Income Tax Appellate Tribunal - Lucknow
A.K.Cold Storage Pvt. Ltd., Kanpur vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL,
B - BENCH, LUCKNOW.
Before Shri H.L.Karwa, Hon'ble Vice President and
Shri N.K.Saini, Accountant Member
I.T.A. No.228(Luc)/2010
Assessment Year:2005-06
The ITO-6(1), vs. M/s A. K. Cold Storage
Kanpur. Pvt. Ltd.,
111/457, Vasundhara Complex,
80ft. Road, Bramha Nagar, Kanpur.
PAN AADCA1924D
(Appellant) (Respondent)
Appellant by :Shri Alok Mitra, D. R.
Respondent by :S/Shri Swarna Singh, C.A. & S. K. Gupta, C.A.
O R D E R
PER N.K.SAINI, ACCOUNTANT MEMBER
This is an appeal filed by the department against the order dated 19/01/2010 of CIT(A)-I, Kanpur relating to the assessment year 2005-06.
2. The following grounds have been raised in this appeal :
"1. That the Commissioner of Income Tax (Appeals)-I, Kanpur, has erred in law and on facts in deleting the addition of Rs.27,76,039/- being rental income for 1/4th cycle which was not credited in Profit & Loss Account and the expenses relating to this income were debited in Profit & Loss Account.
2. That the order of Commissioner of Income-tax (Appeals) being erroneous and bad in law be vacated and the order of the assessing officer be restored.
3. That the appellant craves leave to modify any of the ground of appeal given above and/or add any fresh ground as and when it 2 is considered necessary to do so."
3. The facts of the case, in brief, are that the assessee filed its return of income on 30.10.2005 declaring nil income. Later on, the case was picked up for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee carried on the business of cold storage i.e. preserving potato and realizing rent against potato preservation. The AO also noticed that the assessee had shown rent receipt from upliftment of 1,51,708 bags of potatoes. The said upliftment was over in the month of December, 2004. Thereafter loading of potatoes started in the month of January, 2005, which continued upto March,2005. According to the AO, the loading of 1,83,416 bags was done during this year but the expenses debited in the Profit and Loss Account included the expenses of April, 2004 to December,2004, which were related to upliftment of 1,51,708 bags, corresponding income for the same had been duly credited in the Profit and loss Account. However, the expenses debited in the Profit and Loss Account also included expenses of January, 2005 to March, 2005, which were related to loading and upkeeping of 183416 bags, corresponding income of which had not been duly credited in the Profit and Loss Account. The AO pointed out that the expenditure on loading and fuel incurred during January, 2005 to March, 2005, which were wholly and exclusively attributable to 183416 bags had been debited in the current assessment year. The AO worked out the quantum of excess expenses debited on account of loading charges and fuel at Rs.5,04,394 and Rs.7,71,030 respectively. He also pointed out that besides expenses of loading and fuel, other expenses of the period starting from January to March, 2005 had also been debited during the year whereas matching income had not been 3 credited on mercantile basis. The AO worked out the proportionate expenses for three months i.e. January to March,2005 at Rs.16,13,370. According to the AO, the assessee had debited other expenses of Rs.16,13,370, loading charges Rs.5,04,394 and fuel charges Rs.7,71,030 totalling to Rs.28,88,794 in its Profit and Loss Account during the year under consideration for the period January, 2005 to March,2005,whereas the matching income in respect of those expenses had not been credited in the Profit and Loss Account. He,therefore, required the assessee to explain as to why the Revenue on the loading of potatoes was not charged at the time of loading on mercantile basis.
4. In response to the above query, the assessee vide its letter dated 17.9.2007 submitted to the AO that the assessee was maintaining the books of account as per the provisions of section 145 of the I.T.Act and the Accounting Standard as prescribed by the Institute of Chartered Accountants of India in AS-9 on completed contract method. It was further stated that since the assessee was a service provider and revenue was recognized on completed contract method i.e. at the point of time of upliftment/exit of potato in good marketable conditions; otherwise the assessee has to pay claims against perished potato. It was contended before the exit of potato neither the storage rent falls due nor any legal right to claim potato rent takes place. It was further contended that even under the mercantile system of accounting, the revenue is to be recognized at the time of exist of potato not at the time of booking/storing and the said method has been duly followed regularly and consistently right from the beginning of the business.
