TaxTMI 
TaxTMI 
2011 (9) TMI 43
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....nnot be taxed on the basis of mercantile system of accounting. While doing so that ld. CIT(A) has ignored the fact that there can't be two different systems of accounting for determining income u/s. 143(3) and u/s. 115JB of the I.T. Act, 1961." 3. The facts and circumstances giving raise to these appeals by the Revenue arise as discussed in the order of assessment for AY 04-05 are as follows: The Assessee is a private limited company. It renders professional services/consultancy services in the field of civil/structural engineering and architecture by providing design, supervision and project management. It's income is in the form of fees for services rendered. For AY 04-05, the Assessee filed return of income declaring total income at Rs. 4,76,57,440/-. The above total income is the gross profit as per Profit and Loss Account which is maintained on the cash system of accounting by the Assessee. The tax payable as per the total income declared in the return of income by the Assessee was Rs. 1,66,80,104. The Assessee in compliance with its obligations under Sec.209(3) of the Companies Act, 1956 had maintained books of accounts in accordance with the mercantile system of Acc....
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....its registered office proper books of account with respect to certain matters referred to in Sub-Section (1) thereof. Sec.209(3) of the Companies Act, 1956, mandates that for the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein,-- (a) if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions ; and (b) if such books are not kept on accrual basis and according to the double entry system of accounting. Thus it is mandatory for Companies to maintain books of accounts in accordance with the mercantile system of accounting in compliance with the provisions of the Companies Act, 1956. 4. The AO called upon the Assessee to show cause as to why the Assessee maintains two sets of books of accounts, one under the cash system of accounting and the other under the mercantile system of accounting. The Assessee explained before the AO that it was originally following mercantile system of Accounting. In the year ended 31.3.1983, relevant to AY 83-84, the....
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....ystem in respect of income chargeable under the head "Profits and Gains of business or Profession" or "Income from Other Sources". The choice of method of accounting is left to the assessee and it is not a choice of the jurisdictional Assessing Officer. The assessee is even allowed to change its method of accounting if it feels that the other method is more appropriate and beneficial for its business or profession. Section 44AA of the Income Tax Act provides for maintenance of accounts by persons carrying on profession of engineering or architecture, legal, medical, accountancy, technical consultancy or interior decoration. The books of account required to be maintained by such persons also are prescribed in Rule 6F in Income Tax Rules, 1961. Section 44AB of the Income Tax Act prescribes audit of such accounts for tax purposes. The Assessee thus submitted that the Act takes care about books of account requirement under the Act, method of accounting to be followed and audit to be carried out and report obtained from a Chartered Accountant. Under the companies Act also, there are such provisions for the purpose of the requirements of the said Act. Section 209 of the Companies Act pre....
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.... of accounting since inception upto Assessment year 1986-87. During the financial year ended on 31-3-1989, section 209 of the Companies Act was amended by the Companies (Amendment) Act, 1988, w.e.f 15-6-1988 whereby it was made mandatory for all companies to maintain accounts on accrual basis i.e., mercantile system of accounting only. In compliance with this amendment, the assessee started maintaining accounts on mercantile system of accounting w.e.f. 1-4-1988. Accordingly the accounts for the previous year ended on 31-3-1989 were prepared on the basis of mercantile system of accounting. However, as far as the Income-tax Act was concerned, the assessee prepared its return of income on cash system of accounting, as was hitherto being followed by the company and accepted in past. The Assessing Officer did not accept the income returned on the basis of cash system of accounting and made an addition of Rs. 2,68,870 being the interest amount accrued but not received, not taken into account while taking the return of income on cash basis. He was of the view that as per the provisions of section 145(1) the income chargeable under the head profits and gains, had to be computed in accordan....
