Income Tax Appellate Tribunal - Mumbai
Income Tax Officer (Exemption)-2(4), ... vs Vaibhav Medical And Education ... on 4 March, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
"F" BENCH, MUMBAI
BEFORE SHRI VIKAS AWASTHY, JM &
MS PADMAVATHY S, AM
I.T.A. No. 2496/Mum/2023
(Assessment Year: 2012-13)
ITO (Exemption)-2(4), M/s. Vaibhav Medical and
Room No. 609, 6th Floor, Education Foundation
MTNL Building, Cumballa Hill, Vs. C-1, Aditya Birla Centre,
Peddar Road, Mumbai-400026 S. K. Ahire Marg, Worli,
Mumbai-400030.
PAN : AAATV3207A
Appellant) : Respondent)
Appellant/Assessee by : Shri Chaitanya Joshi / Deep
Chouhan, CA
Revenue/Respondent by : Shri Ankush Kapoor, CIT- DR
Date of Hearing : 26.02.2024
Date of Pronouncement : 04.03.2024
ORDER
Per Padmavathy S, AM:
This appeal of the Revenue is against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC) [for short 'the CIT(A)] dated 19/05/2023 for the AY 2012-13. The Revenue has raised the following grounds of appeal:
2 ITA No. 2496/Mum/2023M/s. Vaibhav Medical and Education Foundation "1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made on account of accrued interest of Rs.3,82,40,749/-?
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that mixed or Hybrid System of accounting has lost statutory mandate w.e.f. 01/04/1997 and therefore the addition made by the A.O. ought to have been upheld.
3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that adopting a mixed or Hybrid System of accounting is prohibited u/s.145 of the Act. When in the instant case, the assessee has adopted cash system for the purpose of accounting of accrued interest only whereas mercantile system for the purpose of benefit of section 11, thereby having an inconsistent / hybrid method of accounting within the financial year itself?
4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of accrued interest rightly made during the assessment on account of inconsistent accounting method, when section 145 of the Act clearly stipulates that there should be a consistent method of either cash or mercantile system to be followed?"
2. The assessee is a registered charitable organization under section 12A of the Income Tax Act, 1961 (the Act) with DIT(E), Mumbai. The assessee filed the return of income for AY 2012-13 on 28.09.2012 declaring a total income of Nil. The assessee's case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) noticed from the Notes to the Financial Statements where it was mentioned that the assessee is following mercantile system of accounting. The AO further noticed that in the computation of income the assessee has offered interest income under the head Income from Other Sources on receipt basis. Therefore the AO was of the view that the assessee is following hybrid system of accounting which is not allowed under section 145 of the Act and accordingly added a sum of Rs. 6,60,47,102/- as credited in the profit and loss account and also the interest income which the assessee has reduced from 3 ITA No. 2496/Mum/2023 M/s. Vaibhav Medical and Education Foundation the interest income stating that the same is not received to the tune of Rs.3,82,40,749/-. The AO subsequently passed an order under section 154 dated 30.06.2015 rectifying the mistake by deleting the addition of Rs.3,82,40,749/- since the same is part of the overall amount of Rs. 6,60,47,102/- that was disallowed.
3. Aggrieved, the assessee filed appeal before the CIT(A). The assessee submitted before the CIT(A) that the asessee has been consistently following the cash basis of accounting from the time of inception of the trust for income tax purposes. The assessee further submitted that it is registered under section 25 of the Companies Act and therefore the accounts are mandatorily required to be prepared on accrual basis. The assessee also submitted that in the computation of income makes the necessary adjustments towards income accrued but not received so that interest income is taxed on actual basis. The assessee accordingly submitted that the interest income accrued but not received for the previous year ended 31.03.2011 amounting to Rs. 5,51,16,611/- was added to the income of the assessee and a sum of Rs. 3,82,40,749/- which was not received for the year under consideration is reduced from the income offered to tax. The assessee also submitted that the assessee is not following the hybrid method of accounting as has been held by the AO and therefore there is no non-compliance of provisions of section 145 of the Act.
