediency is also not in favour of adopting such practice on the part of assessee. The ld. counsel pointed out that this reasoning of the Honble Bombay High Court was approved by the Honble Supreme Court in the case of CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 and followed by Patna High Court in the case CIT v. S. K. G. Sugar Ltd. [1974] 96 ITR 194.
9. In ld. counsel further placed reliance on the decision of Hinble Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 in which their Lordships have dealt with the effect of book keeping entries in the mercantile system of accounting. Their Lordships have observed that - "Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz, the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a "hypothetical income", which does not materialize. Where income has in fact been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." 10. The ld. counsel on the basis of above, argued that there was no income resulted in favour of the assessee company and no addition was warranted.
11. About accrual of income, the ld. counsel also pointed out that no services were rendered by the assessee then question of accrual of income does not arise. Mere filling up of form will not show that assessee had rendered any services to the student (s). Further the Assessing Officer has also not made any effort to find out from any student who had quit the session in the middle of the session and did not pay the installment or from that student who simply filled in the admission form and paid Rs. 100 whether he has paid any amount, to verify the correctness of the entries of the assessee.
According the case of the assessee was that no accrual had taken place nor it was the income of the assessee if the principles of real income are applied to the facts of the case.
12. As against it, the ld. D. R. placed heavy reliance on the order of Assessing Officer as well as that of CIT (A). He pointed out that assessee is following mercantile system of accounting and once the assessee gets duly filled in admission form any student seeking admission and he enrolled him by getting the registration fee, it was the bounded duty of the assessee company to have completed the account books by crediting whole of the amount as it is a case of company and he became entitled to recover the amount calculated by the office staff in the bottom of the admission form meant for office use and in the mercantile system it became the income of the assessee in view of the system of accounting being followed by the assessee and at the same time it gave right to the assessee to recover the same, because contract is complete as soon as the student is enrolled. The ld. D. R.pointed out that burden was on the assessee-company to prove that such and such students and left after payment of Rs. 100 registration fee or left the classes in the middle of the session but nothing has been done by it. Students were not to be examined by Assessing Officer as argued by the ld. counsel but assessee should have produced the same. The ld.D. R. was of the view that real income theory will not come into play in the sense as argued by the ld, counsel for the assessee. The ld. D.R. further pointed out that assessee had not acted as was expected by a businessman. The assessee company was entitled to recover the amount and once that has not been recovered no benefit of non-action on the part of assessee can be extended to the assessee. On the basis of these, the contention was that addition must be upheld.13. The ld. counsel for the assessee in rejoinder placed reliance on the earlier arguments and pointed out that there was no question of contract as students were minors and contract with minor is nullity. He further pointed out that there was no accrual of any income nor that amount comes in the theory of real income. Relying upon the arguments of the held. D. R. it was contended by the ld. counsel that in case book entries were completed then at the most assessee would have claimed that amount as trading loss and that would have been allowable in view of the decision of Honble Gujarat High Court in the case of CIT v. Equitorial (P.) Ltd. [1974] Tax 37 (3) - 82. He further placed reliance on the decision of Honble Supreme Court in the case of Shoorji Vallabhdas & Co. (supra) in which such an entry, if made in the accounts, would have been showing hypothetical income and would have not resulted any income. In the end contention of the ld. counsel was that the appeal is to be allowed.
14. We have carefully considered the submissions of the parties and gone through the material placed before us as well as perused the case laws relied by both the parties. We are of the considered opinion that the theory of real income as propounded by Honble Bombay High Court in the case of H. M. Kashiparekh & Co. Ltd. (supra) do apply to the facts of the case as well as the ratio of the decision of Honble Supreme Court in the case of Shoorji Vallabhdas & Co. (supra) force us to conclude that there resulted no income at all to the assessee.
Undisputedly some of the students had filled in admission forms and deposited Rs. 100 only in each case and later on failed to attend classes for so many reasons as given out by the learned counsel. If any student had failed in the previous examination or he had decided to change the Science stream to Arts or Commerce or moved out of Ahmedabad or joined any other institute in the city, then the assessee company cannot be expected to pursue that case and force the student to join the institute and pay the amount which was calculated by its office staff at the body of the admission form because that calculation alone will not give out any right to assessee to claim the amount from the student if he did not wish to proceed further with the coaching being imparted by the assessee institute. Secondly, these facts will not automatically creat any right in favour of assessee company to recover the amount from such students nor the same will be resulting in any real income in favour of the assessee even though mercantile system of accounting was being followed by it. In the case of students who were extended the benefit of paying the due amount of fees through installments and in case they had not turned up after 2-3 months, the amount cannot be recovered from them as they were not getting any coaching also for the remaining period.
It is again noteworthy fact that if services are not rendered by the assessee then such amount will not be automatically paid out to the assessee. We have gone through the guidance note issued by the Institute of Chartered Accountants of India on Accrual Basis of Accounting and the relevant extract thereof are appearing from pp. 199 to 211 of the paper book of assessee.
Dealing with revenue recognition (AS-9) the said guidance note describes the accounting standard issued by the said Institute in cases relating to sale of goods, rendering of services etc. On page 211 of the same we do find how the amount of tuition fee is to be dealt with and it shows revenue should be recognised over the period of instructions. This again clarifies the whole position of the assessee and method being adopted by assessee. The fact remains that students who were not getting coaching would not be coming forward to pay the amount of fees even then the institute may be following mercantile system of accounting and business expediency also requires that no punitive steps can be taken by the assessee for realisation of the alleged due amount according to the mercantile system of account as once a suit is filed by my institute in any Civil Court of realisation of Rs. 500-1,000 from any student, it will create problems not only on the institute but administration also. This aspect of this type of business cannot be lost sight of because admittedly assessee is dealing with the students and tackling of students now-a-days is being felt by each and one Educational Institution.
15. Another aspect of the matter may be referred to. As pointed out by the ld. counsel for assessee, as many as approximately 5 thousand students are enrolled each year by the assessee company for coaching purposes. The assessee has also furnished the list of such defaulters/drop-out students who had failed to turn up after depositing Rs. 100 or had failed to complete the coaching in the installment scheme; and failed to pay the remaining alleged due amount and out of them these numbers come to 311 only which is not challenged by the revenue. If out of approximately 5 thousand students taking coaching, such defaulters are 311, this will be a very negligible percentage which can be overlooked. The assessee has also furnished before us that this is not only feature of this year or in the institute of assessee company but in all such institutions this type of defaulters/drop-outs occur. The ld. counsel has pointed out that the details of such amount for assessment year 1989-90 which was Rs. 1,40,102 and even in subsequent assessment year 1991-92 where this amount on identical ground was Rs. 1,38,209 nothing was done by the department for assessment year 1989-90 on the similar facts. This fact again is relevant that this type of happening is not a new feature for this assessment year but it has been going on regularly from so many preceding years and taking place even after this assessment year.
16. Considering all these facts and circumstances together, we concluded that it was a case of accrual of no real income in favour of assessee and question of any addition was not warranted. The authorities below were not justified in making the addition and confirming the same. As we are going to delete this addition on these facts, we are not taking up the ground No. 8 of the assessee in the grounds of appeal which is nothing but an alternative submission for treating this amount as bad debt in case this amount is being treated as accrued to the assessee on the basis of mercantile system of accounting. The result is that this ground of appeal spread over ground No. s 3 to 4 and 8 stands disposed of deleting the amount of Rs. 1,58,565 added by Assessing Officer and confirmed by CIT (A).
17. to 27. [There paras are not reproduced here as they involve minor issues].