Income Tax Appellate Tribunal - Pune
Tukaram J. Naik,, Pune vs Department Of Income Tax
Author: G.S.Pannu
Bench: G.S.Pannu
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH " A", PUNE
BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER
AND SHRI G.S. PANNU, ACCOUNTANT MEMBER
S.No. ITA No. Asstt.year
1. 1697/PN/05 2001-02
2. 280/PN/07 2003-04
3. 278/PN/07 2000-01
4. 279/PN/07 2002-03
5. 1160/PN/07 2004-05
Asstt.Commissioner of Income-tax,
Cir. 5, Pune .. Appellant
Vs.
Shri Tukaram J. Naik,
Prop. T.J. Naik & Co.
Near Forest Colony, .. Respondent
Shalimar Chowk, Daund, Pune
PAN ABMPN 1377L
Appellant by : Shri Hareshwar Sharma
& Shri Abhay Damle
Respondent by : Shri Chetan Karia
ORDER
PER G.S.PANNU, A.M:
The five captioned appeals are filed by the Revenue against separate orders passed by the Commissioner of Income-tax (Appeals), Pune which, in turn, have arisen from orders of the Assessing Officer passed under section 143(3) for assessment years 2001-02, 2003-04 & 2004-05, and under section 143(3) read with section 147 for assessment years 2000-01, 2002-03 of the Income-tax Act, 1961 (in short "the Act").
2. Since common issues are involved, and the arguments raised by both the parties are similar, all the appeals were heard together and are being disposed off by a consolidated order, for the sake of convenience.
2 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
3. We shall first take up appeal in ITA No 1697/PN/05 pertaining to the assessment year 2001-02. The issue raised by the Revenue in this appeal relates to the deletion by the Commissioner of Income-tax (Appeals) of the addition of Rs 66,87,208/- made by the Assessing Officer on account of work-in- progress. The facts, in brief, are that the assessee is proprietor of M/s T.J. Naik & Co. and is engaged in the business of excavation, earth moving, road making etc. The return of income showing total income of Rs 20,92,480/- was filed by the assessee on 30.10.2001, which was subject to a scrutiny assessment under section 143(3) of the Act. On a scrutiny of the Profit and loss Account and Balance sheet, the Assessing Officer found that there was no work-in-progress in respect of unfinished work or work against which bills were raised by the assessee. The assessee was reqired to furnish the details of contract receipts, equipments hire receipts, transportation/labour receipts, copies of contract agreements alongwith R.A bills etc. which were duly filed. The Assessing Officer again required the assessee to furnish comparison of contract receipts with TDS certificates and its reconciliation. The Assessing Officer, on verification of the said details filed by the assessee, noticed that certain amounts were receivable from Vascon Engineers P. Ltd., Delfi Dwellings, Sharad Construction etc. He noticed that the amounts billed by assessee and credited by the clients were more than the amounts actually received by the assessee and in some cases the amounts credited by clients were less than the amounts actually received by the assessee. The Assessing Officer accordingly worked out total such receivables as on 31.3.2000 in respect of which payments were received by assessee during assessment year 2001-02 at Rs 56,52,861/-. The assessee was further asked to furnish details of payables and to compute work-in-progress as on 31.3.2001. The assessee filed detailed submissions making a reference to survey proceedings conducted at the premises of the assessee on 28th & 29th January, 2003 and requested the Assessing Officer to consider the entire work- in-progress as on 31.3.2003 for assessment year 2003-04 alone and claimed 3 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
that there was no case for consideration of any work-in-progress for earlier years prior to assessment year 2003-04. An amount of Rs 2,71,47,477/- was receivable from various contractor parties as on 1.4.2002. While filing the return of income for assessment year 2003-04, assessee considered the receivables as on 31.3.2003 and worked out the closing work-in-progress as on that date. An additional income of Rs 80lakhs was offered for taxation in assessment year2003-04. According to the Assessing Officer, such a treatment did not take care of the receivables as on 31.3.2002 and its implication in income of the assessee for assessment year 2002-03. The assessee filed further details of receivables and payables as on 31.3.2001 and the receivables, as per the assessee, were Rs 1,30,46,530/- as on 31.3.2001. The Assessing Officer noticed some discrepancies in the above working of assessee, and adopted the figure of Rs 1,52,07,901/-. The Assessing Officer then proceeded to compute the total work-in-progress of the