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....port of the Assessee wherein it has been mentioned that the system of accounting followed is mercantile. 9. In the report of the Auditors u/s.44AB of the Act, the system of accounting followed had been mentioned as cash system of accounting. The AO noticed that in the Balance Sheet prepared according to the cash system of accounting a sum of Rs. 67,24,540/- was appearing as Sundry Creditors. In cash system of accounting generally there will not be sundry creditors because under the cash system of Accounting no amount is shown as outstanding of the business, as the record is maintained only of actual receipts and actual disbursements. The AO therefore called upon the Assessee to show cause as to why the sundry creditors should not be treated as income of the year under consideration as the Assessee claimed that it was following only cash system of accounting for income tax purposes. The Assessee gave details of Sundry Creditors, which were as follows: Statement of Sundry Creditors as at the end of the year. A Particulars of Amounts shown under Sunder creditors 2003-04 Rs. Remarks Purpose of Liability 1 Service Tax 2,657,087 Collected in March, ....
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....Society. S.No. 5 is received from New India Assurance for on ward payment to staff. S.No.6 to 8 are on capital account. S.No.9 to 10 are errors by bank rectified later by them. S.No.11 & 12 Travel & Misc. Advances: In regard to this, to be read with Item "B Advance given", we submit as under: For conducting company's activities, Staff Members (mostly Engineers & Architects) have to travel to various sites all over India and for that air-tickets, board and lodging and incidental expenses are to be provided. In order to facilitate meeting such expenses, cash advances are given and air-tickets are booked. As a company policy, the expenses are booked only when the travel accounts are submitted by Staff and not on the dates when expenses are actually incurred. As far as possible, these accounts are settled within the financial year. However, expenses relating to the trips in the end of the year are accounted on settling trips in the following year. There is always give and take on settling these accounts. In order to keep track of settlement accounts in which Staff had incurred more expenses than the advances given, they are shown separately,....
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....inst salaries but their accounts are not settled before 31st March. These are adjusted in the following year at the time of settling salary accounts." 10. The Asssessee also made an alternative submission. We need not deal with the alternative submission at this stage because, neither the AO considered the same nor did the CIT(A) consider the same. The AO ultimately rejected the books of accounts making the following observations: "In view of the above, as per the provisions of section 145(3), I am not satisfied about the correctness and completeness of the accounts maintained by the assessee on cash system of accounting and which is not as per law. I also hold that the cash system of accounting is not as per the provisions of section 145(1) as the assessee is following mercantile system of accounting regularly for its business which has been declared in the annual report prepared as per Companies Act and distributed to all shareholders. I, therefore, reject the books of accounts maintained on cash system of accounting and accept the books maintained on mercantile system of accounting as it gives true and fair account of the business of the assessee and are maintained as per law....
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....ounting is unconstitutional as it discriminates between professional partnership and professional limited companies and there was no justification for such discrimination and that it violates Article 14 of the Constitution of India and that it is an unreasonable restriction on the right to carry on a profession and violates Article 19 of the Constitution of India. 12. The CIT(A) first framed the issue as to what is the method of accounting regularly employed by the Assessee for it's business? On the above issue, the CIT(A) held that in the year ended 31.3.1983, relevant to AY 83-84, the Assessee opted to change its method of accounting from Mercantile system of accounting to Cash system of Accounting. The AO has accepted the changed method of accounting followed by the Assessee and the Income Tax Department has accepting such change in the system of accounting has completed assessments of the Assessee on the basis of "Cash system of accounting" ever since the AY 83-84. The CIT(A) held that the Assessee maintained its accounts for its day to day business on cash method and annual accounts are compiled on that basis. On analysis of such books of accounts maintained by the Assessee....
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....ecifically contemplates a situation where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, it has to confirm with the first proviso to Sec.115JB(2) of the Act which mandates preparation of accounts in accordance with provisions of Companies Act, 1956. The CIT(A) thus held that provisions of Sec.209(3) of the Companies Act, 1956 therefore do not override the provisions of the Act or Sec.145 of the Act. The CIT(A) also found that the ITAT Hyderabad Bench in the case of Chennai Finance Co. Ltd. 81 ITD 7 (Hyd.) held that the AO cannot refuse to accept a method of accounting accepted in a earlier year and that the provisions of Sec.209(3) of the Companies Act, 1956 do not override the provisions of Sec.145 of the Act. 13. The CIT(A) also found that the reasons given by the Assessee for following cash system of Accounting are acceptable. He also held that the decision of the ITAT Delhi in the case of Amarpali Mercantile (P) Ltd.,on which the AO placed reliance was distinguishable. The CIT(A) found that in the said decision the facts were that the Assessee was maintaining its books o....
