Income Tax Appellate Tribunal - Delhi
Mr. K.K. Khullar vs Deputy Commissioner Of Income-Tax on 18 January, 2008
Equivalent citations: [2008]304ITR295(DELHI)
ORDER
K.G. Bansal, Accountant Member
1. The assessee has taken eight grounds in the appeal. These grounds involve two issues, namely, whether the learned CIT(A) erred on facts and in law in -(i) holding that the advance fee recovered from the clients was the income of the assessee, and (ii) not following the principle of consistency in not assessing such advance as income?
1.1 In respect of these substantive grounds, it is mentioned that the assessee had been following cash system of accounting year after year and the same was done in this year. Under this system, income is to be recognized in the books on receipt basis. The learned CIT(A) wrongly held that the assessee was following hybrid system of accounting. The system adopted by the assessee was adopted in the assessments for assessment years 1998-99 to 2001-02, which should have been accepted by him. The system adopted by the assessee does not cause any loss of revenue as true and real income was declared. Therefore, the ld. CIT(A) failed to appreciate that the Assessing Officer has changed his opinion, which was bad in law.
2. On perusal of the order of the learned CIT(A), it is found that during the course of assessment the Assessing Officer examined the audit report filed with the return of income, which stated that the assessee was maintaining books of account on cash basis. Therefore, the assessee was requested to explain as to why he was accounting for the receipts in respect of retainership fees on accrual basis. It was explained that the "advance retainership fees" was shown as advance in the books of account. That portion of the advance which was co-related to the services rendered in the year was offered for taxation by debiting it to the advance account. It was further explained that there was no change in the method of accounting in this behalf, which had been followed for more than three decades. The Assessing Officer did not accept the explanation of the assessee. It was pointed out by him that the provisions of Section 145, as applicable to the instant assessment year, permit only cash or mercantile system of accounting and the assessee cannot resort to maintaining the books on hybrid system. Therefore, the whole of the advance was taken as income, leading to an addition of Rs. 4,89,397/-. Before the learned CIT(A), it was submitted that the retainership fees was received in advance for the contract period of the retainership. The fees was determined on monthly, quaterly or yearly basis. What was received initially was an advance and at the end of the year, that portion of the advance for which professional services had been rendered, was transferred to the fees account and the balance amount was shown as liability under the head "advance retainership fees account". It was further submitted that the Assessing Officer erroneously invoked the provisions of Section 145(1) without pointing out any mistake in the system of accounting followed by the assessee. It was also submitted that the issue, which has been settled in the past assessments, should not be raised again. The learned CIT(A) considered the submissions of the assessee and the report of the Assessing Officer thereon. It was pointed out by him that for assessment year 1997-98 and onwards, the assessee cannot adopt hybrid system of accounting. The assessee was admittedly following cash system of accounting. Under this system, the entire amount received, whether arrear or advance, has to be shown as income. Similarly, any amount paid, whether relating to past liability or liabilities to be incurred in future, has to be reckoned as expenditure. The assessee has been following this method in respect of other professional receipts. Therefore, it was held that in respect of retainership fees also, the same system has to be followed. Coming to the issue of consistency of approach by the revenue authorities, it was pointed out that the Assessing Officer had raised a similar query in the proceedings for assessment year 2000-01, but did not make any addition. However, what is to be seen is whether, the revenue gets bound by the decision taken in one year for all times to come. It was further pointed that the principle of res-judicata does not apply to income-tax proceedings. Accordingly, this argument of the assessee was also rejected.
3. Before us, the learned Counsel for the assessee pointed out that the assessee is an advocate, practicing on labour laws side. His income for this year was enhanced by holding that the assessee was not following cash system of accounting but hybrid system of accounting by pointing out that advance retainership fees was not declared as income in full. He referred to the paper book filed by him, which contained 126 pages. Pages 56 to 126 constituted additional evidence consisting of -(i) copies of notices Under Section 148 of the Act issued by the Assessing Officer for assessment years 1998-99 to 2000-01, (ii) replies submitted by the assessee in compliance to the aforesaid notice, (iii) consolidated order passed by the Assessing Officer Under Section 147 dropping the proceedings for these years, (iv) summary balance-sheets for various years ending on 31.3.1997 to 31.3.2006, (v) comparative details of advance retainership fees received in the financial years ending on 31.3.1998 to 31.3.2005, and (vi) copies of assessment orders passed Under Section 143(3) of the Act for assessment years 2003-04 to 2005-06. It was his case that these documents came into the possession of the assessee after the conclusion of appellate proceedings for this year, for which the order was passed on 13.9.2005. The purpose for filing the additional evidence was to show that for all the years covered by the additional evidence, the Assessing Officer had accepted the books of the assessee without making any adjustment to the income on account of advance retainership fees. The learned DR had no objection to admission of these evidences and, therefore, the same was admitted.
