TaxTMI 
TaxTMI 
2020 (3) TMI 940
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....A.Y 2011-12 the Order of the Ld. Disputes Resolution Panel (DRP) dated 26/12/2014 for the A.Y. 2011-12. The Assessing Officer invoked the provisions of section 145(3) of the Act, rejected the cash system of accounting and directed adoption of the accrual system of accounting. Thereafter, the AO passed the Assessment Order dated 27/03/2015 wherein against the Returned loss of Rs. 13,07,888/-, a total income of Rs. 5,59,09,910/- was assessed. 2.1 The Assessing Officer also stated that the Assessee Company, being allegedly formed with the specific and exclusive purpose of executing the overlays contract/s for Common Wealth Games, 2010 CWG) and the Delhi Development Authority (DDA) which were all executed in the A.Y.2011-12, the activities of the Assessee were not carried forward from one accounting year to the next. The A.O., thus, held that the accounts should be in the nature of 'venture account' and the correct profitability could be arrived at by following the accrual method of accounting only. 2.2 Aggrieved by the order of the AO, the Assessee filed an appeal before the Ld. CIT (A). The Ld. CIT (A), vide his Order dated 27/02/2017, upheld the action of the A.O., of rejectin....
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....It was also stated by the AO that even for the Income Tax purposes the company has followed the accrual basis of the accounting initially as is evident from Form 3CEB filed by the company. The Ld. AR further submitted that the Assessing Officer relied upon the Order dated 09/01/2013 for A.Y.2011-12 wherein it was held that the assessee was maintaining accounts on accrual basis but for purposes of reduction of tax, they had switched to the cash system of accounting. He submitted that further, the Order of the Ld. DRP dated 26/12/2014 for the A.Y. 2011-12 were relied upon wherein the cash system of accounting followed by the Assessee in its first year of business operation (being A.Y.2011-12) was rejected. It was submitted that the Assessing officer, while quoting the section 209 of the Companies Act, 1956, has stated that books even for purposes of Income Tax Act were supposed to be maintained on accrual basis. It was submitted that lastly it was stated by the Assessing officer that the Assessee Company, being allegedly formed with the specific and exclusive purpose of executing the overlays contract/s for CWG, 2010 and the DDA which were all executed in the A.Y.2011-12, the activit....
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....t be computed on mercantile method of accounting". 3.4 It was submitted that this issue has been dealt in full vide Para 18 to 36 of the aforementioned Order. The Ld. AR read out the relevant part of the Order of the ITAT as under: "23. We have carefully considered the rival contention and perused the orders of the lower authorities. The only dispute with respect to the above ground of appeal is whether the assessee has maintained its books of accounts on cash basis of accounting from which the correct profit can be deduced or not. It is also not in dispute that the assessee has followed the cash basis of accounting for the purpose of income tax return and maintained its books of accounts on accrual basis to comply with the provisions of section 209 of The Companies Act 1956. According to the provisions of section 145 of the income tax act, to compute the income chargeable under the head profits and gains of business or profession or income from other sources, assessee can either follow cash or Mercantile system of accounting, which is regularly employed by him. This is subject to the provisions of subsection (2) of section 145 of the income tax act. Further, provisions....
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....al Bank vs. Commissioner of income tax (1999) 240 ITR 355 (SC) at page no366 has held that:- "From the decisions discussed above, it can be held: (1) That for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower; (2) In the balance sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose, to value stock-in-trade at either cost or market price. (3) A method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. (4) The concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within their recognized limits. (5) Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (6) Under section 145 of ....
