TaxTMI 
TaxTMI 
2011 (9) TMI 43
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....ccounting. 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 Accounting. As per the books maintained in accordance with th....
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....eferred 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 Assessee opted to change its method of accounting from Mercantile system of accounting to Cash s....
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....hoice 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 prescribes books of account required to be kept. They are also required to be prepared as prescribed in Schedule VI. 6. It was further sub....
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....s 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 accordance with method of accounting regularly employed by the assessee and since the method followed by the company was mercantile, the income had to....
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....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, 2004 & Payable to Govt. 2 T.D.S from others 661,354 Collected in March, 2004 & Payable to Govt. 3 Staff Income Tax 447,300 TDS from Staff Salaries payable to Govt. 4 St....
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....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, even though the Staff have cash advances with them for their successive trips. It may be seen that the staff are the hands through which the Company's activities are carried out and are used as a conduit pipe for incurring company's expenses. Thus, they are the facilitators and amounts due from them or paid to them are like imprest account and fall in the nature of financing the activity and so do not affect the accountability of expenses actually incurred on cash method of accounting. They are part of the system for disbursement. The money....
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....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. The profit calculated as per mercantile system of accounting as has been declared by the assessee for the purpose of section 115JB is taken for normal Income Tax purpose also. The profit of Rs. 7,49,90,325/- as per the annual report is taken as the net profit and the total income is calculated accordingly." 11. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). Before CIT(A), the Assessee reiterated contentions as were put forth before the AO. The following were the contentions put forth by the Assessee. 1. The AO erred in a....
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....see 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 the CIT(A) found that expense and receipts are booked on actual receipt basis. 12. The next issue taken up for consideration by the CIT(A) was as to whether the provisions of Sec.209(3) of the Companies Act, 1956 overrides the provisions of the Act? On this issue the CIT(A) held that Sec.145 of the Act allows an Assessee to employ cash or mercantile system of accounting in respect of income chargeable under the head "Profits and gains of Business or Profession" or "Income from other sources". He held that the choice of method of accounting is left to the Assessee and it is not a choice of the ....
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....t 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 of accounts on day to day basis on mercantile basis. While filing return of income for the purpose of the Act, the Assessee prepared accounts on cash basis. He found that in the case of the Assessee in the present appeal, the the Assessee maintained its accounts for its day to day business on cash method and annual accounts are compiled on that basis. Thus the facts of the Assessee's case were totally different and therefore the ratio laid down in the said decision does not apply to the facts of the Assessee's case. For all the above reasons the CIT(A) held that the rejection of books of accounts of the Assessee and dete....
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.... 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 other provisions of law unless expressly provided in the Act. The following chart giving the various provisions in this regard was filed: Effective Date: Section Changes pertaining 01.04.1976 44AA(Rule 6F) Books of Accounts prescribed 01.04.1985 44AB Tax Audit Introduced 01.04.1988 115J MAT Introduced. Replaced by: 01.04.97 115JA 01.04.97 115JAA 01.04.01 115JB 15.06.1988 209(3) Companies Act-Amended 01.04.1989 3 Previous Year ending 31st March 01.04.1997 145 Hybrid System of Account withdrawn 01.04.1999 145A Method of Accounting in certai....
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....n 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) wherein it was held that the method followed consistently for thirty years and accepted by Revenue Method was valid and could not be rejected - Income Tax Act,1961. Reliance was also placed on the decision of the Hon'ble Bombay High Court in the case of CIT v. Tisco 106 ITR 363 (Bom), wherein it was held that section 13 of the Act of 1922 lays down that income, profits and gains must be computed for the purpose of the Act in accordance with the method of accounting regularly employed by the assessee. The Tribunal had rightly stressed the method of accounting followed by the assessee and had come to the conclusion that the method could not be said to be unreasonable even if a better method, perhaps, be visuali....
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....usiness 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 generally follows the mercantile system of accounting and recognized Income and Expenditure on accrual basis except; Bills/claims raised on account of escalation in cost and on account of variation in contract consultancy work are both recognized as revenueonly when and to the extent of the acceptance/ realization of the amount of the claim of variation. (b) Export incentives, if any, receivable in respect of Professional Services rendered outside India are accounting the year the same are received. (c) (i) Provision for taxation is being made in the accounts as per the tax liability arrived at under "Cash basis" method of accounting which is followed by the company for the purpose of taxation. (ii) Deferred tax assets and liabilities have been worked out....
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....tion 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 aspect we notice that the AO was of the view that when the assessee was following cash system of accounting there cannot be any sundry creditors appearing in the balance sheet. On this query of the AO the assessee has given a detailed reply. The AO has not dealt with that reply at all. In our opinion the reply given by the assessee justifies the action of the assessee in showing sundry creditors in the balance sheet. Therefore, this cannot be a valid basis for rejecting the books of account. We are of the view that the system followed by the assessee does not in any way detract from the cash system of accounting. We, therefore, hold that the reasons assigned by the AO for rejecting the books of account are not proper. Even with regard to the accounting standard (AS-9) of the ICAI which was the r....