Income Tax Appellate Tribunal - Lucknow
Shri Surendra Kumar Dhawan, Kanpur vs Department Of Income Tax on 31 March, 2015
1
IN THE INCOME TAX APPELLATE TRIBUNAL
LUCKNOW BENCH "A", LUCKNOW
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER
AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER
ITA No.551/LKW/2013
Assessment year:2009-10
Dy.C.I.T.-II, Vs. Shri Surendra Kumar Dhawan,
Kanpur. 122/235-C, Fazalganj,
Kanpur.
PAN:AANPD8806G
(Appellant) (Respondent)
ITA No.921/LKW/2014
Assessment year:2011-12
A.C.I.T.-II, Vs. Shri Surendra Kumar Dhawan,
Kanpur. 122/235-C, Fazalganj,
Kanpur.
PAN:AANPD8806G
(Appellant) (Respondent)
ITA No.552/LKW/2013
Assessment year:2009-10
Dy.C.I.T.-II, Vs. Shri Shitej Dhawan,
Kanpur. 122/235-C, Fazalganj,
Kanpur.
PAN:ACQPD3380G
(Appellant) (Respondent)
Appellant by Shri Puneet Kumar D. R.
Respondent by Shri Rakesh Garg, Advocate
Date of hearing 24/02/2015
Date of pronouncement 31/03/2015
ORDER
PER A. K. GARODIA, A.M.
These three appeals are filed by the Revenue. Out of these three appeals, two appeals of the Revenue are in the case of Shri Surendra 2 Kumar Dhawan for the assessment year 2009-10 and 2011-12 and the remaining appeal is in the case of Shri Shitej Dhawan for assessment year 2009-10. All the appeals were heard together and are being disposed of by way of this common order for the sake of convenience.
2. First we take up the appeal in the case of Shri Surendra Kumar Dhawan i.e. I.T.A. No.551/Lkw/2013. Ground No. 1 is as under:
"1. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in deleting the addition of Rs.20,27,619/-, made by the Assessing Officer on account of Revaluation of Sundry Debtors. Further, in this case the prudential norms of accountancy and "Accounting Standard-I" has not been followed by the assessee."
3. Learned D. R. of the Revenue supported the assessment order whereas learned A. R. of the assessee supported the order of learned CIT(A). At this juncture, it was pointed out by the Bench that the issue in dispute as per this ground has been decided by Hon'ble Apex Court as per its judgment rendered in the case of CIT vs. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) and in this case, it was held that in respect of revenue items, foreign currency assets and liability has to be reported at the rate on the balance sheet date. In reply, it was submitted by Learned A.R. of the assessee that in this case, the assessee was a limited company whereas in the present case, the assessees are individuals and therefore, this judgment of Hon'ble Apex Court is not applicable in the present case.
4. We have considered the rival submissions. We find that as per Para No. 5.2 of the assessment order, it is noted by the Assessing Officer that in reply to query dated 22/12/2011, reply was submitted by the assessee before the Assessing Officer as per reply dated 27/12/2011 and as per this 3 reply, it is stated by the assessee that the sales is recognized in the assessee's books of account at the rate of exchange on the date of sale and difference in realization amount is accounted for only on the date of realization. It was also submitted that the assessee has followed this system since the inception of its business. The assessee also submitted that only two accounting standards have been notified under the Income Tax Act and hence, other accounting standards and provisions of other statutes could not be thrust upon it, which are only optional and not binding. Thereafter, the Assessing Officer has discussed in detail in the assessment order that the assessee has to adopt either cash or mercantile system of accounting regularly followed by the assessee. The Assessing Officer has stated in Para No. 5.15 of the assessment order that the assessee has not followed the principles of mercantile system of accounting when the assessee is not reporting the sundry debtors at the exchange price prevailing on the balance sheet date. The CIT(A) has deleted this addition by making following observations:
"I have considered the facts and circumstances of the case. Admittedly, this is not the first year of business. The assessee has been carrying on his business for last several years. The method of accounting followed by the assessee has remained regularly the same which has been consistently followed and accepted by the Department year after year. This is the first time when an addition has been made in the hands of the assessee on the basis of notional realizable value. The books of accounts maintained by the assessee have not been rejected. It is not the case of the AO that the method of accounting followed by the assessee, the true profits cannot be deduced. The Assessing Officer has gone on presumptive basis. It is not the case of the AO, that when the sales are made, those were not made on the basis of the prevailing exchange rate. The bills are raised in foreign currency, but the conversion rate as on the date of sale is taken to be the amount realizable from the debtors. The assessee realizes payments in foreign currency through its bankers, The debtors 4 make payments in their respective currencies. On receipt of the sale proceeds by the bankers, the same is credited to the assessee's bank account at the rate of prevailing exchange rate. This may result either in deficit realization or excess realization on conversion. This fact cannot be determined pre- hand. The realization value will depend upon the date of realization and not nationally on the date realizable. Preparation of balance sheet is something different and accrual of income is something different. Since there is no certainty of the conversion rates till time the sale proceeds are not actually