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....the honourable mother High Court in Sundram and Co Ltd vs. Commissioner Of Income Tax, Madras (1959) 36 ITR 162 (Mad) wherein it has been held 8 page number 167 - 168 as under: "Apparently the tribunal accepted the contention of the assessee, that though the accounts related to the 1st accounting period of its activities, it was a system of accounting "regularly employed" within the meaning of section 13 of the act, though there was no such express finding. In any event, considering it was the same system of accounting that the assessee adopted in the subsequent accounting period is also, the test of "regularly employed" must be held to have been satisfied in this case. That was the principle laid down in an unreported decision of a division bench of this court in Manickavasagam ltd V Commissioner of Income Tax ( case referred no 21 of 1954)." 26. Further, in 149 ITR 738 and at page number 79 in CIT vs. Sikka honourable Delhi High Court also held so. In view of this, we do not have any hesitation in holding that the assessee is maintaining its books of accounts on cash method of accounting and the same method of accounting is regularly employed by the assessee dur....
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....rmined, or not. 29. The learned assessing officer has held that owing to the joint- venture nature of the business of the assessee, the assessee company followed the cash system of accounting for income tax purposes, which is not proper. According to him as the consortium consisting of GL litmus events private limited was found with the specific and exclusive purpose of executing the overlays contract for CWG 2010. Other than the overlays contracts and contract with DDA it has not undertaken any other project either in respect of Commonwealth games or otherwise. Therefore, according to the assessing officer, activities of the assessee are not carried forward from one accounting period to the next. Therefore, according to him, the books of the assessee should therefore be in the nature of venture account only and the correct profitability can be arrived at by following the accrual method of accounting only. Therefore, the books of accounts maintained by the assessee on Cash basis were rejected. The claim of the assessee is that assessee is engaged in the business of performing the contract for services, and is in the 1st year of its operations with the limited vision of com....
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....lowed by the assessee. 30. On careful analysis of the section 5 of the act, it is amply clear that income of the assessee is chargeable to tax when it accrues and arises. The assessee has right to offer such income if the same is though accrued but not received, to offer it for taxation on receipt basis. In this case, the bills that are not received by the assessee are not at all admitted by the person who is supposed to pay it. Thus, there is no obligation of payment on the shoulder of Organizing Committee. Thus the outstanding payments, on the facts of the case, has neither accrued to the assessee, nor received by it. 31. The next reason given by the learned AO for not accepting the books of accounts maintained by the assessee on Cash basis and stated that the profit of the assessee cannot be deduced from it for the reason that: i. total value of the bills found and seized during the course of search comes to only INR 275505611/- as against the total of the above parties as per the books of accounts on 16/10/2010 comes to INR 3 87738567/-. Therefore, according to the learned assessing officer there is a discrepancy of approximately INR 11 crore for whic....
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....see. It is further the case that it is not for the assessee to suggest that what document should be seized by the search party and what document should not be seized. It is solely the discretion of the search team to decide that. Further, all those vendors parties were also paid by account payee cheques. Thus merely for the reason that assessee produced those bills but assessing officer rejected them for the sole reason that assessee is in practice of receiving bogus bills, without proving that, the learned assessing officer is not authorised to reject the method of accounting regularly employed by the assessee. Therefore, it is not proper to state that for this reason, the profits of the assessee cannot be derived for taxation purposes correctly. In fact the rejection should be based on cogent reason as held by the honourable Supreme Court in CIT vs. British paints 188 ITR 44 (SC). ii. The another issue for which the method of accounting adopted by the assessee is rejected is for the reason that from the residence of a director in the assessee company are rough handwritten note and a print out of an email dated 16/6/2010 which was sent by Mr. Oliver of GL events France , ....
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.... method of accounting followed by the assessee that is cash method of accounting is not acceptable and assessee should follow accrual method of accounting. iii. On careful consideration of the argument of the learned AO, we do not find any substance that for this reason the method of accounting employed by the assessee can be challenged or this could be the reason because of which the profits of the assessee or the real income earned by the assessee cannot be deduced. In fact, the learned dispute resolution panel despite having the copies of the email and was having a belief that assessee has paid INR 35.85 crores as an illegal gratification by booking the bogus bills, therefore, it was mandatory for the learned assessing officer, learned dispute resolution panel to have enquired into the bills debited by the assessee and to show that these are the bogus bills. Not all these exercise has been carried out by the learned assessing officer or the learned dispute resolution panel. Over and above, assessee was directed by the learned dispute resolution panel to produce the copies of the bills before the learned assessing officer, the learned assessing officer has strai....