3.1 Coming to the merits, reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. , which deals with the mercantile system of accounting and its import. The facts of the case were that the assessee entered into an agreement on 16.9.1938 with Malabar Steamship Co. Ltd. and on 8.6.1946 with New Dholera Steamships Ltd. Under the agreement, the assessee was entitled to receive commission @ 10% on the freight charges. Such amounts worked out to Rs. 1,71,885/- from Malabar Steamship Co. Ltd. and Rs. 2,56,815/- from New Dholera Steamships Ltd. These amounts were credited in the books and corresponding debit entries were made in the accounts of the shipping companies. In the year 1947, the assessee floated two private limited companies, called Shoorjit Vallabhdas Ltd. and Pratap Singh Ltd. The assessee wanted to substitute these two companies as managing agents of the shipping companies, one for each of them. Two shareholders of Malabar Steamship Ltd. objected to the rate of commission and wanted commission to be reduced to 10% of the profits of the managed company and 2.5% of the freight received. This offer was made to the assessee firm. In reply, the assessee stated that while it will continue to insist on the right to receive full managing agency commission, however, in order to put the company on its firm financial basis, it shall voluntarily agree to reduce the managing agency commission in respect of the current year and future years, as may be mutually agreed between the board and the assessee or between the company and the assessee to the extent of 2.5% of the total freight. A similar procedure was followed in respect of New Dholera Steamships Ltd. The managed companies appointed the two private limited companies as managing agents w.e.f. 1.1.1948. In the Annual General Meeting held in December, 1948, the commission was reduced from 10% of the freight to 2.5% as already agreed. As a result, the assessee gave up 75% of its earnings during the relevant year, amounting to Rs. 1,36,903/- in case of Malabar Steamship Co. Ltd. and Rs. 2,00,625/- in the case of New Dholera Steamships Ltd. The main question before the Hon'ble Court was whether, the aforesaid two sums constituted the income of the assessee for the year ended on 31.3.1948? The Hon'ble Court pointed out that the income-tax is a levy on income. The Act takes into account two points of time at which the liability to tax is attracted, namely, the accrual of income and its receipt. However, the substance of the matter is the income (emphasis supplied). If the income does not result at all, there cannot be a tax even though in book-keeping, an entry is made about a hypothetical income, which does not materialize. Where income has, in fact, been received and is subsequently given up, it remains the income of the recipient, even though given up, the tax is payable. However, where the income has not resulted at all, there is obviously neither accrual nor receipt of income, even if entry to that effect has been passed in the books of account.
3.2 Coming to the issue of consistency, he relied on the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT . The assessee was a religious institution formed for the purpose of propagating the ideals of Radhsoami among the public. Out of the donations and offerings, large funds were built up and properties were acquired over a number of years. In 1904, a trust deed was executed by the Central Council constituted in the year 1902. The creed Split into two as Soami Bagh sect and Dayalbagh San Sangi. For assessment year 1937-38, the Commissioner accepted that the offerings made to the Satguru were not for the personal benefit and although no formal trust had been created by the donors, the offerings were impressed with the character of trust money and, therefore, the offerings were exempt from income-tax Under Section 4(3)(i) of the 1922 Act. The claim in case of Dayal Bagh group was accepted by Allahabad High Court. The question was whether, for assessment years 1964-65 to 1969-70 the assessee was entitled to exemption from income-tax Under Section 11 of the Act? Reversing the decision of the High Court, the Hon'ble Supreme Court held that the properties given to the Satguru were intended for common purpose of furthering the objects of the institution. The Central Council had authority to manage the properties of the institution and on revocation of the trust, the property was not to go back to the Satguru. It was also held that in absence of any material change justifying the departure from the view taken earlier, the question of exemption to the assessee should not have been re-opened. In this connection, it was pointed out that while the principle of res-judicata does not apply to income-tax proceedings as each assessment year is a separate unit, however, where a fundamental aspect finding place in different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the same, it will not be appropriate to allow the position to be changed in a subsequent year. It may, however, be mentioned that the Hon'ble Court emphasized that the decision was confined to the facts of the case and was not to be treated as an authority on the aspects which have been decided for general application. Further, he relied on the decision of Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. and Anr. v. Union of India and Ors. , decided under the Service-tax Act. Our attention was drawn to the head note on page 276, wherein it was mentioned that the principle of res-judicata does not apply in matters pertaining to tax for different years because it debars the courts from entertaining issues on the same cause of action, whereas the cause of action for each assessment year is distinct. The courts will, however, generally adopt an earlier pronouncement of law or a conclusion of facts unless a new ground is urged or there is a material change in factual position. This approach is based not on res-judicata but on theory of precedent. This mandate is subject to distinguishing the earlier decision or showing that the earlier decision was per incuriam.