assessee as on 31.3.2001 by reducing gross profit from the amount of receivables. The Assessing Officer noted that total expenses debited under various heads came to Rs 3,50,93,234/-. The Assessing Office further noted that due to the nature of the business of the assessee, no Trading account was prepared and only Profit and loss account was prepared. In the opinion of the Assessing Officer, since no trading activity is being carried out except in the case of sale of metal which was very nominal, all the expenses debited to Profit and loss account had a direct bearing on the calculation of gross profit. As per the Assessing Officer, since the assessee is following cash system of accounting, direct expenses of Rs 3,50,93,234/- pertained the works of Rs 5,02,49,412/-. He accordingly worked out the closing work-in-progress as on 31.3.2001 at Rs 1,06,21,198/-. He further computed the closing work-in-progress as on 31.3.2000 at Rs 39,33,990/-. According to the Assessing Officer, no opening or closing work-in-progress was considered by the assessee and, therefore, correct profit for a particular year could not be deduced. According to the Assessing Officer, though the assessee had a choice to adopt cash or 4 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
mercantile system of accounting as per the provisions of the Act, it was imperative that the accounts should be maintained in such a way that true profit of the year can be arrived at. In the opinion of the Assessing Officer, by not considering the closing and opening work-in-progress, in the Profit and loss Account, assessee is booking the expenditure on cash basis for receivables, but at the same time, not making any proportionate deduction out of expenses booked that are attributable to the receivables as on the last day of the year, which violated the principle of matching of expenses and, therefore, the same was not acceptable. Hence, the Assessing Officer held that the closing and opening work-in-progress has to be considered in the books of account of assessee, even though he has been following cash system of accounting. Adopting the closing work-in-progress as on 31.3.2000 of Rs 39,33,990/- as opening work-in-progress for assessment year 2001-02, the Assessing Officer concluded that the difference between the opening and closing work-in-progress had the effect of enhancement of net profit of the business. He accordingly made an addition of Rs 66,87,208/- to the total income of the assessee. Being aggrieved with the order of the Assessing Officer, the assessee went in appeal before the Commissioner of Income-tax (Appeals).
4. Before the Commissioner of Income-tax (Appeals), the assessee filed voluminous Paper Book in support of his various submissions. After considering the detailed submissions as well as case law cited on behalf of the assessee, and the Remand reports obtained from the Assessing Officer, the Commissioner of Income-tax (Appeals) proceeded to decide the issue. He noted that the assessee has been assessed to tax since assessment year 1991-92 and from the very beginning, the assessee has been consistently following cash system of accounting; that the assessee has never accounted for closing stock, work-in- progress and receivables in his books of account and these had not been considered for computing income returned by him in the past as also in the assessment year under consideration. Since the survey under section 133A of 5 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
the Act conducted in the assessee's premises on 28th & 29th January, 2003 was not related to assessment year under consideration, the Commissioner of Income-tax (Appeals) observed that the conclusions in the impugned order shall be confined to the year under appeal only. The Commissioner of Income-tax (Appeals) then proceeded to examine the nature and implication and connotation of both the systems of accounting, i.e. cash system and mercantile system. Further, the Commissioner of Income-tax (Appeals) examined the provisions of law in respect of method of accounting as contained in section 145 of the Act and observed that there are certain basic differences between provisions of law in respect of method of accounting brought about by the present section 145 as compared to section 145 as it then stood before the substitution by the Finance Act, 1995 with effect from 1.4.1997. Thereafter, the Commissioner of Income-tax (Appeals) analysed the position as under:
"i) Present section 145(1) says that income chargeable under the head 'Profits and gains' or 'Income from other sources' shall, subject to provisions of sub-section (2), be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee.
