TaxTMI 
TaxTMI 
2010 (9) TMI 1252
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....) of the Income-tax Act, 1961 was issued and served upon the assessee. In response to the notice of hearing, Shri SP Jain, FCA and Shri Learned CIT(Appeals) Gupta, Senior partners of the assessee firm attended the proceedings from time to time and submitted the necessary details. 3. On scrutiny of accounts submitted by the assessee, it revealed to the Assessing Officer that in the tax audit report furnished by the assessee firm, the auditor has reported that assessee is following hybrid system of accounting i.e. expenditure on accrual basis and professional fee on receipt basis. Assessing Officer issued a show-cause notice to the assessee inviting its explanation as to why its books of account should not be rejected as they are not following either mercantile system or cash system of accounting as required under sec. 145(1) of the Act. The assessee has submitted a reply which has been reproduced by the Assessing Officer. On an analysis of section 145 in the light of assessee's reply, he observed that method of accounting for determining the income of the assessee is to be taken as cash basis. He passed the assessment under sec. 143(3) and determined the taxable income of Rs. 10,....
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....nder sec. 143(3) and the Assessing Officer did not disturb the method of accounting followed by the assessee. All the professional bills raised during the particular year are realized by the assessee within that year itself and have accounted for as income by the assessee. During the present year also, the assessee firm had realized all the professional bills raised by it in the year itself and the amounts have been duly accounted for in the professional receipts declared in the P & L account. It was further contended that assessee firm is engaged mainly in auditing services and all the bills for audit and certification work have been raised by it during the instant year itself and have also been realized by it during the instant year itself. There is neither any outstanding fee nor there is any such service rendered during the year for which bill has been raised but has not been realized till the close of the year. To buttress this contention, assessee has filed copies of all the bills and other relevant material. 7. In order to explain the merit, it was contended that out of the total amount worked out by the Assessing Officer at Rs. 5,74,087, Rs. 1,59,871 represent the travel....
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....t Services (P) Ltd. Add: Credits on account of printing And stationery charges Job Work 48,000 Stationery 1,32,000 1,80,000 Add: Amount received from M/s. Dass Gupta Management Services (P) Ltd. 25,000.00 4,60,586.80 Less: Amount paid i) As per copy of account Enclosed (1) 47,000 ii) As per separate account Debited in Loan & Advances (II) 50,000 97,000.00 3,63,586.80 Balance as per Account (1) = Rs. 4,13,586.80 cr. Balance as per Account (ii) &nb....
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....ing Officer has erred in arbitrarily assuming that cash method of accounting has to be applied in the case of the assessee without appreciating the actual facts and circumstances of the case. It is respectfully submitted that the learned Assessing Officer ought to have appreciated the fact that the actual method of accounting employed by the assessee is mercantile method of accounting and accordingly this expenditure deserves to be fully allowed. In view of above submissions it is prayed that the addition of Rs. 5,74,087 deserves to be deleted". 8. Learned CIT(Appeals) has considered all these aspects, however, did not agree with the assessee. He confirmed the stand of Assessing Officer in principle. He has excluded some of Rs. 2,55,586 from the amount of Rs. 4,13,586 on the ground that it is the opening balance in the account of M/s. Dass Gupta Management Services (P) Ltd. This amount does not represent any expenditure claimed by the assessee during the year which has not been paid by the assessee hence according to the Learned CIT(Appeals) it cannot be added during the year consideration. 9. Before us, learned counsel for the assessee reiterated the stand taken before the L....
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....ed to reject this argument on the basis of the note appended in the audit report. Learned CIT(Appeals) has not assigned any reason as to why this contention of the assessee cannot be accepted. It is based on the details submitted during the course of assessment proceedings. The apprehension of the Learned CIT(Appeals) may be that in this year assessee might have raised the bills for all the services it has rendered and able to realize them, but that would not suggest that it is following mercantile system of accountancy. In our opinion, this is based on surmises and conjecture. There is no material pointed out by the Assessing Officer or by the Learned CIT(Appeals) to substantiate this reasoning. As a matter of fact, it comes out that there is no pending bill, which does not suggest that assessee only accounting the bills which have been realized. In fact, it is following mercantile system of accountancy. 12. Apart from the above conclusion, we have examined the issue with the other angle also. Hon'ble Supreme Court in the case of Shoorji Ballabhdass has pointed out that the Income-tax Act, 1961 takes into account two points of time on which the liability to tax is attracted....
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....e are amounts payable to M/s. Dass Gupta Management Services (P) Ltd. rendered by them. In alternatively, it was pointed out that some of the amounts is an old balance on account of loan raised. The assessee has explained how the loan was raised and how much the amount represent. We have already extracted the submissions of the assessee. On the strength of this reconciliation, assessee has pointed out that even under the cash method of accounting only Rs. 83,000 can be added on account of non payment of the amount. Otherwise, assessee has explained the other entries how much it has paid and how much it was payable. Considering all these aspects, we are of the opinion that we have accepted the contention of the assessee that it is following mercantile system of accountancy, therefore, even if certain amount not actually paid this year but shown as payable assessee is entitled for deduction of that amount, since the services have already been availed from M/s. M/s. Dass Gupta Management Services (P) Ltd., in this accounting year. 14. In the next ground of appeal, the grievance of assessee is that Assessing Officer has erred in making addition of Rs. 1,80,000 with the help of....