realized, whatever calculation is done, would be all on assumption and notional basis. I agree with the AR of the assessee that tax under the Income Tax Act is to be levied on real income and not on notional income. Further, the AO in the present case has chosen to take the realizable value of the sundry debtors as on the date of close of the accounting year. It is not known as to the realizable value of the accounting year. If the realizable value has to be taken, then the whole balance sheet has to be recasted. There is no finding in the entire assessment order that the Accounting Standard 1 and 2 as laid down have not been followed. Consistency has to be followed. The AO has admittedly not disputed that the method of accounting followed by the assessee has not remained the same over last several years. The accounts have been tax audited and no addition in this respect has been made in the past also, Preparation of financial statements/balance sheets is different than computing of income for income-tax purposes. The balance sheet of business gives a picture of its financial strength of the business. It does not determine the income. Accordingly, true and fair view of balance sheet would not be material for the purposes of determination of income. Moreover, when the assessee hi."1 self accounts for the deficit or excess realization on conversion of currency at the time of actual receipts of sale proceeds or/realization of debtors, such deficit or excess is taken into consideration in the income and expenditure account at the time when the amount is realized. Such accounting is the correct mode. The reason being on realization alone, the actual amount would surface.
Keeping in view the totality of the circumstances and the fact that there is no change in the method of accounting regularly followed by the assessee as also there being no finding that the profits cannot be actually deduced from the 5 method of accounting followed or there are defects in accounts with the assessee which could not be explained. I am of the considered view that the AO is not justified in taxing the realizable value of the sundry debtors on notional basis. The income has to be taxed on real income concept and not on notional income concept. The addition of Rs.20,27,619/- made by the AO is, therefore, deleted. These grounds of appeal no. 1,2 and 3 are allowed."
4.1 From the above paras from the order of CIT(A), it is seen that he has not given a finding that the assessee is following mercantile system of accounting and not hybrid system of accounting, which is not permissible in law. As per the facts noted by the Assessing Officer and as discussed in course of hearing before us, it comes out that the assessee is following mercantile system of accounting for recording the sales on the date of sale on the rate prevailing on that date but in respect of accounting for the exchange rate difference from the date of sale till the date of realization, the assessee is following cash system of accounting and therefore, it results into following of hybrid system of accounting, which is not permissible because as per section 145 (1), the assessee can either follow cash system or mercantile system of accounting. In the case of Woodward Governor India P. Ltd. (supra), Hon'ble Apex Court has decided this issue and it was held that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. For the sake of ready reference, we reproduce Para 18 of this judgment of Hon'ble Apex Court, as under:
"18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of exchange differences. Under paragraph 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words " monetary items" are defined to mean money held and assets and 6 liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word " paid" is defined under section 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under paragraph 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as " recording of transaction on initial recognition" . Paragraph 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Paragraph 7(a), inter alia, states that on each balance- sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under section 37(1), paragraph 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that paragraph, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in paragraph 10 and paragraph 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under section 43A of the 1961 Act. At this stage, we are concerned only with paragraph 9 which deals with revenue items. Paragraph 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-a-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using the closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period."7
5. As per above Para from the judgment of Hon'ble Apex Court, we find that Hon'ble Apex Court has approved the reporting of monetary items on the exchange rate of balance sheet date and it includes foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables etc. It may be that AS-11 is optional and not binding but it is not optional and this is binding that the assessee has to follow either cash or mercantile system of accounting. When the assessee is reporting sales on the basis of sales affected even before realization, the assessee is following mercantile system of accounting. If the assessee is following mercantile system of accounting for reporting sales before realization then the difference in exchange rate and its effect on receivable has to be considered on the balance sheet date and if it is not so considered then it amounts to following cash system of accounting as has been done by the assessee in the present case but it is not permissible as per law.