It may be mentioned that provisions of law as contained in present section 145(2) were not on statute book earlier. However, section 145(1) before it was substituted by Finance Act 1995 w.e.f. 1.4.97 contained three provisos which are absent in section 145(1) substituted by Finance Act, 1955 w.e.f. 1.4.97. Proviso one to earlier section 145(1) gave discretion to the AO to compute income even in case of correct and complete accounts upon such basis and in such manner as the AO may determine if according to the AO, the method employed by the assessee is such that the income cannot be properly deduced therefrom. This proviso is absent in section 145(1) substituted by the Finance Act 1995 w.e.f. 1.4.97. The implication of omission of proviso one in section 145(1) clearly shows that "Profits and gains of business or profession" or "Income from other sources" shall subject to provisions of sub-section (2) be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. Thus, section 145 requires that if one of the two methods of accounting viz. cash or mercantile is regularly employed by the assessee, the income has got to be computed in accordance with such method. Section 145(3) lays down that the AO may make an assessment in the manner provided in section 144, if either of the two conditions are satisfied.
i) Where the AO is not satisfied about the correctness and
completeness of the accounts of the assessee,
or
6 ITA 1697/PN/05 etc.
Shri Tukaram J. Naik, Daund.
ii) Where the method of accounting provided in sub-section (1) of
section 145 of accounting standards as notified under sub-section (2) had not been regularly followed by the assessee.
Thus, as per provision of law as contained in statute book in section 145(1), (2) & (3) substituted by Finance Act 1995 w.e.f. 1.4.1997, the income has got to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee unless conditions for invoking section 144 as contained in sub-section (3) of section 145 exists in a case. The use of word shall in section 145(1) makes it clear that provisions of law as contained u/s 145(1) are mandatory."
Adverting to the facts of the case, the Commissioner of Income-tax (Appeals) observed that the assessee is mainly engaged in the business of excavating the earth soil and moving the excavated soil at the construction site on contract basis. In most of the cases the assessee is sub-contractor working for the principal contractors and the excavation is done either manually or mechanically depending upon the site condition and for this purpose, the assessee employs earth moving equipments and substantial labour force. From the details of various activities carried on by the assessee during the year 2000-01, the Commissioner of Income-tax (Appeals) noticed that out of the total receipts of Rs 4,59,80,164.92 transport activity accounted for Rs 32,82,526.54, i.e. 7.14% and hiring activity accounted for Rs 14,49,509.32 i.e. 3.15% and supply of metal Rs 5,53,757.03, i.e.1.21%. Thus, the excavation activity as sub-contractor carried out by the assessee was 88.50% of the total activity. The Commissioner of Income-tax (Appeals) then proceeded to consider whether non-accounting for of receivables resulted in preventing correct determination of profit during the year under consideration. He observed that wherever there is any conflict between the principles of accountancy and provisions of law, the provisions of law would prevail. The Commissioner of Income-tax (Appeals) deleted the addition of Rs 66,87,208/- made by the Assessing Officer, holding as under:
"In the present case, the relevant law is contained in section 145 of the Income-tax Act, 1961. It may be mentioned that section 145(1) brought to statute book by Finance Act 1995 mandates that "Profits & gains from business or profession" shall be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. Since cash system of accounting by its very definition does not require accounting for of receivables and it is an undisputed fact in the case of the appellant that the appellant has regularly employed cash system of accounting in the past as well as in the year under appeal, in case of the appellant, I am of the considered view, that it cannot 7 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
be said that the non accounting of receivables results in a situation where true profits of the business cannot be arrived at during the year under appeal. As regards the AO's view regarding matching of expenses as contained in para 4.3 of the assessment order, it may be mentioned that the law as contained u/s 145(1) of the I.T. Act, 1961 gives the appellant option either to adopt cash system or mercantile system and in cash system of accounting matching principles has extremely limited role to play. The matching principle has full application for computing profits only in mercantile system of accounting. In view of this, legislative mandate as contained u/s 145(1) giving option to the appellant for employing either cash or mercantile system of account cannot be stifled by invoking a principle of accountancy in the present case. In view of this, I am of the considered view that the conclusion of the AO that non-accounting of WIP, which according to AO is required to be computed by reducing GP from the amount of receivables, does not result in a situation preventing deducing of correct profit during the year. In fact where profit is deduced by exercising option contained u/s 145 of the I.T. Act, 1961 it is clear that the legislative mandate as contained in section 145(1) is fulfilled. Thus on given facts, it is held that the appellant has exercised the option available to it u/s 145(1) of the Income Tax Act, 1961 and showing of income or receipt basis by the appellant following cash system of accounting, is in accordance with law as contained in section 145(1) of the Income Tax Act, 1961.