45. The AO did not accept the contention of the assessee and made the addition of Rs.26,76,039 by observing as under :
" (a) The assessee company's submission that it is following mercantile system of accounting is factually incorrect because the expenses relating to the potatoes stored during January to March 2005 have been booked/debited during the current year, whereas, the matching income has not been accounted for on mercantile basis. During the year, the assessee company has shown rent receipt from upliftment of 151708 bags. The upliftment of potatoes was over in the month of December 2004. Thereafter loading of potatoes starts in the month of Jan.2005 which continues upto March 2005. This year loading of 163416 bags was done. Now the expenses debited in the P & L a/c includes expenses of April 2004 to December 2004, which were related to upliftment of 151708 bags, corresponding income for which has been duly credited in the P & L A/c.
However the expenses debited in the P&L a/c also includes expenses of Jan.2005 to March 2005, which were related to loading and upkeeping of 183416 bags corresponding income of which has not been duly credited in the P&L a/c. The expenditures of loading and fuel incurred during Jan.2005 to March 2005 are wholly and exclusively attributable to 183416 bags have been debited in the current assessment year. The quantum of excess expenses debited on account of loading charges and fuel are Rs.5,04,394/- and Rs.7,71,030/- respectively, which were exclusively for loading of 183416 bags. Besides the expenses of loading and fuel, other expenses of the period starting from Janaury to March 2005 have also been debited during the year, whereas matching income has not been credited, on mercantile basis. The assessee company has debited total expenses of Rs.77,28,908/- during the previous year relevant to the A.Y. 2005-06. If the expenses of loading and fuel are excluded then the total expenses debited in this year comes to Rs.64,53,484/-. The proportionate expenses for three months i.e. January to March 2005 comes to Rs.16,13,370/-. Thus, the assessee company has debited other expenses of Rs.16,13,370/-, loading Rs.5,04,394/- and fuel Rs.7,71,030/- totalling to Rs.28,88,794/- in its P&L A/c during the year under consideration for the period January 2005 to March 2005. Whereas the matching income in respect to these expenses has not been credited in the P&L A/c. This kind of practice adopted by the assessee company cannot give correct 5 picture of taxable profits. As regards, the assessee company's submission that it is following this method of accounting regularly and consistently is also not acceptable because the assessee company has to follow either cash system of accounting or mercantile System of accounting as per the provisions of Section 145A of the Income Tax Act, 1961. Thus, the regularly and consistently followed system should either be mercantile or cash. We are not changing the system of accounting followed by the assessee company but the principles of mercantile system as prescribed by accounting standards are being applied correctly i.e. matching expenses and income' should be shown simultaneously.
(b) The assessee company's submission that it is following completed service contract method, which consists of execution of single act and accordingly revenue is recognized when the sole final act take place and service become chargeable is also not acceptable because the business of cold storage does not involves execution of single act. In the assessee company's line of business first act starts with the loading of potatoes staring from January to March, The period of storage of potato extends to roughly six months. Therefore, this period can be taken as Second and Third act. During this period, the potatoes are kept in the cold storage for a period of five to six months without any loading or upliftment. Fourth and final act involves upliftment of potato starting from the month of September to November.
(c) The assessee company's submission that the revenue is recognized at the time of upliftment/exit of potato in good marketable condition otherwise assessee company will have to pay claim against perished potato. In this regard the assessee company was specifically asked to submit the details of damage/spoilage of potato during last two years. The assessee company vide its reply dated 10.10.2007 submitted that there had not been any damages/spoilage of potato during last two years. Therefore, assessee company's submission that significant uncertainty exist is also not correct.
From the perusal of accounting standards, as discussed above, it is clear that the assessee company should have followed method of proportionate completion contract because in the case of the assessee company the quantum of ultimate collection is pre-decided i.e. the 6 rent per quintal of potato for entire season is pre-decided. Further, as per the provisions of Section 145, the assessee company has to follow either cash system of accounting or mercantile system of accounting. Since, the assessee-company has opted for mercantile system of accounting as per the Audit Report filed with the return of income, therefore, the claim of expenses for earning a particular income can be allowed on mercantile basis, if, the matching income arising out of those expenses is also accounted for on the mercantile basis.
