TaxTMI 
TaxTMI 
2013 (9) TMI 230
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....Commissioner of Income Tax (Appeals) has erred in law and on facts in restricting the disallowances to Rs.1,70,764/- made by the AO out of various expenses debited to the Profit & Loss account ignoring the facts that there was tremendous increase in the expenses in comparison to gross receipts and assessee could not furnish a specific reply for such increase. 3. That the ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in deleting the addition of Rs.12,74,589 made by the AO on account of undisclosed profit from trading of potatoes ignoring the fact that assessee could not satisfactorily reply the queries raised during the course of assessment proceedings which proves that the assessee is engaged in the trading of potatoes. 4. That the ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in deleting the unexplained cash credits of Rs.16,10,690/- added by the AO to the income of the assessee ignoring the fact that the assessee could not prove the genuineness of these cash credits during the course of assessment proceedings. 5. That the order of learned Commissioner of Income Tax (Appeals) Agra being erroneous in law and on facts deserves to ....
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....dings, the A.O. noticed that the assessee has declared the receipts of hire charges on potatoes, storage in Feb/March 2002, which was taken out from the cold storage during May 2002 to Nov. 2002. The AO further noticed that the assessee was maintaining its books of account on mercantile basis, but the assessee has shown gross receipt of rent on cash basis. The assessee was asked to explain the basis of gross receipt shown before the A.O. No satisfactory explanation has been furnished by the assessee. The A.O. further noticed that in the A.Y. 2000-01, 2001-02 and A.Y. 2002-03 gross receipt of rent were taken on mercantile basis by the A.O. but in the appeal the CIT(A) directed the A.O. to accept the gross receipt of rent as declared by the assessee and it was held that as the assessee has been following the cash system for declaring gross receipts/hire charges consistently hence A.O. cannot change accounting system followed by the assessee. The A.O. further noticed that Revenue did not accept the findings of CIT(A) and filed appeal before the ITAT which was pending for adjudication. The A.O. was of the view that since the matter is sub-judice before the Tribunal hence in the assessm....
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....ra in case of the appellant itself in earlier year i.e. 2000-01, and therefore, I also hold that system of accounting being followed consistently by the appellant company for recording rent from cold storage business since its inception is correct and, therefore, its gross receipts should be taken at Rs.93,32,817/- instead of Rs.87,61,916/- as computed by the AO in assessment order. However, this decision will not change anything in the computation of taxable income of the appellant during the year under consideration because despite reducing gross receipts, the AO did not reduce income of the appellant because the resultant difference of Rs.5,70,090/- was added on protective basis. Accordingly, ground no.2 is allowed but the appellant would not get any relief in computation of its income." 5. The learned D.R. submitted that the assessee did not maintain books of account on mercantile method of accounting. The learned D.R. submitted that the assessee has declared the receipt of hire charges on potatoes storage in February/March 2002 which was taken out from cold storage during May 2002 to November, 2002. The assessee has shown hire charges when the potatoes are taken out from the ....
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....ssessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.]" 9. It is to note that under section 145(1), the income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" has to be computed in accordance with the method of accounting regularly employed by the assessee, unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom or the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee. Under the sub-section (3) of section 145 in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer b....
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....s, had, as a consistent practice, valued its goods-in-process and finished products exclusively at cost of raw materials totally excluding overhead expenditure. The justification for the practice, according to the respondent, was that the goods being paints had limited storage life and, if not quickly disposed of, were liable to lose their market value. For the assessment years 1963-64 and 1964-65, the Income-tax Officer held that there was no justification to recognise a practice of valuing stock otherwise than in accordance with the well-recognised principle of accounting which required the stock to be valued at cost (viz., raw material plus expenditure) or market price, whichever was lower. He, therefore, calculated the value of the opening and closing stocks by adding the overhead expenditure. The Appellate Assistant Commissioner confirmed that order. On appeal, the Appellate Tribunal held that there was no evidence to show that the goods in stock deteriorated in value and that there was no justification for excluding the overhead expenditure in valuing the stock; and, if it was in the interest of the business to value stock solely with reference to cost of raw materials and wi....
