TaxTMI 
TaxTMI 
2019 (5) TMI 11
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.... 4. Whether the Ld. CIT(A) has erred in deleting addition amounting tot Rs. 15,450/- on account of under recording of contract payment by Rs. 15,450/- 5. The appellant crave leave to add, alter or amend any/all of the grounds of appeal before or during the course of hearing of the appeal." 2. Brief facts of the case are that assessee filed return of income on 13.10.2010 declaring income of Rs. 1,63,960/-. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee is partnership firm and engaged in the business of civil construction work during the impugned year. During the year under consideration, the assessee declared net profit at 0.38% as against 5.31% declared in the preceding year, thereby the profit declined by 4.93%. The AO noticed from the audit report that auditor has stated that the assessee is maintaining mercantile system of accounting whereas in the ITR -V the assessee stated that the cash system of accounting is employed during the year and in the reply dated 10.12.2012 the assessee also submitted that the assessee is maintaining his books of account on cash basis and bank interest is accounted for only on accrual....
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....ved from the order of the Ld. CIT(A) the revenue is in appeal before the Income Tax Appellate Tribunal. 4. Ld. DR relied upon the order of the AO. He submitted that the assessee has himself accepted before to have maintained books of accounts on cash basis. No any credible evidence was produced before the AO for substantiating that the assessee is maintaining his books of accounts on mercantile basis. Therefore, the AO was justified in making additions. Ld. CIT(A) has accepted the submissions of the assessee and deleted the additions without any good reason. 5. None is present on behalf of the assessee nor any adjournment request is received. We, therefore, have no option but to decide this appeal exparte qua assessee. 4. After hearing to the DR we notice that the Ld. CIT(A) has examined the issue in detail after considering the submissions of th4e assessee and order of the AO. He has made good reasoned order which reads as under :- "5.2 I have carefully considered the facts of the case, submission of the appellant and perused material on the record. Here, the maintenance of regular books of accounts which are duly audited is not questionable. Further, the AO has ....
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....ring the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year. In some cases these methods may not give a clear picture of true profits earned and certainly not of taxable profits [CIT v. A. Krishnaswami Mudaliar; 53 ITR 122 (SC)]. It is undoubtedly correct that the statute stipulates that the income shall be computed on the system of accounting either cash or mercantile 'regularly' followed by the assessee. It should mean 'during the period under consideration'. However, the provision cannot be interpreted to mean that once a system of accounting is adopted, it can never be changed. 'Regular' cannot in the present context mean permanent. It has not been pointed out with reference to any provision that a change is impermissible or barred even when it is warranted by the existing situation. The choice of the method of accounting lies with the assessee; but the assessee must show that he has followed the method either cash or mercantile r....
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....nd in what way it can be worked out. 5.6 The next question is quantification of income. The Hon'ble Supreme Court in the case of British Paints India Ltd. 188 ITR 44 has held as under: "What is the profit of a trade or business is a question of fact and it must be ascertained, as all facts must be ascertained, with reference to the relevant evidence, and not on doctrines or theories: "no assumption need be made unless the facts cannot be ascertained, and then only to the extent to which they cannot be ascertained. There is no room for theories as to flow of costs. Minister of National Revenue v. Anaconda American Brass Ltd. [1956J AC 85; [1956) 30 ITR 84,99 (PC). Section 145 of the Income-tax Act, 1961, confers sufficient power upon the officer-nay it imposes a duty upon him-to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where, accounts are prepared without disclosing the real cost of the stock in- trade, albeit on sound expert advice in the interest of efficient administration of the company, it is the duty of the Income-tax Officer to determine the taxable income by making such co....
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....Industries Ltd. in ITA No. 848/2010, order dated 06.09.2010 has held as under: "11. A Division Bench of the Gauhati High Court in CIT V. Doom Dooms India Ltd. [1993J 200 ITR 496 (Gauhati) 12. CIT V. Guttoffnungashutto Sterkrado, [1992] 197 ITR 66 (Orissa), CIT v. Kataria Road Lines, [2009] 316 ITR 115 (Raj.) 5.9 The Hon'ble Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd.; 119 ITR 573 has held that the provisions of the section 145 are only machinery provisions and it cannot override charging provision. The section 145(1) is only an enabling provision to effectuate the charge. The section cannot be used for destroying the charge to tax. It is only a machinery provision and cannot qualify the charging section so as to make the latter otiose, nor can it be given overriding effect so as to defeat the charge. Here, the current year liability of expenses has been disallowed by the AO on the reasoning that the same can not be allowed in cash system of accounting in the relevant AY. The corollary to this finding is thus that the expenditure should be allowed in the year of payment. In case the AO's reasoning is accepted th....
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....k was valued. In case the appellant's contention is accepted then its cases for the AY 2008-09 and 2009-10 have to be reopened. Similarly, the assessments of subsequent years also have to be reopened as per the law. Without prejudice to finding herein after the AO is free to reopen the appellant's assessments for preceding and subsequent years in accordance with the law. 5.11 After considering facts of the case in entirety and particularly (i) non-allowance of liability of expenses as on 31.03.2009 paid in the relevant AY as expense in the relevant AY, (ii) non-exclusion of contract receipts accrued in the preceding year offered for tax in the relevant AY on actual receipt basis (iii) inclusion of mobilization advance in the relevant AY and (iv) inclusion of contract receipts accrued in the relevant AY but received in the subsequent AY, I am of the considered view that the AO has not truly & strictly followed the cash system of accounting. By disallowing the current year liability of expenses in the relevant AY & allowing it in the year of payment and excluding contract receipts accrued in the preceding year offered for tax in the relevant AY & taxing advance contr....
