2022 (5) TMI 1381 - AT - Income Tax

Tribunal validates hybrid accounting, upholds exemptions under Income Tax Act, emphasizes compliance

The Tribunal partially allowed the appeals in favor of the assessee, upholding the applicability of Section 11(4A) of the Income Tax Act, validating the ... Exemption u/s 11 - self style jurisdiction in enquiring into the applicability of section 11(4A), in respect of the present year - Whether Forum below, have again erred, as to applicability of section 11 (4A), which he has simply concurred with the findings of the Assessing Officers. And it was never being a fact that the appellant assessee did not want to avail the exemption U/s 11(4A)? - HELD THAT:- issue raised by the assessee in ground Nos.2 & 3 has already been decided by the Hon’ble Jurisdictional High Court in assessee’s own case r [2003 (1) TMI 27 - ORISSA HIGH COURT] in favour of the assessee. Therefore, this ground may be allowed as per the decision of the Hon’ble Jurisdictional High Court (supra). Notional income computed on mercantile system - AR drew our attention assessee’s paper book wherein the interim order has been passed by the Tribunal directing both the parties i.e. assessee as well as the department to bring on record as to whether the accrued income for these particulars years have subsequently been accounted by the assessee in other assessment years on cash basis or not. Our attention was also drawn regarding reply filed by the department in compliance of the direction issued by the Tribunal on 05.05.2008, wherein the department has expressed its inability to verify the voluminous documents; more specifically the verifications of the documents to be made are not in possession of the department. It was also stated by the department in the said letter that verification by the AO regarding the incomes accrued to the assessee cannot be possible to be done by the AO alone. Without going much into the merits of the case and delving into the assessment year under consideration along with the year of appeal, we are of the substantive opinion that when the department itself has expressed its inability to verify the documents as had been directed by the Tribunal vide its order dated 05.05.2008, either on account of voluminous documents or for any other reason whatsoever, hence the contentions of the assessee cannot be rebutted or curtailed by the revenue, therefore, the assessee cannot be kept in abeyance from getting justice which he deserves. Accordingly, we allow the ground No.4 of appeal of the assessee. Issues Involved:1. Applicability of Section 11(4A) of the Income Tax Act.2. Rejection of the hybrid system of accounting by the assessee.3. Entitlement of the assessee to exemption under Section 11 of the Act.4. Imposition of penalties under Section 271(1)(c) of the Act.Detailed Analysis:1. Applicability of Section 11(4A) of the Income Tax Act:The assessee argued that the applicability of Section 11(4A) was not initially pleaded before the Assessing Officer (AO) or the Commissioner of Income Tax (Appeals) [CIT(A)], and the Income Tax Appellate Tribunal (ITAT) had suo-motu applied this provision. The Hon'ble High Court of Orissa had previously ruled in favor of the assessee on this issue, stating that the Tribunal had overstepped its jurisdiction by applying Section 11(4A) without it being raised in the pleadings. The Supreme Court also directed the Tribunal to reconsider this issue, leading to the Tribunal allowing this ground in favor of the assessee, thereby upholding the High Court's decision.2. Rejection of the Hybrid System of Accounting:The assessee had shifted from a cash system to a hybrid system of accounting starting from the assessment year 1985-86. The AO and CIT(A) rejected this method, arguing that it did not reflect the true state of affairs. However, the Tribunal noted that prior to the assessment year 1997-98, the hybrid system of accounting was permissible under the Act. The Tribunal also observed that the assessee, being a charitable trust, was not subject to the provisions of Section 145, which applies to business or professional income. The Tribunal further noted that the Revenue had failed to verify the accrued income in subsequent years due to the voluminous nature of the documents. Consequently, the Tribunal allowed this ground in favor of the assessee, recognizing the hybrid system of accounting as valid.3. Entitlement of the Assessee to Exemption under Section 11 of the Act:The Tribunal addressed whether the assessee was entitled to exemption under Section 11, which was initially denied due to the change in accounting practice. The Tribunal, following the directions of the Supreme Court and the High Court, concluded that the assessee was indeed entitled to the exemption under Section 11. The Tribunal's decision was based on the fact that the Revenue could not substantiate its claims against the hybrid accounting system and failed to verify the accrued income.4. Imposition of Penalties under Section 271(1)(c) of the Act:The AO had initiated penalty proceedings against the assessee for the assessment years 1985-86, 1989-90, and 1993-94, alleging concealment of income and furnishing inaccurate particulars. The CIT(A) upheld these penalties, but the Tribunal's interim order directed the Revenue to verify if the 'Receivables' for the assessment year 1985-86 had been accounted for in subsequent years. The Revenue's failure to comply with this direction led the Tribunal to question the validity of the penalties. Ultimately, the Tribunal's decision to recognize the hybrid system of accounting and grant exemption under Section 11 indirectly impacted the penalty proceedings, favoring the assessee.Conclusion:The Tribunal allowed the appeals partly, ruling in favor of the assessee on the major issues of the applicability of Section 11(4A), the validity of the hybrid system of accounting, and the entitlement to exemption under Section 11. The Tribunal's decision was influenced by the higher courts' directions and the Revenue's inability to substantiate its claims. The penalties imposed under Section 271(1)(c) were also indirectly impacted by these rulings. The Tribunal emphasized the need for the Revenue to comply with the directions and verify the relevant documents, which it failed to do.