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.... the raw materials. The overhead charges representing 15.51 per cent. of the total cost have been admittedly excluded from the assessee's valuation of the stock. But, by the very method of accounting which the assessee has adopted, it is possible for the Income-tax Officer to make the necessary additions or deductions so as to arrive at the correct value of the stock for the purpose of determining the chargeable income. The correctness of the accounts maintained by the assessee is not in question ; nor is the system adopted by the assessee, I except in so far as the stock is valued without tak- ing into account the production expenditure. The question, therefore, is whether or not the Assessing Officer is justified in holding that the stock- in-trade of the, assessee has necessarily to be valued, for the purpose of computing the income, at 100 per cent. of the cost, and not at 84.49 per cent. as the assessee has admittedly done. It is contended on behalf of the assessee that, for a number of years, the Revenue did not question the method of accounting regularly employed by the assessee. It was during the assessment years in question that an objection was raised for the first time ....
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....nd inaccurate and did not give a true value of the goods for the purpose of computing the correct income. In the resent case, what the assessee contends for is neither the "direct cost" method nor any other method which takes into account the actual or even part of the cost involved in the manufacture of the goods-in- process and finished products. What it contends for is valuation of the raw material without taking into account any portion of the cost of manufacture. No decision has been brought to our notice in support of such a contention. The question of fact which the Assessing Officer must necessarily decide is whether or not the method of accounting followed by the asses- see discloses the true income. It is a well recognised principle of commercial accounting to enter in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower. As stated by the Lord President in Whimster and Co. v. CIR [1925] 12 TC 813, 823 (C.Sess.) "... In computing the balance of profits and gains for the purposes of income-tax. . . . two general and fundamental common places have always to be kept ....
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....by reason of the fall in the market value of those goods below their original cost. Ordinarily, therefore, the goods should riot be written down below the cost price except where there is an actual or anticipated loss. On the other hand, if the fall in the price is only such as it would reduce merely the prospective profit, there would be no justification to discard the initial valuation at cost. In B. S. C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1972] 83 ITR 269, 294 ; [1971] 2 WLR 1313, 1332 (HL), Lord Pearson, criticizing the system adopted in the valuation of a retailer's stock, observed : "Then is the incorrectness of the stock valuations such as to be likely to distort the assessment of the profits and gains for the year? The system produces a comparatively low valuation of the opening stock at the beginning of the year and a comparatively low valuation of the closing stock at the end of the year and therefore a comparatively low difference between them ... Then in a period of rising turnover and rising prices the difference is an element of profit, and by keeping down that difference the system diminishes the assessment of, taxable profit for the year. Over a series ....
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....s observed by this court in CIT v. McMillan and Co.[1958] 33 ITR 182, the expression 'in the opinion of the income-tax Officer' in the proviso to section 13 of the Indian Income-tax Act, 1922, does not confer a mere discretionary power ; in the context it imposes a statutory duty on the Income-tax Officer to examine in every case the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income, pro- fits and gains of the assessee could properly be deduced there from." The officer has to consider the material placed before him and, if, upon such consideration, he is of the opinion that correct profits and gains could not be deduced from the accounts, he would then be obliged to have recourse to the proviso to section 145. [the principle stated in S. N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579, 588]. For computation of the true profits of the year in the case of a trade or adventure, each year being a self-contained unit, the value of the stock- in-trade at the beginning and at the, end of the accounting year has to be taken into account. In CIR v. Cock, Russell and Co. Ltd. [1949] 29 TC 387, 392 (KB)....