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....ot been addressed by the CIT(A). On this ground also, he submitted, that the revenue's appeal should be allowed. It was also submitted by him that in A.Y.05-06, the reasons given by the AO are identical as in AY 04-05. He pointed out that in AY 06-07, the AO has also held that Accounting Standard (AS) 9 issued by the Institute of Chartered Accountants of India (ICAI) advocates following mercantile system of Accounting and even on that basis the Assessee should follow only mercantile system of accounting. He referred to the decision of the Hon'ble Supreme Court in the case of Challapalli Sugars Vs. CIT 98 ITR 167(SC) wherein it was held that it would be necessary to ascertain the connotation of certain expressions used in the Act but which is not defined in the Act, in accordance with the normal rules of accountancy prevailing in commerce and industry. According to him the rules of Accountancy would still be necessary to be followed by an Assessee and more so the Accounting Standards prescribed by ICAI. 16. The learned counsel for the Assessee submitted that the Act is a self - contained code as far as maintenance of books of Accounts are concerned and is not dependent on any oth....
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.... principle of re judicata is not applicable to decision of Income Tax Authorities. An assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the Department in a subsequent year. But this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the Income-tax Act and earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed and if the earlier decision is given after taking into consideration all material evidence. It was submitted that one should be extremely slow to depart from a finding given by an earlier Tribunal. It was also submitted that the effect of revising a decision in a subsequent year should not lead to injustice and the court must always be anxious to avoid injustice to the assesse. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of United Commercial Bank v. CIT 240 ITR 355(SC) w....
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....e Hon'ble Supreme Court in the case of British Paints, 188 ITR 44(SC). 22. We have considered the rival submissions. It is seen that the assessee was following regularly the cash system of accounting and has been maintaining its books of accounts accordingly. Prior to assessment year 1983-84 the assessee was following mercantile system of accounting. The assessee switched over to cash system of accounting in A.Y 1983-84 and duly apprised the revenue of the changed method of accounting. The changed method of accounting namely cash system of accounting has been regularly followed by the assessee and its assessment is being completed on that basis ever since A.Y 1983-84. The assessee has been maintaining its accounts in relation to day to day business on cash system of accounting and annual accounts are compiled on that basis. The assessee has also maintained its books of account on mercantile system on accounting for the purpose of compliance with the provisions of Companies Act, 1956 (Section 209(3) of the said Act). In fact in the annual report given to its share holder the assessee has duly highlighted this aspect. "i. System of accounting: (a) The company gen....
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....en drawn up as per cash system of accounting. In the case of the assessee in the present case the facts are otherwise. As we have already held that the assessee regularly employing cash system of accounting for the purpose of its day to day business activities. Further in the case of the assessee it was not the dispute in the year of change. As we have already seen the assessee's method of accounting for tax purposes has been cash system of accounting and had been accepted by the revenue from A.Y 1983-84. Therefore, the decision in the case of Amarpali Mercantile Pvt. Ltd(supra) will not be applicable. 24. On the otherhand the decision in the case of Chennai Finance Co. Ltd. (supra) it has held that the provisions of section 209(3) of the Company Act 1956 do not override provisions of section 145 of the Act. The other reasons given by the CIT(A) for coming to the conclusion that section 209(3) of the Companies Act 1956 does not override provisions of section 145 of the Act are also found to be justified. One aspect which we find missing in the CIT(A) order is the reasons given by the AO for rejecting the books of account of the assessee under section 145 of the Act. On this aspe....