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....assessee. Therefore, for this reason it cannot be stated that the profits of the assessee cannot be correctly deduced because there is a negative cash balance in the books of the assessee. In view of this, we do not find this reason to sustain the rejection of the method of accounting employed by the assessee on this ground. 32. Thus the accounting defect of the bills, emails and seized documents found and negative cash cannot be the reasons, individually or collectively to reject the method of accounting regularly followed by the assessee to reach at the real profit / income of the assessee. 33. The learned dispute resolution panel/assessing officer has heavily relied on the decision of the honourable Supreme Court in case of Commissioner Of Income Tax Vs British Paints India Ltd (1991) 188 ITR 44 (SC). The learned dispute resolution panel in para number 5.11 stated that the honourable Supreme Court in case of the above decision has held that it is only the right but the duty of the learned assessing officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced there from are not. It is further held that th....
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....rue and proper income." 35. Further at page number 53 the honourable Supreme Court further held that:- "it is not only the right but the duty of the assessing officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say, as contended on behalf of the assessee, that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and officer is not bound by the method followed in the earlier years." 36. Therefore, it is evident from the decision of the honourable Supreme Court that the books of accounts and the method of accounting regularly employed by the assessee can be discarded, only if the proper profits, real income, there from cannot be deduced. Therefore, if an assessing officer desires to reject the method of accounting regularly employed by the assessee, he must give a cogent reason, which clearly shows that profits of the business cannot be correctly deduced from the method of accounting employed by the assessee. In the present ca....
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....ove grounds of appeal is whether correct profit/s of the assessee can be deduced or not from the books of account which the assessee has maintained on cash basis of accounting. It is seen this ground of appeal has been discussed in detail in the case of the assessee for the A.Y 2011-12, by a co-ordinate Bench of the ITAT in ITA No.2502/Del/2015 dated 01/07/2019. It has been held in this order:- "We are of the view that the cash method of accounting, which is followed by the assessee for the impugned assessment year as well as subsequently, cannot be rejected and the income of the assessee should not be computed on mercantile method of accounting. Accordingly, ground number 1 of the appeal of the assessee is allowed." 5.1 In view of the above, cash method of accounting, which is followed by the assessee consistently and also for the impugned assessment year, cannot be rejected and the income of the assessee should not be computed on mercantile method of accounting. Accordingly, ground number 2 of the appeal of the assessee is allowed. 6.0 Coming to ground nos. 3, 4 and 5, the Ld. AR submitted that the A.O in the Assessment Order, while relying on the Assessment order ....
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.... Ld. CIT(A), relying on the order of the Ld. DRP for the earlier assessment year A.Y. 2011-12, wherein the Ld. DRP had rejected the cash system of accounting of the Assessee and had directed the assessee to follow the accrual system of accounting, upheld the order of the A.O. It was stated that the Ld. CIT (A) further held that the fact that the assessee maintained two sets of accounts, first on cash basis and second on accrual basis, pointed out that the intention of the assessee was not bona fide. It was stated by the Ld. AR that in agreement with the A.O., the Ld. CIT (A) held that no real business activity was carried out by the Assessee in the A.Y. 2012- 13 and, thus, the disallowance of the claim of expenses of Rs. 5,72,17,800/- was correctly done by the A.O. 6.4 The Ld. Authorised representative submitted that it would be of utmost importance here to analyse the manner in which the A.O. has computed the income of the Assessee Company after rejecting the books of the Assessee. The Ld. AR stated that it is seen from the computation (reproduced at pg 33 of this order above) that the A.O., while rejecting the Cash system of accounting has in fact adopted the Income as declare....