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....e year and by ascertaining the difference between them: See P. M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC). The object of stock valuation is the correct determination of the pro- fits and loss resulting from a year's trading. It is the true result of the trading activity of that year that must be disclosed by the books. ".....the profits are the profits realised in the course of the year. What seems an exception is recognised where a trader purchased and still holds goods or stocks which have fallen in value. No loss has been realised. Loss may not occur. Nevertheless, at the close of the year he is permitted to treat these goods or stocks as of their market value." [Whimster and Co. v. CIR [1925] 12 TC 813, 827 (C. Sess.) ]. As stated by Patanjali Sastri C. J. in Chainrup Sampatram v. CIT 1953] 24 ITR 481, 485 (SC) :- "It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling o....
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....urpose of computing the chargeable income. Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessments Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income cannot properly be deduced there from. It is therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he has done in the instant case, for determining what, in his opinion, is the correct taxable income. The Tribunal's order, affirming that of the Assessing Officer, was based on findings of fact made on cogent evidence and in accordance with correct principles. Th....
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....ly adopted by the assessee except in cases when the proviso to that section came into operation. The profits earned and credited in the books of account were to be taken as the basis for computation of income. 10.4 In CIT vs. A. Krishnaswamy Mudaliar [1964] 53 ITR 122, the Supreme Court reiterated that the Income-tax Officer is bound to compute the profits by appropriate adjustments from the accounts maintained by an assessee where a system of account is regularly employed. The court held as under:- "The only departure made by section 13 of the Indian Income-tax Act from the legislation in England is that whereas under the English legislation, the Commissioner is not obliged to determine the profits of a business venture, according to the method of accounting adopted by the assessee, under the Indian Income-tax Act, prima facie, the Income-tax Officer has for the purpose of sections 10 and 12 to compute the income, profits and gains in accordance with the method of accounting regularly employed by the assessee. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the I....
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....v. Tata Iron & Steel Co. Ltd. [1977] 106 ITR 363 that if the method of accounting followed by an assessee cannot be said unreasonable, the same has to be given effect to even if a better method can be visualized. There are also clear authorities to the effect that it is not open to an assessee to set up in his income-tax return a claim altogether at variance to the books of account maintained by the assessee. As a matter of fact, this issue has been decided as early as in the case of CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (PC), At page 40 the judgment records :---- "Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes ---- in this case for the purpose of the Company's business and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom. It may well be that, though the profit brought out in the accounts is not the true figure for ....
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..... The book results can be rejected by the tax authorities only if the method adopted by the assessee is either defective or if the system adopted does not disclose a proper and true income." 11. From the above decided cases, it is clear that an assessee after having made entries in the books of account consistent with the method of accounting followed by him cannot be permitted to seek assessment of his income for income-tax purposes on a different basis on the ground that another basis may also be permissible under the method of accounting followed by the assessee or has been upheld in certain judgments of a High Court or Supreme Court. To this extent, the entries made in his books of account are as much binding as the method of accounting itself. It is only when the entries made in the books of account are erroneous or contrary to the correct legal position, the same are not conclusive or decisive of the matter, as held by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and several other judgments. This position is also in built in the provisions of section 145(1) itself that where the method of accounting is followed is such that i....
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....d what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The Hon'ble Apex Court in the case of Commissioner of Income-tax vs. British Paints India Ltd. [1991] 188 ITR 0044[SC] held that the method of accounting followed by the assessee should disclose picture of profits and gains. If system adopted does not disclose true and proper income, the A.O. is entitled and is duty bound to adopt appropriate computation to determine true income. 15. In the case under consideration it cannot be said that the A.O. was not satisfied about the correctness of completeness of the accounts of the assessee. Because the assessee has disclosed gross receipt Rs.93,32,817/- whereas according to the A.O. gross receipt was Rs.87,61,916/-. The finding of the A.O. is contrary to the provision of Section 145 of the Act. Even otherwise also if the A.O. found that the method of accounting followed by the assessee accounting the hire chargers at the time of delivery of potatoes to farmers, he is empowered to correct the method of accounting in accordance wit....