12.3 It may be mentioned that there is no finding in the assessment order about invoking of law as contained u/s 145(3) in the present case and in any case not showing of receivable in case of appellant regularly employing cash system of accounting cannot warrant invoking of section 145(3) and therefore it is held that the learned AO has failed to bring on record any material for invoking the provisions of law as contained u/s 145(3) of the Income Tax Act, 1961.
13. In view of the foregoing discussions, taking into account the submission of the appellant mentioned hereinbefore, case law relied upon by the appellant, further taking into account the relevant legal and factual position n this case and in view of the fact that the appellant has computed its income in accordance with cash system of accounting regularly employed by it, it is held that the addition of Rs 66,87,208/- is not justified in law and on facts and is hereby deleted. This disposes of grounds No. 1 to 4 of the appeal."
Aggrieved with the order of the Commissioner of Income-tax (Appeals), Revenue is in appeal before us.
5. Before us, the learned Departmental Representative, appearing for the Revenue, vehemently argued that the primary issue in all the appeals relates to the addition made by the Assessing Officer by disregarding the manner in which the income was declared by the assessee in the returns of income. It was pointed out that in the assessment year 2001-02 the Assessing Officer had noticed that the account books maintained did not show the correct state of affairs so as to deduce the true profits. It was pointed out that the assessee was following the cash system of accounting whereby only cash receipts were shown and the receivables were not reflected in the return while the expenditure was debited against such receivables and, therefore, the profit shown by the assessee was not properly deduced. For this reason, the Assessing Officer added back the difference between closing and opening work-in-progress (WIP) 8 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
of Rs 66,87,028/- to the income of the assessee. Similar additions for other assessment years was also sought to be justified. The learned Departmental Representative submitted that the Commissioner of Income-tax (Appeals) erred in observing that the WIP does not arise as the assessee was merely rendering services and was not engaged production. In this regard, it was pointed out that assessee executes contract work of earth excavation as per agreement with the parties. The bills raised by the assessee are on the basis of the quantity of work done based on the measurement of digging and excavation per cubic meter which shows that the plea of non-arising of WIP is incorrect. It was also pointed out that in the course of survey action undertaken in the period relevant to the assessment year 2003-04, assessee had declared the WIP of Rs 80,00,000/- and had also agreed that he would adopt the mercantile system of accounting. Even otherwise, it is pointed out that in the cash system of accounting also, WIP can be considered in order to compute profits of business and in this connection, reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of ACIT v Adlabs 14 SOT 505 (Mum).
6. On the other hand, learned Counsel pointed out that Commissioner of Income-tax (Appeals) made no mistake in deleting the addition. It was pointed out that in this case factually there is little scope for having WIP because the assessee was primarily a service provider. It was engaged in the business of excavating the soil and moving such soil on contract basis. For this purpose, the assessee employed earth moving equipments and a substantial labour force. The assessee was not engaged in production of any tangible product so as to result in any work-in-progress. Having regard to the nature of activities carried on, at no point of time the assessee can be said to hold any WIP except small quantity of diesel, oil, spare parts of the equipments, which are in the nature of consumables which might be unused as on the last day of the accounting year. It is also pointed out that the Assessing Officer has not doubted the correctness or completeness of the accounts of the assessee and further that there is no 9 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
dispute that assessee was following cash system of accounting, which is permissible in terms of section 145(1) of the Act. It is also pointed out that such method of accounting wherein no WIP or the receivables are accounted for has been carried out for last many years.
7. On this aspect, we have considered the rival submissions carefully. In so far as the assessment years other than 2003-04 is concerned there is no dispute that the assessee is following cash system of accounting. In this connection, the moot question is as to whether the impugned addition is sustainable or not. The Assessing Officer noticed that from the Profit & Loss account and the Balance sheet that no opening or closing WIP has been considered by the assessee, although the assessee was following cash system of accounting. As per the Assessing Officer, this does not reflect the profits of the assessee and correct profit for a particular year cannot be deduced, though as per the Assessing Officer the assessee enjoyed the choice to adopt either the cash or mercantile system of accounting as per the provisions of the Act. According to him, assessee was booking the expenditure on cash basis for receivables also, but at the same time not making any proportionate deduction of expenses that are attributable to the receivables as on first day of the year or at the end of the year. As per the Assessing Officer, this violated the principles of matching of expenses.