4. In reply, the learned DR referred to paragraphs 4.6 and 4.7 of the order of the learned CIT(A). The contents of these paragraphs have already been summarized by us. It may be mentioned that paragraph 4.6 deals with the amendment made in Section 145, w.e.f. 1.4.1997, under which the assessee can follow either cash or mercantile system of accounting thereby prohibiting the hybrid system of accounting from assessment year 1997-98. Paragraph 4.7 contains his finding that under cash system of accounting, the entire amount received, whether arrear or advance, had to be shown as income and the same will be the position in respect of the money paid for expenditure.
5. We have considered the facts of the case and rival submissions. We may refer to the charging Section 4 of the Act to the effect that income-tax shall be charged for any assessment year at the rate or rates provided in any central Act in respect of the total income of the previous year of every person. Section 5 deals with the "scope of total income", which is defined in respect of any previous year in terms of accrual, deemed accrual, receipt and deemed receipt etc. Section 145 deals with the method of accounting in respect of "profits and gains of business or profession" or "income from other sources". Thus, while Sections 4 and 5 deal with the scope of income and its charge to income-tax, Section 145 is a procedural section regarding the method to be followed for recording of income in the books of account. It is no doubt true that for assessment year 1997-98 and onwards, the assessee can follow either cash or mercantile system of accounting and the hybrid system of accounting is prohibited. However, what is to be taxed is income and receipt of an amount is not be the basis for the levy of the tax. In the case of Shoorji Vallabhdas & Co. (supra), the Hon'ble Supreme Court pointed out that the Income-tax Act takes into account two points of time on which the liability to tax is attracted, namely, -(i) accrual of income or (ii) receipt of income. It is further mentioned that the substance of the matter is "income". It may be emphasized that it is accrual of income or receipt of income that can become the subject matter of tax and it is the income which has to be recorded as per system of accounting followed by the assessee in view of Section 145 of the Act, because the substance of the matter is "income". Therefore, there is an infirmity in the order of the learned CIT(A) in paragraph 4.7 where it was stated that the entire amount received, whether arrear or advance, is to be shown as income under cash system of accounting. The correct position would be that the entire income received, whether arrear or advance of income, has to be shown as income under cash system of accounting. Coming to the facts of this case, the assessee received certain amounts for services to be performed over a period of time. The amount relatable to the services rendered in the year under consideration was shown as income, the reason being that the assessee became entitled to receive that amount from the client in respect of the services rendered. In other words, debt to the extent of the amount pertaining to services rendered only got vested in the assessee. The rest of the amount was taken as liability to be adjusted in subsequent year as and when the service was rendered. It is but clear that the excess amount would have to be returned in case the service was not performed in subsequent year and, therefore, in respect of such amount no debt came into existence in favour of the assessee. Therefore, this amount did not become the income. Accordingly, we are of the view that the learned CIT(A) erred in finding that the assessee was following hybrid system of accounting on the ground that the whole of the amount received from the clients as retainership fees was not declared as income in the year of receipt of the amount.
5.1 Coming to the issue of consistency of assessments, it may be mentioned that the Hon'ble Supreme Court itself mentioned in the case of Radhasoami Satsang (supra) that their findings should not be taken as a general proposition of law to be followed in every case as it was confined to the facts of that case. We may add that if a manifestly wrong decision has been taken by the Assessing Officer in one year or in a number of years, it will not bind the Assessing Officer in assessment of a subsequent year because there cannot be any estoppel against the law. However, in this case, we find the earlier and subsequent assessments were made on correct appreciation of the principle of cash system of accounting. Since the assessee succeeds on merits on this aspect, there is no need for us to give a finding that the Assessing Officer was bound in this year to follow the past or future assessment.
6. In the result, the appeal is allowed as discussed above. The order was pronounced in the open court on 18 January, 2008.