TaxTMI 
TaxTMI 
2017 (4) TMI 1067
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....005 362/LUC/2002 12.07.2005 1995-96 482 of 2005 359/LUC/2002 12.07.2005 1994-95 694 of 2007 359/LUC/2002 06.07.2007 1994-95 258 of 2016 360/LUC/2002 06.07.2007 1995-96 3. Income Tax Appeal no. 481 of 2005 was admitted on following two substantial questions of law:- "(i) Whether, the assessee was entitled to exemption under Section 80-HH of the Act to the tune of Rs. 41.81 lacs and 80-I of the Act to the tune of Rs. 52.26 lacs? (ii) Whether, the books of accounts of the assessee could be rejected in absence of infirmity?" 4. Income Tax Appeal no. 482 of 2005 was also admitted on two substantial questions of law. Question no. 2 is similar to question no. 1 of Income Tax Appeal no. 481 of 2005 except of difference of amount. However we reproduce both questions on which Income Tax Appeal no. 482 of 2005 was admitted:- (i) Whether, the assessee was entitled to claim deduction of commission payable to M/s Oriental Engineering and Commercial Company Limited for Rs. 10,26,495/-? (ii) Whether, the assessee was entitled to claim exemption under Section 80-HH of the Act to the tune of Rs. 52.63 lacs and 80-I of the Act to the tune of Rs. 66.83 lacs? 5. Income....
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....s also. Similar deduction towards commission paid to OECC of Rs. 24,41,236/- was claimed for A.Y. 1994-95. 11. Assessing Officer (hereinafter referred to as "A.O.") not only disallowed partial deduction in respect to commission paid to aforesaid agency but also took the view that expenses of Ema Division are undue inflated and those of Gehring Division unduly deflated. Accordingly it disallowed deduction towards commission paid to OECC of Rs. 10,26,491/-, and vide order dated 17.03.1997 made assessment of total income Rs. 69,56,700/-. 12. Similarly in respect to A.Y. 1995-96 assessment order was passed on 25.03.1998 on a total income of Rs. 1,08,78,260/-. 13. Aggrieved thereby, Assessee preferred appeal before Commissioner of Income Tax (Appeals) (hereinafter referred to as "CIT(A)") who allowed both appeals partly vide order dated 04.02.2002. Still dissatisfied, Assessee preferred appeals before Tribunal who has dismissed both the aforesaid appeals. 14. After judgment of Tribunal, Assessee preferred Misc. application nos. 196 and 197/Luc/05 stating that ground no. 5 of appeal for A.Y. 1994-95 and Ground no. 3 of appeal for A.Y. 1995-96 dealing with rejection of books of accoun....
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....n respect to the units of Assessee for the reason that primary object was to compute profit as near to the real profit as possible, by adopting best method, in the given set of facts and exercise of discretion judiciously. After rejection of books of accounts, A.O. is under an obligation to find out true profits of Assessee on the basis of information available with him. Discretion is left to A.O. as to what mode he should adopt. If the matter of accounting adopted by Assessee, in the accounts of Assessee, is not such from which true profits can be deduced, then A.O. has to adopt the most reasonable method of computation of income, as required in the given facts and circumstances of the case. 17. A.O. here found as under:- "As has been discussed above and particularly in more detail in asstt. year 1994-95, it has been established clearly and beyond doubt that there are common expenses of both the units which are either being debited only in EMA Div. or major part of the same is being debited only in EMA Div. Even assessee itself conceded the fact that all administrative and liaisoning expenses were debited in EMA Div. even though they related to work of both the units. Therefore....
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....orrect and complete but the method employed by Assessee is such that income cannot properly be deduced. It is not mere mention of provision which will determine the things but existence of substance of the intention deducible from the order we have to see the order to find out whether the same is in a particular provision or not. 19. A.O. has said; (i) the administrative liaisoning expenses relates to both divisions but debited to EMA Division only, (ii) it is factually established that common expenses relating to both units were either debited in the books of EMA Division only or irrationally debited in the books of EMA Division. (iii) Assessee could not correlate each expenditure, unit wise, in respect to common service. 20. There is a clear observation by A.O. which shows that he was not satisfied that the accounts are correct and complete. It is only a combined method employed which resulted in non determination of income properly. On the other hand, A.O. has observed that books' result cannot be accepted, as is evident from following:- "This clearly shows that where the affairs of the assessee are such that it is not possible to accept the book results as it is, ....
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....ar 1993-94 towards commission of sales. 26. He also drew our attention to the letter dated 04.02.1997 sent by Assessee to Assistant Commissioner, Income Tax stating that agreement between Assessee and M/s OECC continued upto 31.03.1994. It has further said as under:- "Upto Assessment Year 1992-93, the amount of commission credited by the assessee company on mercantile basis fully tallied with that of the figures submitted by M/s OECC to the department. However, for the assessment year 1993-94, the figure submitted by OECC differed from that of credited by the assessee company and the reconciliation therefrom revealed that they have claimed extra Rs. 4,879.80. These details have already been submitted by us to the department alongwith our letter dated 27.1.1997 but nevertheless the basis or calculation of commission accruing to M/s OECC was taken by them exactly the same as given in the commission agency agreement being in force at that time. Since in the assessment year under review the same agreement with the same terms and condition was in force (which is still in force) and the commission agent has rendered various services for execution of customer orders for sale of Honin....
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....deduction irrespective of fact it was actually paid or not. In a case where such due or accrued amount appears to be fictitious to the taxing authorities, we find no reason that they cannot take any notice thereof inasmuch as the purpose of A.O. is to find out correct income of Assessee. 28. Mercantile system is based on accrual. It is a double entry system of accounting. Under the mercantile system of accounts, profit arises or accrued at the date of transaction are liable to be taxed notwithstanding they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. 29. In Taparia Tools Ltd. Vs Joint Commissioner of Income Tax, Special Range-I, (2015) 7 SCC 540, referring to Section 43 of Act 1961, it was held that Even if the amount is not actually paid but 'incurred', according to the method of accounting, the same would be treated as 'paid'. Since Assessee was following mercantile system of accounting, the amount of interest could be claimed as deduction even if it was not actu....