8. In this connection, it is quite well settled that the mercantile system of accounting stands on a different footing from the cash system of accounting. In the cash system, actual cash receipts and actual cash payments are recorded as credits and debits, whereas under the mercantile system, credit entries are made in respect of amounts due immediately on accrual basis before they are actually received and the expenditure is booked for an item for which legal liability is incurred even before the amounts in question may actually be disbursed. Therefore, in mercantile system, revenues are recognized on accrual basis, whereas in cash system of accounting, it is recognized on payment basis.
10 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
9. After considering the orders of the authorities below as well as rival submissions, the moot question which arises is as to whether the Revenue's approach of treating receivables as WIP and taxing the difference between closing balance and opening balance of receivables is in order having regard to the fact that the method of accounting followed by the assessee is cash basis. In our considered opinion, the Commissioner of Income-tax (Appeals) made no mistake in holding that such an addition is not tenable since the assessee was computing its income in accordance with cash system of accounting regularly employed by it. In this connection, reference may be made to the judgment of the Hon'ble Allahabad High Court in the case of Income-tax Appellate Tribunal v Jananmandal Ltd. 143 ITR 228 (All.) wherein an addition on account of difference between the outstanding at the beginning of the assessment year and at the close of the year was made. The said addition was deleted by the Tribunal noticing that the assessee followed the cash system of accounting, which was affirmed by the Hon'ble High Court by noting the findings of the Tribunal that no items of bills receivables or sundry debtors were to be found in the balance sheets filed by the assessee alongwith its returns of income for various assessment years. Notably, the addition made by the Revenue was found untenable having regard to the cash system of accounting being followed by the assessee therein in order to compute the income. To the similar effect are the judgments of the Hon'ble Supreme Court in the cases of CIT v A Krishnaswami Mudaliar & Ors 53 ITR 122 (SC), Morvi Industries Ltd v CIT (Cen.) Calcutta 82 ITR 835 (SC), and CIT v Barjatya Family Charitable Trust 163 ITR 269 (Raj.) and 137 CTR 133 (Raj). Moreover, we also find that the assessments for assessment years 1997-98 and 1998-99 have been completed after scrutiny, wherein the question of accounting of WIP was not raised at all. Thus, in principle, we find no error in the approach of the Commissioner of Income-tax (Appeals) in deleting the impugned addition.
11 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
10. In so far as the assessment year 2003-04 is concerned, there was a survey action in the course of which the assessee agreed to offer income on account of WIP for assessment year 2003-04. In this connection, assessee claims that it had also offered an amount of Rs 80 lakhs on this account in the return of income filed. The factual aspects of the statement made by the assessee during survey and the return of income filed thereof and the assessment finalized by the Assessing Officer for assessment year 2003-04 would be discussed separately in the subsequent paragraphs.
11. In the assessment year 2003-04, the learned Departmental Representative has raised an Additional Ground of appeal, which was hitherto not raised in the Memo of Appeal. By way of Additional Ground, it is challenged that the Commissioner of Income-tax (Appeals) erred in treating the revised return filed by the assessee as a valid return under section 139(5) of the Act. The contention raised is that the Commissioner of Income-tax (Appeals) has considered the return as valid merely because the same was filed within the period prescribed under section 139(1) of the Act, whereas as per the said section, a return can be revised only on discovery of an omission or a wrong statement in the return originally filed. It is contended that in the instant case there is no omission or wrong statement made by the assessee in the original return. The ld Departmental Representative also relied upon the judgment of the Hon'ble Gauhati high Court in the case of Sunanda Ram Deka v CIT 210 ITR 988 to contend that only a bona fide mistake or omission is contemplated as a requirement for revising a return under section 139(5) of the Act. It has also been contended that section 139(5) of the Act does not contemplate a revision of return meant to rework the income on the basis of a different method of accounting. In this connection, reliance was placed on the judgment of the Hon'ble Madhya Pradesh High court in the case of Deepnarayan Nagu & Co v. CIT 157 ITR 37 (MP).