Cold storage business is in the same nature as warehousing, where the main essence of the transaction is letting out of storage space having appropriate facilities for preservation of goods The income from cold storage is in the nature of rental income and should be accounted during the currency of the period for which goods are agreed to be stored therein. This is not only in accordance with the accrual system of accounting but also the 'matching concept' which requires that costs should be accounted for in such quantum and period which is directly related to the income for which they are being incurred. The reverse also holds true. Therefore, since the costs are being incurred on the cold storage facility throughout the currency of the period which it is let, the total rental received for the same should also be accounted for as income on a periodic proportionate basis. In the case of the assessee company, the income of cold storage rent is charged for one complete cycle irrespective of the period for which the potato was kept in the cold storage. Thus, as the rent is directly related to the complete cycle period or say season the income should be proportionately apportioned on the basis of the period of completed cycle. In the case of assessee company period of loading starts from January and upliftment is carried on upto December. Therefore, it would be appropriate, if period of loading i.e. January to March is taken as 1/4 completion of proportionate service contract. The figure of 1/4 period is being taken because the assessee company's business involves four specific acts as discussed above. The expenses of loading fuel and other expenses amounting to Rs.28,88,794 incurred from January 2005 to March 2005 in respect to 183416 loaded in this period has been debited in P&L A/c as discussed in Para 3(a) above, whereas matching income on mercantile basis has not been credited in P & L a/c. Thus, in view of the facts as discussed above, the books of accounts maintained by the assessee company does not give true and correct picture of the income, as such, they are being rejected u/s 145A of the Income Tax Act 1961. The rental income of 183416 bags for 3 months i.e. January 2005 to March 2005 is being worked out as under:
7Rental income of 151708 bags as shown by the assessee company = Rs.88534788 Rental income per bags works out =Rs.58.36 Rental income of 183416 bags for ¼ cycle =Rs.58.36x183416/4 =Rs.26,76,039.8
Since the assessee company was required to have shown rental income of 183416 bags [on proportionate basis] as per the matching concept of revenue recognition. Therefore, rental income [one fourth] of 183416 bags amounting to Rs.26,76,039/- is being added back to the income of the assessee company for A.Y. 2005-06 on mercantile basis as discussed above matching expenses in respect of this income has already been debited in P&L A/c of A.Y. 2005-06. "
Reliance was placed on the judgment of the Hon'ble Supreme Court in the case of CIT vs. British Paints India Lgd. (1991) 188 ITR 44 (SC).
6. The assessee carried the matter to the ld.CIT(A) and submitted as under :
"B) Addition of Rs.2676039/- on account of Rental Income
1. Ld. AO has made the addition of Rs.26,76,309 against the booking of potato in F.Y. 2004-05 without making the adjustment for booking of F.Y.2003-04 credited in 2004-05, which is against the principles of consistency and natural justice as well.
2. Ld. A.O. has not considered the fact that the addition of Rs.2676309/- has already been returned in Asstt. Year 2006-07 hence this addition amounts to assessing the same income twice once in Asstt. Year 2005-06 and again in Asstt.
Year 2006-07 which is not permissible by law.
In view of the above facts and circumstances the whole of the addition is arbitrary, unwarranted, illegal and bad in law and liable to be quashed.
9. It has been further submitted by the appellant that-
" In addition to our written submissions dated 05.03.2009 9 we would also like to bring your kind notice that actual rent received for the assessment year 2006-07 is Rs.8407894.77 instead of Rs.183416*58.36=10707157.76 as taken in assessment order, certified copy of Balance sheet and P/L for F.Y. 2005-06 and 2006-07 are enclosed for your Honour's kind perusal and if the principle as adopted for assessing the income be taken than Returned Income should have been reduced i.e. addition of 1/4th of Rs.8407894.77 and deduction of 1/4th of 8853788.00. Further the way Honourable A.O. has derived the income that amounts to assessment of 15 months income. i. e. 12 months already credited in P/L account and for 3 months added by Ld. AO which is illegal and not permissible by Law of Income Tax.
Again the income which have been added in 2005-06 is already assessed in 2006-07, hence the same income is assessed once in 2005-06 and again 2006-07, which is not permissible.
In view above submissions your Honour are very humbly prayed to kindly delete the addition and oblige."
7. The ld.CIT(A), after considering the submissions of the assessee, deleted the addition by observing as under :
" (i) The appellant has been following Mercantile method of accounting and there is no change in the accounting method applied by the appellant from year to year.
ii) The A.O. has observed that "we are not changing the system of accounting followed by the assessee company but the principles of mercantile system as prescribed by accounting standards are being applied correctly i.e. matching 'expenses and income' should be shown simultaneously." But at the same time it is also true that the "matching principle" cannot be applied in isolation without further making adjustment in the earlier and subsequent years in respect of the effect of such matching principle. In that case, the whole books of accounts of the earlier and subsequent years are liable to be adjusted. In any case there is no addition in the income of appellant. rather it is 10 only adjustment for setting off income of the current year as computed by the A.O., in the earlier and subsequent years.
iii) It is also on record that action u/s 147/148 was initiated for A.Y. 2000-01 on the similar ground but it was dropped by the department. The certified copy of such record has been placed before me.
iv) The argument of the appellant noted above in Clause-7 calls for adjustments which have not been done by the A.O.
v) From the above facts on record, it is clear that the department has itself accepted the accounting practice and principle followed by the appellant in the earlier and subsequent years.