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....h vouchers were produced for my examination. I have gone through books of account as well as bills and vouchers produced by the appellant. In respect of diesel and fuel expenses, I find that all the bills are available but for other expenses complete bills are not available and they are mostly supported by self made vouchers. I have also gone through the case record of the appellant and find that such disallowances are being made in the assessment orders that are being passed in case of the appellant since A.Y. 98-99 onwards and they are being confirmed even up to the level of Hon'ble ITAT, through, they are being reduced by the appellate authority. Such disallowance sustained till the stage of Hon'ble ITAT has been found to be Rs.33,000/- in assessment year 98-9 and 4,30,000/- in A.Y. 2000-01. In assessment 2001-02 and 2002-03 total disallowance of Rs.50,000/- have been made but no appeal was filed by the appellant for those years. Such statistics clearly shows that these natures of expenses being claimed by the appellant are excessive and they are not fully supported by proper bills and vouchers. While examining the bills and vouchers for this year, I have found that for machiner....
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....e out of the machine repairs and maintenance, electric repairs and maintenance. Thus we notice that the CIT(A) after detailed examination of each of the expenses some of the expenses has been disallowed to the extent of 10% and some of them are taken up to 10% as per the above table. The revenue has failed to point out any contrary material to the finding of the CIT(A). We, therefore, confirm the order of the CIT(A) on the issue. 21. The third ground of Revenue's appeal is in respect of deletion on addition of Rs.12,74,589/-. The brief facts of this ground of the appeal are that the A.O. made the addition after computing estimated profit on alleged sale of potatoes. The addition made by the A.O. is deleted by the CIT(A) in paras nos.8.4, 8.5, 8.6 & 8.7 as under :- "8.4 I have considered the issue relating to addition of Rs.12,74,589/- added by the AO on estimate basis holding it as profit earned by the appellant on sale of potatoes considering that it deposited sale proceed of potatoes received by way of draft in its bank account and also argument put forward by the Ld. AR in its written submission along with the decision of Hon'ble ITAT, Agra in case of Ravi Ice & Cold Storage (....
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....revalent in this type of business being carried out by the assessee. It is for the AO to establish that the explanation filed by the assessee (appellant) was wrong and then addition of that particular credit amount should be made as unexplained cash credit u/s 68A. If on the basis of certain credit amount in the books of account, the AO concluded that these credit were appearing in books of account on account of certain types of business being carried out by the assessee, the details with regard to that type of business should have been collected by the AO and after that it had to be established that the particular type of business was being carried out by the assessee and then requisite addition for the profit earned from that business should have been made in the assessed income of the appellant (assessee). In the present case, the AO has failed to establish that the appellant company was carrying out trading business of potatoes because he did not collect any evidence showing that the appellant company was making purchases from farmers and then same were being sold by it in the market. The addition of the AO in this particular year is also found to be quite arbitrary because the....
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....ts of rent because the assessee would take the rent before making payment to farmers and this argument of the counsel of M/s Ravi Ice & cold Storage was accepted by the Hon'ble Tribunal and addition made on account of such sale was deleted." "8.7 Considering the facts that this addition is made by the AO only in one assessment year and in other assessment years business practice of the appellant company of selling potatoes on behalf of the farmers has been accepted, however, in this assessment year though addition is made, no evidence has been brought by the AO on record to show that the appellant company has made purchases of potatoes from farmers and following the decision of Hon'ble ITAT, Agra in the case of Ravi Ice and Cold Storage Pvt. Ltd. (supra), I am of the considered opinion, that no such trading of potatoes has been carried out by the appellant company as held by the AO just on presumption and, therefore, addition of Rs.12,74,589/- made in the assessment order on account of profit earned on such alleged potatoes trading is hereby deleted." 22. We have heard the learned Representatives of the parties and records perused. The CIT(A) noticed that A.O. has only brought ou....