12 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
12. On the other hand, the learned Counsel for the respondent-assessee has not objected to the action of the Revenue in raising the said additional Ground of appeal. However, on merits, it is contended that the revised return filed by the assessee for the assessment year 2003-04 fulfills the parameters of section 139(5) of the Act. It has also been contended that the revised return was filed on bona fide considerations and the assessment finalized by the Assessing officer for the assessment year 2001-02 on 31.3.2004 itself proves the bona fides of the assessee for revising its return for the assessment year 2003-04. It has been pointed out that in the assessment made for assessment year 2001-02 on 31.3.2004 the addition was made on account of work-in-progress and this clearly showed that assessee was entitled to a suitable credit as an opening balance in the subsequent assessment years and, therefore, the return for the assessment year 2003-04 filed originally without incorporating such credit in the opening balance contained an omission or mistake within the meaning of section 139(5) of the Act and, therefore, the revised return filed on 25.8.2004 for the assessment year 2003-04 fulfills the parameters of section 139(5) of the Act.
13. We have considered the rival submissions carefully. Section 139(5) of the Act provides that any person, having furnished a return under section 139(1) or in response to a notice under section 142(1), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of the period prescribed therein. In the present case, there is no controversy that the revised return filed by the assessee on 25.8.2004 is within the period prescribed. However, the only controversy is as to whether there was any "omission" or a "wrong statement" in the original return so as to entitle the assessee to file a revised return in terms of section 139(5) of the Act. From the phraseology of section 139(5), it is clear that for a return to be valid under section 139(5) of the Act it is necessary that omission or the wrong statement in the original return must be due to a bona fide inadvertence or mistake on the part of 13 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
the assessee, as opined by the Hon'ble Gauhati High court in the case of Sunanda Ram Deka (supra).
14. In this case, a survey action under section 133A of the Act was carried out on 28.1.2003 wherein as per the Assessing Officer there was a declaration of Rs 80 lakhs as unaccounted additional income for the assessment year 2003-04 in the statement recorded under section 131 of the Act. The assessee filed a return of income for the assessment year 2003-04 on 29.11.2003 declaring total income of Rs 1,41,44,010/- inclusive of Rs 80 lakhs declared as additional unaccounted income on account of WIP. Subsequently, the return was revised on 31.3.2004 declaring total income of Rs 1,01,27,100/- which was further revised on 28.8.2004 to an income of Rs 64,44,010/-. As per the Assessing Officer, in the revised and re-revised return, the additional unaccounted income has been withdrawn without assigning any reasons and, therefore, the same was not accepted. The claim of the assessee is that the Assessing Officer was incorrect in observing that there was a declaration of Rs 80 lakhs as unaccounted additional income in the statement recorded under section 131 of the Act at the time of survey. It was pointed out that subsequent to the date of survey a letter was filed on 30.1.2003 clarifying that the assessee would consult his lawyers and Chartered Accountants and then only would take a final decision about shifting from cash system of accounting to mercantile system of accounting. It was explained that the amount of Rs 80 lakhs was offered for the first time in the return of income filed on 29.11.2003 as closing WIP as on 31.3.2003 which was withdrawn by filing revised as well as re-revised return as the Department had reopened the assessment of the assessee for the earlier years despite the fact that it was agreed that upon offering Rs 80 lakhs as WIP as on 31.3.2003 without claiming the benefit of opening WIP as on 1.4.2002 assessment of the earlier years would not be reopened. Even before us, the learned Counsel for the assessee pointed out that at the time of filing of the revised return, the assessment of earlier years was made wherein additions were made on account 14 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
of WIP and therefore, under these circumstances for the assessment year 2003- 04, the assessee was entitled to credit for the opening receivables which were assessed in the preceding year. It was also explained that on such action of the Revenue for the earlier assessment years, the return of income originally filed by the assessee for the assessment year 2003-04 was rendered "wrong" within the meaning of section 139(5) of the Act.