11. Under the circumstances, effecting any change on the misconceived notion of matching principle will destroy the correct measurement of income of the appellant during the year. If at such change is to be effected, the consequential effect cannot be left/ignored.
12. Considering the above facts and the nature of addition made by the A.O. by changing the accounting method, it is clear that no taxable income has been unearthed and also no bogus expenses have been found. At best, the addition made by the A.O. is result of adjustments made in the accounting of current year which is liable to be considered in previous/subsequent years. It is also on record that the assessment in previous and subsequent years has been completed by accepting the accounting method and principle practice by appellant from year to year. Accordingly, considering the "Rule of Consistency"
in accounting business and for the reasons discussed above in detail, I find that the addition made by the A.O. is uncalled for."
8. Now, the Department is in appeal.
119. During the course of hearing, the ld.D.R. strongly supported the order of the AO and also submitted that similar issue had already been adjudicated by this Bench of the Tribunal in the case of M/s. M.B.Cold Storage Pvt. Ltd.,Kanpur vs. ITO in ITA No.680(Luc.)/2009 for the assessment year 2006-07 (order dated 19.5.2010). He further submitted that the facts of the present case are identical to the facts involved in the aforesaid referred to case, therefore, the same course may be adopted in the assessee's case.
10. In his rival submissions, the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted in writing that the facts of the asessee's case are distinguishable from the facts involved in the case of M/s. M.B.Cold Storage Pvt. Ltd. (supra) for the following reasons :
" The decision of Honourable ITAT Lucknow in the case of MB Cold Storage (P) Limited Vs ITO 6(1), Kanpur in ITA No. 680/luc/09 is distinguishable on undernoted points and therefore not applicable to the instant case of respondent:
(a) In the respondent's case, the method of accounting has been accepted by the department in the earlier years, first in the AY 2000-2001 the case of the assessee was reopened u/s 148 of the Income Tax Act, 1961 on the aspect of method of accounting only, however the proceedings were dropped considering the method of accounting adopted by assessee as correct. Similarly in AY 2001-02 in the assessment u/s 143(3)of the Income Tax Act, 1961 the method of accounting was considered correct by the Department hence as a principle of consistency the method of accounting cannot be changed by the department since the facts remains the same.
(b) In the case of MB Cold Storage (P) Limited (Supra), since the 12 relevant material and contractual terms of the transactions were not placed before the Hon'ble ITAT bench, Lucknow, it has not been decided at what point of time an enforceable debt has come into existence in favour of the assessee and consequently when he had acquired the right to receive the income. This aspect is one of the condition precedent in deciding when an income accrues to the assessee under Mercantile System of Accounting.
Reliance was placed on the following case laws:
(a) Honourable Allahabad High Court in the case of CIT Vs Kalicharan Jagan Nath 41 ITR 40 and approved by Honourable Supreme court in the case of CIT Vs A. Gajapathy Naidu,53 ITR 114.
(b) Honourable Supreme Court of India in the case of E.D. Sassoon & Company Ltd and others Vs CIT,26 ITR 027.
(c) Honourable ITAT Special Bench in the case of Honourable ITAT Ahmadabad Special Bench in the case of Dy. CIT Vs Fag Bearings India Ltd., 115 ITD 53.
(d) Honourable Allahaba.d High Court in the case of Lachman Vs. Jarbandhan, (AIR 1928 Allahabad 1931).
(e) Honourable Supreme court in the case of CIT Vs A. Gajapathy Naidu,53 ITR 114.
(f) Honourable Madras High Court in the case of CIT Vs Brilliant Tutorials (P) Ltd., 210 CTR 49.
(g) Honourable Supreme Court in the case of Radhasoami Satsang Saomi Bagh Vs CIT, 193 ITR 321
(h) Honourable ITAT Mumbai Bench in the case of ITO Vs Rasiklal & Co. Pvt Limited, 123 TTJ 279.
(i) Provisions of The UP Regulation of Cold Storage Act, 1976.