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....d to this addition and also submission made by the Ld. AR as discussed above along with the judicial pronouncements as referred by him. I find that AO has held the advance of Rs.16,10,690/- as unexplained cash credit liable to be added under section 68 of the I.T. Act, 1961 because confirmations of all the farmers in whose name these advance were shown could not be filed. However, the AO has failed to take note of the fact that these advances were adjusted in the account of farmers from whom rent was shown by the appellant to have been received. I have also verified the accounts of farmers and found that in the subsequent assessment years, these advances were adjusted against rent due from the farmers. Therefore, the advances shown in the name of the farmer does not remain in the books of account of the appellant as cash being available without explaining the source. Whatever cash advance were received from the farmers have been shown to be adjustment against the rent which have been declared by the appellant as income in subsequent years. Therefore, these advances cannot be said to be unexplained cash credit as it has been held by the jurisdictional Allahabad High Court in the cas....
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....hed distinctive numbers of shares sold. The AO disallowed the claim of assessee for the reason that the notices sent u/s 133(6) to the company and the share broker M/s. Motley Securities Pvt. Ltd. requiring them to furnish some details of shares as mentioned at page 8 & 9 of the assessment order, stood not responded; that the assessee failed to furnish complete details of shares and to explain the genuine sale thereof; that the assessee failed to produce the director of the company whose shares were transacted and the share broker for examination; that whereabouts of the company and the alleged purchaser of shares are also not known and therefore, the assessee failed to discharge its onus that lay upon him to prove the genuineness of sale of shares. This led the AO to hold that the alleged sale proceeds of Rs.5,33,120/- of shares is not genuine, which resulted into disallowance of short term-capital loss of Rs.25,93,455/- as claimed by the assessee and the same was added to his total income. The AO further observed that the assessee has taken accommodation entries of Rs.5,33,120/- in the garb of sale of shares and for managing the same, he might have incurred unexplained expenses @....
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.... the case of Aayushi Stock Broker Pvt. Ltd., this broker was found involved in giving entries for bogus share transactions. He, however, did not accept the contention of assessee regarding sale of shares observing that the assessee could not produce any evidence except photocopy of sale bill and contract note issued by share broker M/s. Motley Securities Pvt. Ltd. He also observed that the assessee failed to discharge its onus to produce the share broker. The copy of Economic Times newspaper showing the selling rate of shares at Rs.18 & Rs.17.50 per share on the date of sale was not legible and the selling rate of shares was not got confirmed by the assessee from the concerned stock exchange. Therefore, the ld. CIT(A) considering the definition of primary evidences under the Evidence Act, confirmed the disallowance of short- term capital loss of Rs.25,93,455/- claimed by assessee. The ld CIT(A) however, did not agree with the findings of the AO that the amount of Rs.5,33,120 shown to have been received as a result of alleged sale of shares was invested out of inflated expenses, for which no separate addition of Rs.9,50,000/- was made on account of inflated expenses. The ld. CIT(A),....
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....uinely. Sale consideration is received through broker who is also existing assessee with the Revenue Department. Therefore, there is no reason to treat the aforesaid transaction as non-genuine for the purpose of making addition. Since the source of the receipt of the amount in question is explained and the transaction entered into by the assessee with the broker clearly suggests a case of short-term capital gains, therefore, the ld. CIT(A) rightly directed the AO to compute the income as per return of income and for capital gains. The departmental appeal has no merit and is, accordingly dismissed." 30. Similar view has been taken by ITAT, Agra Bench in the case of ITO vs. Smt. Raj Dulari Farsaiya vide order 17.09.2010, and ITO vs. Shri Ajay Bansal Agra in ITA No. 87/Agra/2010 vide order dated 15.06.2011 wherein also in the similar set of facts and circumstances, the issue has been decided in favour of the assessee and against the revenue. 31. ITAT, Agra Bench in the case of ACIT vs. Ram Prakash Garg in ITA No. 237/Agra/2011 on the similar issue dismissed the departmental appeal vide order dated 18.01.2013, wherein following findings were recorded in para nos.5 & 6 of the order : ....