15. In order to appreciate the factual contours of this aspect, we may refer to the following conclusions of the Commissioner of Income-tax (Appeals) contained in para 3.15 and 3.16 which read as under:-
"3.15 I have gone through the facts of the case from the assessment order, written submissions of the appellant, the statement of Shri Tukaram J. Naik, the appellant, recorded u/s 131 of the Income Tax Act, 1961 at the time of survey as also the remand report of the AO. It is seen that the return of income declaring total income at Rs 1,41,44,010/- was filed on 29.11.2003, which was required to be filed on 31.10.2003 of the relevant assessment year. When pointed out, it was stated that vide F. No. 220/3/2003 ITA-II dated 16.10.2003 reported at 264 ITR (St) 10, the CBDT had extended the date for filing the return of income for the assessment year 2003-04 for one month and, therefore, original return of income was filed within time and thus, the appellant was in his rights to revise or re-revise the return within one year from the end of the relevant assessment year, i.e. till 31.3.2005. It is undisputed that the revised and re-revised returns were filed on 31.3.2004 and 28.9.2004 respectively. The AO has harped upon the fact that no reasons, whatsoever, have been given while filing the revised or re-revised returns and that in the statement recorded u/s 131, in response to question Nos 20 to 23, the appellant had declared additional unaccounted income of Rs 80 lacs on account of WIP. This statement of the AO does not appear to be correct in so far as the AO has herself reproduced the question Nos 20 to 23 and 27 and answers of the appellant thereto on page 6 of the assessment order, wherein there is no mention of declaration of the amount of Rs 80 lacs by the appellant at the time of survey. There is no declaration of the amount of Rs 80 lacs in response to the question No 21 also, which pertains to the returns filed for the earlier assessment years 2001-02, 2001-02 & 2002-03, wherein the contract receipts were not tallying with the TDS certificates placed on record. It is seen that the amount of Rs 80 lacs had never been declared by the appellant during the course of survey but was included in the original return of income filed on 29.11.2003 for the assessment year under appeal for the working of WIP as extracted vide para 3.3 above. The appellant had also written a letter to the AO that cash system of accounting was the correct method of accounting being followed but he will change the method of accounting to mercantile system after consultation with his advocate. The appellant has given reasons as to why he revised and re-revised the return. It was stated to be on account of oral discussion/agreement made with the then CIT & Addl. CIT that the method of accounting would be changed from cash system to mercantile system and additional amount of Rs 80 lacs would be declared in the return of income for the assessment year 2003-04 without claiming credit for any opening WIP. However, it was in scrutiny and the AO computed the opening and closing WIPs and was in the process of making additions of the difference and the cases for the assessment years 2000-01 and 2001-02 were being reopened by issuance of notice u/s 148, the appellant found himself unduly harassed and he was under no obligation to stick to the agreement and declare the closing WIP as on 31.3.2003 and increase the income by Rs 80 lacs, the appellant revised and re-revised the return which as already stated above, were filed within time allowed under section 139(5) of the Act. No discriminating documents had been found from appellant. No self incriminating declaration was made during survey. A return was file declaring an amount of Rs 80 lacs which was revised and re-revised within time on retraction of agreement by the Department. It is trite law that once a valid revised return is filed u/s 139(5) of the Act, it obliterates the original return and the revised return is the only return which could be considered. Reference in this connection is made to the following decisions:-
15 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
(i) Shri Vallabh Glass Works Ltd v ITO 212 ITR 433 (Guj.) (ii) Dhampur Sugar Mills Ltd. v CIT 90 ITR 236 (All) (iii) Beco Engg. Co. Ltd. v CIT 148 ITR 478 (P&H) (iv) CIT v Mangalore Chemicals & Fertilizers Ltd. 191 ITR 156 (Kar.) (v) Chief CIT v Machine Tool Corpn. of India Ltd 201 ITR 101 (Kar.) 3.16 Further, it is noticed that the appellant was undisputedly following cash system of
accounting for the earlier years since 1991 and it was only during the course of survey that he had agreed to shift the system of accounting to mercantile. On the very next day, he had filed a letter retracting the statement of shifting the cash system of accounting to mercantile system of accounting stating that he would have to consult his counsels. The inclusion of Rs 80 lacs in the return of income on the basis of showing WIP as on 31.3.2003 without claiming opening WIP does not ipso facto show that the appellant was following mercantile system of accounting. It is seen that the tax auditors had merely stated the facts as per clauses 11(a) & 11(c) of the audit report, which was produced during the course of appellate proceedings. The method of accounting employed in the previous year was stated to be 'cash system' while against the column 'whether there was any change in the method of accounting employed as compared to the method employed in the immediately preceding previous year', it was stated that 'there was no such change'. It was clarified that the appellant had shown the value of WIP at the end of the accounting period for the first time while calculating the taxable income. The method of valuation of closing stock employed in the previous year was stated to be the value of the WIP taken at cost but it was further reiterated that the appellant was following cash system of accounting. It is seen that nowhere had the auditors given a certificate that the appellant was following mercantile system of accounting as claimed by the AO."