(j) Provisions of The Indian Contract Act, 1872.13
(k) Uttar Pradesh Cold Storage Viniyaman (licence Dena) Niyamavali, 1976.
(l) Uttar Pradesh Cold Storage Viniyaman (licence Dena)(Pratham Sansodhan) Niyamavali, 1987. "
11. We have considered the submissions of both the parties and gone through the material available on the record. It is noticed that the facts of the present case are identical to the facts involved in the case of M/s. M.B.Cold Storage P. Ltd. vs. ITO, Kanpur in I.T.A.No.680(Luc.)/2009 for the assessment year 2006-07. In the present case also, the AO made the addition on account of 1/4th rental income from potato bags loaded in January and upliftment of which was over in the month of December. The loading also started in the month of January which continued upto March. The assessee had shown the income at the time of upliftment of the potato bags but claimed the expenditure for the period starting from January to March,2005 without showing the corresponding income. Therefore, the facts are identical, the only difference is in the quantity of potato bags and the amount of expenditure as well as the rental income; otherwise the facts are similar. We,therefore, are of the confirmed view that this issue is squarely covered vide order dated 19.5.2010 passed in I.T.A.No.680(Luc.)/2009 in the case of M/s. M.B.Cold Storage Pvt. Ltd.,Kanpur (Supra). The relevant findings given in the said order read as under :
"8. We have considered the rival submissions and carefully gone through the material available on record. In the instant case it is noticed that the assessee is engaged in the business of running a cold storage which is a cyclic industry and the cycle starts with the storing of potatoes and ends with the return of stored potatoes. For storing the potatoes the assessee is charging rent. However, the rental 14 income is accounted for at the time of uplifting of potatoes by the farmers. The cycle starts from the loading of the potatoes in the month of January to March. Thereafter, potatoes are stored for the month of April to September and lifting takes place from October to December. In the Income Tax matters, an income pertaining to a previous year is taxed in the assessment year, the previous year is defined in section 3 of the I.T. Act, 1961 which means the financial year immediately preceding the assessment year. In the present case, the assessment year is 2006-2007 which starts from 1st April 2006 and ends on 31st March 2007. The previous year, therefore, starts from 1st April 2005 and ends on 31st March, 2006. So in the instant case the taxable profit earned by the assessee from 1st April, 2005 to 31st March, 2006 is chargeable to tax in the assessment year 2006-2007, however, for charging the profit to tax, a method of accounting followed by the assessee is to be kept in mind, the method of accounting to be followed has been prescribed in section 145 of the I.T. Act, 1961 and sub section (1) of section 145 reads as under:
"(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee."
8.1 From the above provisions, it is crystal clear that an assessee can either adopt a cash system of accounting or mercantile system of accounting and the said method of accounting is to be followed regularly. The cash system is that system in which the income earned is taken into account on receipt basis and similarly the expenditure incurred are considered on payment basis in the period falling in the previous year. However, in the mercantile system of accounting the income as well as expenditure are considered on accrual basis. In this type of accounting system, it is immaterial whether actual receipt of income is there or actual payment of expenses is there. Under the mercantile system entries are made in the account books on the dates when the monies fall due, and not on the dates when they are paid or received. Thus, if goods are 15 sold, the seller would credit himself with the sale proceeds in his books on the date of the sale, though he has received no money, making a corresponding debit entry immediately against the purchaser. If a principal has contracted to pay commission to his agent, at a certain percentage for the work to be done by him (agent) during the accounting year, on an appointed date or dates during or after the expiry of the accounting year, he would debit himself in his books with the amount of the commission as agreed upon on the appointed date or dates and likewise credit the agent with an identical sum on the appointed date or dates, though the principal in fact has made no payment. If interest is payable by a merchant to his creditors on a certain date, the merchant would debit himself on that date in his accounts, though, in fact, he made no payment and would make a corresponding credit entry in his books in favour of the creditor the same day. That is to say, the assessee would credit himself with the monies as soon as he became entitled to demand payment, though he has not in fact received them, and likewise, he would debit himself with the monies as soon as he became liable to pay, though he has made no payment then. The profit thus computed is, obviously, the profit earned, not realized, and similarly, the loss computed is the loss sustained not paid.
8.2 The Hon'ble Supreme Court in the case of Keshav Mills Ltd. vs. CIT [1953] 23 ITR 230 observed that the mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system bring into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure in respect of which a legal liability has been incurred before it is actually disbursed. The profits or gains of the business which are thus credited are not realized but having been earned are treated as received though in fact there is nothing more than an accrual or arising of the profits at that stage. They are book profits. Receipt being not the sole test of chargeability and profit and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax the assessability of 16 these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen.