6. Various arguments were made before authorities below and before us also that in earlier years, the assessee was following the same system of accounting and it was accepted by the Department also. It means the assessee is trying to insist upon that as per rule of consistency, the system being adopted by the assessee should not be disturbed in the present case. We do not find any force in this contention because in our considered opinion, in the garb of principle of consistency, the stand taken by the Revenue in earlier years cannot be changed if the stand taken by the Revenue in earlier year is a possible and plausible view. We have seen that the stand taken by the assessee in earlier years and accepted by the Revenue to permit the assessee to follow hybrid system of accounting is not a possible and plausible view and this view is not permissible in law because as per sub section (1) of section 145, the assessee has to follow 8 either mercantile system or cash system and assessee cannot follow hybrid system, as has been followed by the assessee. In the name of consistency, the mistake cannot be allowed to be perpetuated.
7. As per above discussion, we have seen that the order of CIT(A) is not sustainable because the assessee cannot be allowed to follow hybrid system of accounting as has been followed by the assessee in the present case and therefore, we reverse the order of CIT(A) and restore that of the Assessing Officer on this isue. Ground No. 1 is allowed.
8. The remaining grounds are as under:
"2. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.30,000/-, made by the Assessing Officer on account of staff welfare expenses, to 50% of this amount ignoring the fact that most of the expenses were in the cash and were unverifiable.
3. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.50,000/-, made by the Assessing Officer on account of travelling & conveyance expenses, to 50% of this amount ignoring the fact that the assessee failed to produce complete details of bills & vouchers of such expenses.
4. That the Ld. Commissioner of Income 1 ax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.50,000/-, made by the Assessing Officer on account of telephone expenses, to 50% of this amount without assigning any specific reason for the same.
5. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.75,000/-, made by the Assessing Officer on account of repair & maintenance expenses, to 50% of 9 this amount ignoring the fact that most of the expenses were in cash and remained unverifiable.
6. That the Ld. Commissioner of Income 1 ax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.50.000/-, made by the Assessing Officer on account of vehicle running & maintenance expenses, to 50% of this amount ignoring the fact that the assessee did not produce any log book for use of vehicle.
7. That the order of learned CIT(A) dated 28/03/2013 needs to be quashed and the order passed by the Assessing Officer dated 26/12/2011 to be restored."
9. Regarding all these grounds, Revenue supported the assessment order whereas Learned A.R. of the assessee supported the order of CIT(A). He also submitted that ad hoc disallowances were made by the Assessing Officer and the same were reduced by CIT(A) to the extent of 50%.
10. We have considered the rival submissions. We find that these issues were decided by learned CIT(A) as per Para 7 of his order, which is reproduced below for the sake of ready reference:-
"7. Grounds No. 6,7,8,9 and 10 relate to disallowances made on ad hoc basis out of expenses, such as Rs.30,000/- out of Staff Welfare, Rs.50,000/- out of Travelling & Conveyance, Rs.50,000/- out of Telephone expenses, Rs.75,000/- out of Repair & Maintenance, Rs.50,000/- out of Vehicle Running & Maintenance. These expenses have been disallowed on ad hoc basis to cover possible leakages. It is the case of the A.R. that the aforesaid expenses are fully vouched and verifiable. Details of the same were given to the AO. The AO has disallowed the expenses for the reason that the bills are in cash and in certain cases the vouchers are self made. Be it may, the fact remains that accounts have been tax audited. Details were furnished. However, the disallowances are being restricted to 50% under different heads to meet the ends of the justice."10
10.1 From the above Para from the order of CIT(A), we find that it is noted by CIT(A) that the disallowance was made by the Assessing Officer on ad hoc basis on the reasoning that the bills are in cash and in certain cases, the vouchers are self-made. The disallowance was made by the Assessing Officer on ad hoc estimate basis and this was reduced by CIT(A) to 50%. Considering these facts, we do not find any infirmity in the order of CIT(A). Accordingly, these grounds are rejected.
11. In the result, the appeal of the Revenue stands partly allowed.
12. Now we take up the appeal of the Revenue in the case of Shri Shitej Dhawan i.e. I.T.A. No.552/Lkw/2013. In this appeal, the Revenue has raised the following grounds:
"1. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in deleting the addition of Rs.22,10,981/-, made by the Assessing Officer on account of Revaluation of Sundry Debtors. Further, in this case the prudential norms of accountancy and "Accounting Standard-1" has not been followed by the assessee.
2. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.50,000/-, made by the Assessing Officer on account of staff welfare expenses, to 5% of this amount ignoring the fact that most of the expenses were in the cash and were unverifiable.
3. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.50,000/-, made by the Assessing Officer on account of travelling & conveyance expenses, to 5% of this amount ignoring the fact that the assessee failed to produce complete details of bills & vouchers of such expenses.11
4. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.70,000/- made by the Assessing Officer on account of telephone expenses, to 5% of this amount without assigning any specific reason for the same.
5. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.75,000/-, made by the Assessing Officer on account of repair & maintenance expenses, to 5% of this amount ignoring the fact that most of the expenses were in cash and remained unverifiable.
6. That the Ld. Commissioner of Income Tax (A)-II, Kanpur has erred in law and on facts in restricting the addition of Rs.50,000/-, made by the Assessing Officer on account of vehicle running & maintenance expenses, to 5% of this amount ignoring the fact that the assessee did not produce any log book for use of vehicle.
7. That the Ld. Commissioner of Income Tax (A)-II. Kanpur has erred in law and on facts in deleting the addition of Rs.35,000/- made by the Assessing Officer on account of job work expenses ignoring the fact that the expenses were in cash and were unverifiable.
8. That the order of the Ld. Commissioner of Income Tax (A)-II, Kanpur dated 28.03.2013 needs to be quashed and the order passed by the assessing Officer dated 26.12.2011 to be restored."
13. Learned D. R. of the Revenue supported the assessment order whereas learned A. R. of the assessee supported the order of learned CIT(A). Both the sides agreed that all the issues are identical to the issues involved in the case of DCIT vs. Shri Surendra Kumar Dhawan in I.T.A. No.551/Lkw/2013 and the same can be decided on similar line.
14. We have considered the rival submissions. We find that the issue involved in ground No. 1 was decided by us in favour of the Revenue while 12 deciding the appeal in the case Shri Surendra Kumar Dhawan in I.T.A. No.551/Lkw/2013 and on the same line, in this case also, this issue is decided in favour of the Revenue and against the assessee. The remaining issues were decided by us in favour of the assessee and against the Revenue and accordingly in the present case also, these issues are decided against the Revenue and in favour of the assessee. Ground Nos. 2 to 7 are rejected whereas Ground No. 1 is allowed.
15. In the result, the appeal of the Revenue stands partly allowed.
16. Now we take up the appeal of the Revenue in the case of Shri Surendra Kumar Dhawan i.e. I.T.A. No.921/Lkw/2014 for assessment year 2011-12. In this appeal, the Revenue has raised the following grounds:
"1. The Ld. Commissioner of Income Tax (Appeals)-II, Kanpur has erred in law and on facts in deleting the addition of Rs.9,88,979/-, made by the Assessing Officer on account of revaluation of Sundry Debtors, stating that the method followed by the assessee do not have any impact on the revenue.
2. That the Ld. Commissioner of Income Tax (Appeals)-II, Kanpur has erred in law and on facts in deleting the addition of Rs.9,88,979/-, made by the Assessing Officer on account of Revaluation of Sundry Debtors, without considering the facts that the prudential norms of accountancy and "Accounting Standard-I" have not been followed by the assessee.
3. That the order of the Ld. Commissioner of Income Tax (Appeals)-II, Kanpur dated 11.09.2014 needs to be quashed and the order passed by the Assessing Officer dated 15.10.2013 to be restored."
17. Both the sides agreed that the issues involved in this appeal are identical to the issues involved in the appeal of the Revenue for assessment year 2009-10 as per ground No. 1 in that year. Both the sides agreed that 13 in the present year also, the same can be decided on similar line. While deciding the appeal for assessment year 2009-10, this issue was decided in favour of the Revenue and against the assessee. Accordingly, this issue is decided in favour of the Revenue and against the assessee.
18. In the result, the appeal of the Revenue stands allowed.
19. In the combined result, two appeals of the Revenue i.e. I.T.A. No.551 & 552 are partly allowed whereas the appeal of the Revenue in I.T.A. No.921 is allowed.
(Order was pronounced in the open court on the date mentioned on the caption page) Sd/. Sd/.
(SUNIL KUMAR YADAV) ( A. K. GARODIA ) Judicial Member Accountant Member Dated:31/03/2015 *C.L.Singh Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Asstt. Registrar