2018 (2) TMI 601 - AT - Income Tax

ITAT upholds assessee's subsidy accounting method under AS-12, dismissing Revenue's appeal

The ITAT dismissed the Revenue's appeals, upholding the CIT(A)'s order that the assessee correctly accounted for the subsidy based on finalized figures ... Addition on account of subsidy payable by the Govt. - system of accounting - Held that:- It is seen that as in the earlier years the AO in the year under consideration also questioned the Accounting System followed by the assessee and held it to be a hybrid system and thus contrary to the statutory mandate. The assessee's claim that it was following the mercantile system of accounting was not accepted. The CIT(A) relying on the past precedent available in the decision cited, and considering the facts in the year under consideration which were identical rejected the addition made by the AO by way of a disallowance. Issues Involved:1. Deletion of addition made on account of subsidy payable by the Government.2. Adherence to the mercantile system of accounting versus alleged hybrid system of accounting.Detailed Analysis:Issue 1: Deletion of Addition on Account of Subsidy Payable by the GovernmentThe Revenue challenged the deletion of an addition of Rs. 53.56 crores made on account of subsidy payable by the Government. The CIT(A) had deleted this addition, and the Revenue sought to have the CIT(A)'s order set aside and the AO's order restored. The CIT DR relied on the assessment order, while the Authorized Representative for the assessee argued that the issue was covered in favor of the assessee by prior ITAT orders for earlier assessment years, specifically citing the ITAT's order dated 02/08/2017 for the 2008-09 assessment year.The ITAT noted that the issue had been considered in earlier years and that the AO had questioned the accounting system followed by the assessee, labeling it as a hybrid system contrary to statutory mandates. The CIT(A) had rejected the AO's addition based on past precedents and the identical facts for the year under consideration. The CIT(A) emphasized that audit observations alone could not form the basis for an addition, especially when the Department had accepted the accounting method in previous years. The CIT(A) also highlighted that the AO had not provided evidence of any deviation in the accounting treatment or distortion of profits.The CIT(A) further noted that the appellant followed AS-12 for government grants and that the AO had misunderstood the accounting standards. The CIT(A) concluded that the appellant had correctly accounted for the subsidy based on the finalized figures from the Punjab State Electricity Regulatory Commission (PSERC), which often took 2-3 years to finalize.Issue 2: Adherence to Mercantile System of AccountingThe Revenue argued that the assessee was following a hybrid system of accounting by recognizing subsidy on a cash basis rather than on an accrual basis as required by the mercantile system. The CIT(A) and the ITAT both found that the assessee was indeed following the mercantile system of accounting and AS-12 in totality. The ITAT noted that the subsidy figures could not be anticipated accurately at the end of the financial year due to the regulatory process and were accounted for in the year they were finalized by the PSERC.The ITAT upheld the CIT(A)'s decision, noting that the assessee's method of accounting for the subsidy had been consistent and that the AO had not provided any evidence of deviation or distortion in profits. The ITAT reiterated that the Department could not revisit settled issues without sufficient cause.Conclusion:The ITAT dismissed the Revenue's appeals, finding no infirmity in the CIT(A)'s order either on facts or law. The ITAT emphasized that the assessee's accounting treatment of the subsidy was consistent with past practices and accounting standards, and there was no justification for the addition made by the AO. The appeals were dismissed, and the CIT(A)'s order was upheld. The judgment was pronounced in the open court on 07/02/2018.