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....urther submitted by the Ld. Authorised representative that as per the provision of section 142 of the Act, the AO is required to make a proper inquiry before reaching a conclusion. After referring to the language of section 142, the Ld. AR submitted that a reading of provision of section 142 of the Act would show that the AO, u/s 142(1), may serve notice on the assessee to produce such accounts and documents required by him and also to furnish such information in writing as required by him for the purpose of making an assessment. Thereafter, u/s 142(2) of the Act, the AO is required to make such enquiry as he considers necessary to obtain full information in respect of income or loss of assessee. It was submitted that the AO shall, u/s 142(3) of the Act, give opportunity of being heard to the assessee in respect of material gathered on the basis of inquiry u/s 142(2). It was submitted that however, in this case, the AO has utterly failed to comply with the provision of section 142 of the Act. 6.7 It was further submitted by the Ld. AR that the Audited Financial statements prepared on cash basis and accrual basis, both, were furnished by the assessee before the AO. Hence, it was ....
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....igh impact on the business performance of the assessee company. Due to this, the assessee company was not getting any contract/s or business from any other concerns or organizations. Further, out of the total contract amounting to Rs. 156.70 crores with the Organising Committee (OC), CWG, bills amounting to Rs. 70.18 crores were accepted by the OC, CWG and payments were also received to the same extent. Bills amounting to balance of Rs. 86.52 crores were not accepted by the OC, CWG and the payments were also not received. The Ld. AR submitted that due to this reason the assessee was also facing financial crisis and the amounts of many creditors are still payable especially to the associated enterprises. This was also the reason that no party was ready to do business with the assessee company. Hence, the AO's allegation that no business activity was done by the assessee company is completely false and it was only because of the aforesaid reason that the assessee was not getting any contract/s and there was a lull in the business. The Ld. AR submitted that it was only because no revenue was generated during the year, it cannot be presumed that no business activity was performed durin....
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....that the A.O. has held that since the cash system of accounting was rejected and since the Assessee had failed to furnish fresh Return on accrual system of accounting, he held that the Return of income filed by the assessee as per cash basis was to be treated as Return as per the accrual basis. Thus, the A.O. held the Income (net) as per the cash system of Rs. 13,07,888/- (as per Return) to be the Income as per the accrual system of accounting and then the A.O., alleging that the assessee had in its Return (filed on cash basis) claimed an expenditure of Rs. 5,72,17,800/- (which was actually the expenditure claimed in the Accrual Profit & Loss Account) disallowed the same. Thus, the A.O. has made an addition of the said Rs. 5,72,17,800/- to the Income of the Assessee. The Ld AR submitted that the return of income filed on cash basis cannot be treated as return filed on accrual basis as these two methods are distinct from each other. Had the both the methods been the same, the assessees would not have been provided with an option to select any one of the two methods. It was submitted that under cash system of accounting, transactions are only recorded when actually paid or received. ....
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....went on to pick up the expenses as debited in the Accrual books and disallowed the expenses as claimed in the said accrual accounts on the premise that no real business activity was done and, therefore, no expenses were justified. It is our considered opinion that the finding given by the AO that no business was carried out during the year is not based on any cogent reason. The business of any company cannot be said to be defunct until and unless the company has been wound up or has surrendered the Certificate of Incorporation in accordance with law. The status of the assessee company as per the MCA website is, undisputedly, active till date. Therefore, the company cannot be considered as a defunct company. Since, the assessee company is active, it has to incur some expenditure to maintain its daily operations and accounts such as salary to staff, audit fees, legal and professional fees, rent, repairs and maintenance, bank charges, professional tax, interest on loan taken in earlier years, depreciation, etc. Such expenditure cannot be disallowed only on the ground that there was no business activity during the year especially in the case of companies. It is also seen that the AO ha....