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....ree receipts were not included in his income for the assessment year 1997-98 on the reasoning that these TDS certificates were received after the close of the relevant previous year ending on 31-3- 1997. The assessing officer included the actual billed amounts as per the TDS certificates to the declared income and has also allowed the credit of tax deducted at source amounting to Rs. 5,929. The Commissioner of Income Tax (Appeals) confirmed the action of the assessing officer. 4. It was contended before the Tribunal that the assessee was raising the bills against his clientele for the services rendered in a month only in the succeeding month and on that basis the bills in respect of the services rendered in March 1997 were placed only in the month of April 1997. Accordingly, the receipts corresponding to services rendered in March, 1997 have been credited in the accounts of the succeeding assessment year. The learned counsel submitted that this method has been consistently followed by the assessee. The assessee has already included the receipts for twelvemonths in the accounts for the year under consideration and by adding the receipts for March, 1997 the assessing officer....
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....& Fertilizers Ltd.'s case (supra) has held that income-tax law does not march step by step in the divergent foot prints of the accountancy profession. The learned Judicial Member further observed that having claimed corresponding expenditure under mercantile system of accounting, the assessee cannot defeat the taxability of the income on the ground that he has not raised the bills. According to him, this is a case where the assessee has executed the work, received the benefit of tax deducted at source and was also allowed expenditure in executing the said work. Therefore, the assessee cannot, in the opinion of the learned Judicial Member turn around to say that corresponding income is not taxable. He, therefore, upheld the order of the assessing officer. The expression of different opinions on this matter has brought before me the question as abstracted above. 5. I have heard both the sides extensively and have carefully gone through the records. On the facts, both the learned Members are clear. The difference is the result of understanding the exact purpose and intent of the provisions of sections 198 and 199 of the Income Tax Act, 1961. On the method of acco....
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....ncurred by an assessee depends upon the method of accounting followed by him. The assessee, in this case, is following mercantile system of accounting. All expenses, to which liability is accrued in the accounting year, are deductible as business expenditure. In the same manner all business receipts will have to be determined on the basis of method of accounting employed by the assessee. Unless the assessee renders services for the entire month, it is not open to him to raise the bill upon his clientele. In other words, some of the services rendered in March 1997 will have to be necessarily billed after the close of the month which falls outside the accounting year under consideration and, in fact, the assessee has billed the same immediately after the close of the accounting year, in the month of April 1997 which is subsequent to the previous year for the year under consideration and has treated the same as part of business receipts for the next assessment year. I do not think that there is any flaw in this method of accounting regularly employed by the assessee and accepted by the department from year to year in the past. After all, the TOS certificates which are again dated and ....
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....t is to be given on the basis of the certificate furnished. In other words, when the assessee produces the certificates of TDS, the assessing officer is required to verify whether the assessee has offered the income pertained to the certificate before giving credit. If he finds that the income of the certificate is not shown, the assessing officer has only not to give the credit for TDS in that assessment year and has to defer the credit being given to the year in which the income is to be assessed. At the cost of repetition, it may be mentioned that sections 198 and 199 do not in any way change the year of assessability of income, which depends upon the method of accounting regularly employed by the assessee. They only deal with the year in which the credit has to be given by the assessing officer. It cannot be disputed that according to the method of accounting employed by the assessee the income in respect of the three TDS Certificates, which are mentioned in paragraph 3 above, does not pertain to the assessment year in question, but it pertains to the next assessment year and, in fact, in that year the assessee has offered the same to tax. Therefore, the credit in respect of th....
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.... by me above. A. The appellant also get support from the judgement passed in the case of M/s. Maruti Securities Ltd Vs Addl. Commissioner of Income Tax, Range-16, Hyd, (468/Hyd/2009), relevant portions are reproduced as under:- "21. We have considered the rival submissions and perused the impugned orders of the Revenue authorities and other material on record. We have also gone through the written submissions filed and the decisions relied upon by the parties before us. We are of the opinion that to arrive at a real income, accrual basis cannot be a justifying factor and the commercial and business realties of the assessee, should be considered. The interest income has been recognized in the books of accounts only to the extent of actual collection, which is the recommended/ recognized method as per Accounting Standard 9 of ICAI which lays down that when uncertainties exist regarding the determination of the amount or its collectability, the revenue shall not be treated as accrued and hence shall not be recognized until collection. The recognition of revenue on accrual basis presupposes the satisfaction of two conditions- (a) The revenue is measurable ....
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....ssion and case law reported in 98 ITD 147, I do not find any justification in changing the entire accounting method of the appellant on cash basis as it will result in a distorted picture of true state of the business for the purpose of computing the chargeable income unless reopening of preceding and subsequent assessment years are not done; though it is revenue neutral exercise over the years in case all contract receipts are offered for tax and expenses have been genuinely claimed over the years. After considering the entire comments in column l1(a) to 11(d) of the Tax Audit Report in Form-3CD and the fact that receipts were not certain till bill is cleared as there is chances or deductions out of the billed amount on various accounts as mentioned above; I am of the considered view that the appellant has maintained its books of account on deemed mercantile system of accounting in case of contract receipts as there is no time lag between accrual and receipt of income. Definitely, both income and expenditure have to be accounted for on one system of accounting; cash or mercantile. However, neither the AO nor the appellant has strictly followed either cash or mercantile system of a....