2024 (7) TMI 590 - HC - Income Tax

Revenue cannot alter accounting system position in subsequent years without challenging fundamental aspect across different assessment years

Pr. Commissioner of Income Tax, Shillong Versus M/s North Eastern Electric Power Corporation Limited

Pr. Commissioner of Income Tax, Shillong Versus M/s North Eastern Electric Power Corporation Limited - [2024] 469 ITR 4 (Meghalaya) Issues Involved:1. Quashing of revisionary proceedings under Section 263 of the Income Tax Act, 1961.2. Mercantile system of accounting and trade receivables.3. Hybrid system of accounting and interest on debtors on cash basis.4. Adherence to Ministry of Power's direction on accounting for interest on cash basis.Detailed Analysis:Issue 1: Quashing of Revisionary Proceedings under Section 263 of the Income Tax Act, 1961The Department challenged the Income Tax Appellate Tribunal's (ITAT) decision to quash the revisionary proceedings under Section 263 of the Act, 1961. The Principal Commissioner of Income Tax, Shillong, had initially set aside the assessment order for the year 2014-2015, directing a re-computation of the Company's income. The ITAT quashed these proceedings, leading to the Department's appeal. The High Court observed that once the order under Section 263 was quashed, any subsequent order based on it was invalid. The Principal Commissioner did not satisfy the conditions under Section 263, and thus, the revisionary order could not stand.Issue 2: Mercantile System of Accounting and Trade ReceivablesThe Department argued that the Company followed the mercantile system of accounting and had shown Rs. 791.90 crores as trade receivables. The ITAT and the CIT (Appeals) had rightly set aside the assessing officer's order, adding surcharge to the income of the assessee. The High Court referenced the Punjab and Haryana High Court's judgment in 'The Commissioner of Income Tax, Hisar Vs. Dakshin Haryana Bijli Vitran Nigam Ltd., Hisar,' which held that hypothetical income should not be taxed merely because of an entry in the books of account. The High Court found no error in the ITAT's decision.Issue 3: Hybrid System of Accounting and Interest on Debtors on Cash BasisThe Department focused on the Company's use of a hybrid system of accounting, particularly regarding 'interest on debtors on a cash basis,' which they argued contravened Section 145 of the IT Act, 1961. The High Court noted that the issue involved a question of fact already decided by the Punjab and Haryana High Court and upheld by the Supreme Court. The High Court cited the Supreme Court's judgment in 'Commissioner of Income Tax vs. M/s Excel Industries Ltd.,' which emphasized that hypothetical income should not be taxed and that consistent judicial views should not be altered without convincing reasons.Issue 4: Adherence to Ministry of Power's Direction on Accounting for Interest on Cash BasisThe Department argued that the Company was obliged to follow the Ministry of Power's direction to account for interest on a cash basis. The High Court noted that the method of Late Payment Surcharge (LPS) on a cash basis had been consistently followed by the Company since 2003-2004 and recognized through various judicial pronouncements. The High Court found no reason to interfere with the ITAT's decision, which was consistent with previous judicial views and the Company's established accounting practices.Conclusion:The High Court dismissed the Department's appeal, finding no merit in the arguments presented. The ITAT's order quashing the revisionary proceedings under Section 263 was upheld, and the Company's accounting practices were found to be consistent with judicial precedents. The High Court emphasized that hypothetical income should not be taxed and that consistent judicial views should not be altered without compelling reasons. The appeal was dismissed with no costs.