4. The CIT(A) after considering the submissions of the assessee deleted the addition made by the AO by holding that I find from the assessment order that the AO has not rebutted the appellant's contention that section 145 of the Act prohibits hybrid or mixed system of accounting for income assessable under the heads "profit and gains of business or profession" and "income from other sources". Thus, the AO has 4 ITA No. 2496/Mum/2023 M/s. Vaibhav Medical and Education Foundation failed to rebut the appellant's contention that the appellant being a trust, was free to follow the hybrid system of accounting.
In his order the AO ought to support this contention by pointing out that the other specific provisions in section 11, which takes care of situation where the income accrued but not received by a trust. I have considered the contention of the AO. The mere fact that the provision has been made to overcome certain situation that may arise in case of a trust following the mercantile system of accounting does not mean Page 27 of 31 AAATV3207A- VAIBHAV MEDICAL AND EDUCATION FOUNDATION A.Y. 2012-13 ITBA/NFAC/S/250/2023- 24/1052978217(1) that all trusts are bound to follow the mercantile system of accounting. I therefore, hold that the AO erred in making the addition of interest income of Rs.3,82,40,749/- on accrual basis. I therefore direct the AO to delete the addition of Rs.3,82,40,749/-. In the result, the ground of appeal no.2 is allowed
5. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal.
6. The ld. DR submitted that the assessee for the purpose of books is following mercantile system of accounting whereas for the purpose of income tax offering interest income on cash basis. The ld. DR drew our attention to the above abstracted findings of the CIT(A) wherein the CIT(A) has given relief to the assessee merely for the reason that the AO has not rebutted the contention of the assessee that being a Trust the assessee is free to follow hybrid system of accounting. The ld. DR further submitted that as per the provisions of section 145, the assessee while computing the income under the head "Profits & Gains and Income from Other Sources" can use only either mercantile system of accounting or cash system of accounting. The ld. DR relied on the decision of the Hon'ble Karnataka High Court in the case of Delhi International Airport Ltd. Vs. PCIT [2022] 138 taxmann.com 541 (Karnataka) where it has been held that 5 ITA No. 2496/Mum/2023 M/s. Vaibhav Medical and Education Foundation "27. The assessee has recognized only the expenditure on mercantile method. The assessing officer has held that the assessee has to follow consistent method of accounting as per the accounting standards and the expenditure has to be brought to tax. As per the Accounting Standard of Accountancy, expenditure has to be matched with the income offered. The assessce has claimed the expenditure for offering services to M/s National Aviation Company of India Limited (NACIL) but failed to offer the corresponding income for the period from October 2011 to March 2012 amounting to Rs.69.04 crores and accordingly, the said amount has been brought to tax as income from business. However, the assessing officer has noticed the contentions of the assessee that the said income has been offered to tax on receipt basis for the assessment year 2013-14, as such, it has been considered and observed that if this inconie is brought to tax for the assessment year 2012-13, the same has to be excluded for the assessment year 2013-14."
7. The ld. AR on the other hand submitted that the assessee is a section 25 company in existence since 1988 and has been maintaining books of accounts on mercantile system of accounting since inception. In this regard the ld. AR drew our attention to note to financial statements for the year ended 31.03.2012 (page 7 of PB) wherein it is stated that the assessee is following mercantile system of accounting. The ld. AR therefore, stated that the contention of the AO that the assessee is following hybrid system of accounting is not correct. The ld. AR further submitted that the assessee has been consistently offering the interest income on receipt basis since inception and the same has been accepted by the Revenue till AY 2010-11. The ld. AR submitted a table containing way in which the interest income is offered to tax by the assessee from AY 2011-12 to AY 2014-15 to submit that from perusal of the said table it would become clear that the assessee is adding the interest income claimed as deduction in the previous year since it was not received and the same is offered to tax in the year under consideration on receipt basis. The ld. AR therefore argued that in any case there is no loss to the revenue and that there is only a timing difference in offering the income to tax. The ld. AR drew our attention to the fact that the assessee has offered more interest 6 ITA No. 2496/Mum/2023 M/s. Vaibhav Medical and Education Foundation income to tax for AY 2012-13 than interest accrued in the books of accounts to reiterate the fact that there is no loss to the revenue.
8. The ld. AR made a without prejudice submission that if the contention of the revenue is to be accepted that the interest income should be taxed on accrual basis then the effect for the same should be given in all the AYs in which the assessee has offered interest income on receipt basis.