8.3 The Hon'ble Supreme Court in the aforesaid case has held that "Mercantile system brings into credit what is due, immediately it becomes 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.
8.4 The claim of the assessee in the instant case is that mercantile system of accounting is followed, therefore, the income earned by the assessee which has accrued for the period starting from 1st April 2005 and ending on 31st March 2006 is to be considered and same is the position for the expenses. As regards to the incurring of expenditure is concerned there is no dispute that the assessee had entered and accounted for in the books of accounts all the expenditure incurred/accrued from 1st April 2005 to 31st March 2006, those expenses had been considered as genuine and no disallowance has been made. In the present case the only dispute relates to the earning of income, the assessee is claiming that income is accounted for at the time of uplifting of the potatoes. In this manner the income earned upto December 2005 has been accounted for and no income for the period 1st January 2006 to 31st March 2006 is accounted for. As we have already pointed out that in the mercantile system of accounting the income is accounted for on the basis of accrual and since the assessee earned the rent for storing potatoes from January to March 2006 also but the said income had been considered and accounted for at the time of uplifting of potatoes which got over in December of the relevant year i.e. December, 2006. Therefore, we are of the view that the assessee should have shown the proportionate rental income for the period January to March 2006 also in the assessment year under consideration. At the same time the income of the preceding year i.e. from January, 2005 to March, 2005 had been accounted for by the assessee since there was uplifting of 40,829 bags upto December, 2005, but no income related to 49,577 bags which got loaded from January, 2006 to March, 2006 had been shown. We are of the vie that the Assessing Officer was fully justified in working out the income of Rs.11,15,482/- which is required to be considered for year under 17 consideration. At the same time, the assessee is entitled to the set off of the income which had already been included in this year i.e. income from January to March, 2005. We, therefore, direct the Assessing Officer that the benefit of the aforesaid set off of the income is to be allowed against the addition made by him. Since the assessee had realized rent of Rs.36,74,610/- for the potatoes uplifted in the financial year 2005-2006 which also included the period of 1st January, 2005 to 31st March, 2005, therefore, the assessee is entitled to the set off of Rs.9,18,652/- (1/4th of Rs.36,74,610/-) against the addition of Rs.11,15,482/- (1/4th of Rs.44,61,930/-) which has been worked out by the Assessing Officer out of rent realized at Rs.44,61,930/- for 49,577 bags loaded in the financial year 2006- 2007. The said income of Rs.11,15,482/- is not to be considered in the subsequent year since it has been considered in the present assessment year i.e. assessment year 2006-2007. In this manner, an addition of Rs.1,96,830/- (Rs.11,15,482 - Rs.9,18,62/-) is sustained. As regards to the contention of the learned counsel for the assessee that the tax rates are not slab-wise and also there is no change in the rates year after year, as such exercise will be a revenue neutral if the income shown in the succeeding year is considered in this year. We are of the view that the said exercise even if it is revenue neutral has to be done because true and correct taxable income of the previous year is to be shown in the assessment year since each year is separate and independent. We, therefore, in view of the aforesaid discussion, hold that since the assessee is following mercantile system of accounting, the income for the period starting from 1st January, 2006 to 31st March, 2006 is to be accounted for on accrual basis for taxing the income in assessment year 2006-2007 but the assessee is entitled to set off of the income relating to the period 1st January, 2005 to 31st March, 2006 which had been received in the financial year 2005-2006 and included in the taxable income, considering that the mercantile system of accounting has been adopted by the assessee."
12. We, therefore, respectfully following the aforesaid referred to order passed by this Bench of the Tribunal, hold that since the assessee is following mercantile system of accounting, the income for the period starting from 1st January, 2005 to 31st March, 2005 shall be accounted for on 18 accrual basis for taxing the income in assessment year 2005-06, but the assessee is entitled to set off the income relating to the period 1st January, 2004 to 31st March, 2004,which had been received in the financial year 2004-05 and included in the taxable income considering that the mercantile system of accounting has been adopted by the assessee.
131. In the result, the appeal is partly allowed.
The order pronounced in the open Court on 9.9.2010.
Sd. Sd. (H.L.Karwa) (N.K.Saini) VICE PRESIDENT ACCOUNTANT MEMBER September 9th ,2010. Copy to the :
1. Appellant 2. Respondent 3. CIT(A) (4) CIT 5.DR.
A.R.,ITAT, Lucknow.
Srivastava.
19