16. In view of the aforesaid discussion, it is quite clear that the circumstances prevailing with the assessee to revise and re-vise its returns of income are well- founded. It is quite clear that originally the income of Rs 80 lakhs was declared in the computation of income, as is evident from a copy placed at page 109 of the Paper Book. It is also clear that the income from business other than Rs 80 lakhs on account of WIP, has been declared as per regular method of accounting followed, i.e. cash system of accounting. Notably, additional income of Rs 80 lakhs has been offered in the computation of income and has not affected the regular accounting system followed. Therefore, the plea of the learned Departmental Representative that the return has been revised to change the method of accounting, in our view, is untenable. Factually, additional income of Rs 80 lakhs which was hitherto declared in the revised return cannot be said to be a change made in the accounting system, because at the original stage there was no adjustment made in the books of account which continued to be maintained on cash bass, while the said amount was declared as additional income by way of computation of income. Under these circumstances, the reliance placed by the learned Departmental Representative on the judgment of 16 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
the Hon'ble Madhya Pradesh High Court in the case of Deepnarayan Nagu & Co (supra) to argue the untenability of the revised return, is misplaced. According to the learned Departmental Representative, as per the Hon'ble Madhya Pradesh High Court, a revised return cannot be filed in order to adjust or revise the method of accounting. On acts, in this case, we do not find that tha return has been revised to effectuate any change in the method of accounting. Moreover, as explained by the learned Counsel, the declaration of Rs 80 lakhs on account of only closing WIP in the assessment year 2003-04 is undeniably inconsistent with the norms of accounting, since it does not take into consideration the adjustment in the opening WIP and, therefore, this itself constitutes a "wrong" within the meaning of section 139(5) of the Act. Apart therefrom, the circumstances explained by the Commissioner of Income-tax (Appeals) in terms of which the revised return was necessitated, have not been controverted before us. Considering all these factors, in our view, the Commissioner of Income-tax (Appeals) made no mistake in holding that the revised and re-revised returns fall within the parameters of section 139(5) of the Act. Thus the action of the Assessing Officer in making the addition merely because the amount was offered in the original return of income was filed on 29.11.2003 cannot be upheld, since it was incumbent on the Revenue to have considered the revised and re-revised returns and the reasons prevailing for the same and only after evaluating the same the issue was required to be examined. In our view, the Commissioner of Income-tax (Appeals) has correctly appreciated the controversy and under these circumstances, we hereby affirm his order.
17. Since for the assessment year other than 2003-04 we have already opined in para 9 that the Commissioner of Income-tax (Appeals) has correctly deleted the addition, in the assessment year 2003-04 following similar reasonings, we hereby affirm the order of the Commissioner of Income-tax (Appeals).
17 ITA 1697/PN/05 etc. Shri Tukaram J. Naik, Daund.
18. In the result, the appeals of the Revenue for the captioned assessment years are dismissed.
Decision pronounced in the open court on this 31st day of May,2011.
Sd/- Sd/-
(I.C. SUDHIR) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune: Dated: 31st May, 2011
B
Copy of the order is forwarded to :
1. Shri T J Naik, Pune
2. The Dy. CIT Cir. 5, Pune
3. The CIT(A)-II Pune
4. The CIT-III, Pune
5. The D.R, 'A' Bench, Pune
"True copy"
By order
Assistant Registrar
ITAT, Pune Benches, Pune