9. We have heard the parties and perused the material on record. The main reason that the AO to make the addition towards interest is that the assessee is following hybrid system of accounting. The AO also did not accept the submissions of the assessee that only the real income can be applied towards the objects of the trust for the purpose of claiming exemption under section 11. The CIT(A) has given relief to the assessee on the ground that the AO failed to rebut the assessee's contention that the assessee being a Trust was free to follow hybrid system of accounting and that all Trust are not bound to follow mercantile system of accounting. The main contention of the is that the emphasis should be given to the words used in section 145 that "the system of accounting regularly employed by the assessee" and that the assessee has been consistently following the cash system of accounting since inception in the year 1988 which has been accepted by the Revenue until AY2010-11. It is also contented that the assessee is not following hybrid system as claimed by the AO as in violation of section 145 of the Act. Before proceeding further we will look at the relevant provisions of Section 145 of the Act which reads as under -
Section 145 Method of accounting.
145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of 7 ITA No. 2496/Mum/2023 M/s. Vaibhav Medical and Education Foundation sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.
(emphasis supplied)
10. From the plain reading of the above section it is clear that income chargeable under the head "Profits & Gains from Business or Profession or Income from Other Sources" should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. In the given case, we notice that the assessee has been offering Income from Other Sources by following cash system of accounting i.e. on receipt basis consistently from inception. Therefore, in our view there is merit in the contention there is no violation of section 145 since for the purpose computing income from Other Sources the assessee is not following hybrid system of accounting but has been consistently following cash system of accounting. In the case law relied on by the Revenue in the case of Delhi International Airport Ltd (supra), the findings of Hon'ble Karnataka High Court which is extracted in the earlier part of this order is with regard to assessee offering income on cash basis and expenditure on the mercantile method which the Court held to be not in accordance with the standard accounting practice and that there should be proper matching between income and expenditure. However the facts in assessee's case are clearly distinguishable for 8 ITA No. 2496/Mum/2023 M/s. Vaibhav Medical and Education Foundation the reason that the assessee while offering income under the head "Income from Other Sources" has done so following cash system of accounting and therefore the decision of the Hon'ble High Court is not applicable in assessee's case.
11. The alternate contention of the ld AR is that there is no real loss to the revenue since the interest income reduced in the earlier year is offered in the subsequent year on receipt basis. From the perusal of the below table as submitted by the ld. AR during the course of hearing it is clear that the assessee is adding the interest income which was deducted in the previous AY to the income of the current AY on receipt basis and the amount of interest not received during the year under consideration is reduced (Amount in Rupees) Particulars AY 2011-12 AY 2012-13 AY 2013-14 AY 2014-15 Interest income as per Financial 2,78,54,824 6,60,47,102 6,99,96,295 6,47,56,485 Statement Add: Accrued interest of previous year 2,81,42,396 5,51,16,611 3,82,40,749 67,98,483 and received in current year Sub - Total 5,59,97,220 12,11,63,713 10,82,37,044 7,15,54,968 Less: Accrued interest of current year 5,51,16,611 3,82,40,749 67,98,483 and not received in current year Interest income offered to tax in 8,80,609 8,29,22,964 10,14,38,561 7,15,54,968 Return of Income
12. The above table also substantiates the fact that the the assessee for the purpose of computation of income under head income from Other Sources is following cash system of accounting. It is noticed that for the purpose of maintenance of books of accounts, the asessee is following mercantile system of accounting since the assessee is mandatorily required to do so under the Companies Act. Therefore in our view the contention of the AO is that the assessee is following hybrid system of accounting which is not accordance with section 145 is factually incorrect and not sustainable. Therefore, in our considered view the 9 ITA No. 2496/Mum/2023 M/s. Vaibhav Medical and Education Foundation addition made by the AO on the basis that the assessee is following hybrid system of accounting is not correct and therefore, we hold that the addition made towards interest income be deleted.
13. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 04-03-2024.
Sd/- Sd/-
(VIKAS AWASTHY) (MS. PADMAVATHY S)
Judicial Member Accountant Member
*SK, Sr. PS
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. DR, ITAT, Mumbai
4. Guard File
5. CIT
BY ORDER,
(Dy./Asstt. Registrar)
ITAT, Mumbai