Income Tax Appellate Tribunal - Delhi
L.C. Kailash & Associates, New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "D" NEW DELHI)
BEFORE G.E. VEERABHADRAPPA, HON'BLE VICE-PRESIDENT
AND SHRI RAJPAL YADAV: HON'BLE JUDICIAL MEMBER
I.T.A. No. 2399/Del/2010
Assessment Year: 2007-08
L.C. Kailash & Associates, Vs. Income-tax Officer,
NBR House, C-124, Ward 37(1),
Preet Vihar, New Delhi.
PAN: AAAFL 1601J
(Appellant) (Respondent)
Appellant by: Shri Sanjeev Jain, CA
Respondent by: Shri Arun Kumar Gurjar, Sr.DR
ORDER
PER RAJPAL YADAV: JUDICIAL MEMBER The assessee is in appeal before us against the order of Learned CIT(Appeals) dated 15.3.2010 passed for assessment year 2007-08. In ground No.1, it is pleaded by the assessee that Learned CIT(Appeals) has erred in upholding the addition of Rs.3,40,501 out of the total addition of Rs.5,74,087 made by the Assessing Officer.
2. The brief facts of the case are that the assessee is a partnership firm carrying out profession of chartered accountancy and engaged in profession of auditing. It has filed its return of income on 15.11.2007 declaring an income of Rs.89,558. The return was processed under sec. 143(1) of the Act. 2 The case was selected for scrutiny assessment and a notice under sec. 143(2) of the Income-tax Act, 1961 was issued and served upon the assessee. In response to the notice of hearing, Shri SP Jain, FCA and Shri Learned CIT(Appeals) Gupta, Senior partners of the assessee firm attended the proceedings from time to time and submitted the necessary details.
3. On scrutiny of accounts submitted by the assessee, it revealed to the Assessing Officer that in the tax audit report furnished by the assessee firm, the auditor has reported that assessee is following hybrid system of accounting i.e. expenditure on accrual basis and professional fee on receipt basis. Assessing Officer issued a show-cause notice to the assessee inviting its explanation as to why its books of account should not be rejected as they are not following either mercantile system or cash system of accounting as required under sec. 145(1) of the Act. The assessee has submitted a reply which has been reproduced by the Assessing Officer. On an analysis of section 145 in the light of assessee's reply, he observed that method of accounting for determining the income of the assessee is to be taken as cash basis. He passed the assessment under sec. 143(3) and determined the taxable income of Rs.10,42,985 on such method of accounting against the income of Rs.89,558 disclosed by the assessee.
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4. First item of addition is Rs.5,74,087. It contains two components. Rs.4,13,586 relates to M/s. Das Gupta Management Services (P) Ltd. The remaining amount relates to advance against travelling expenses received by the assessee from various concerns. According to the Assessing Officer, the assessee has not extended the services for which it has alleged to have been received travelling advances. He treated such advances as revenue receipts and included them in the total taxable income of the assessee. With regard to the amounts relatable to M/s. Dass Gupta Management Services (P) Ltd., the Assessing Officer has observed that assessee has failed to prove this payment to M/s. Dass Gupta Management Services (P) Ltd. hence under cash system of accountancy it cannot be allowed as a deduction, he made an addition of Rs.4,13,586.
5. Dissatisfied with the action of the Assessing Officer, assessee carried the matter in appeal before the learned CIT(Appeals).
6. It was contended by the assessee that in the tax audit report, the auditor has stated that professional fee received is accounted for on realization basis and the expenses are accounted for on mercantile basis. From this narration, Assessing Officer drew an inference that assessee firm 4 was applying hybrid method of accountancy and was thus not following either cash method of accounting or accrual method of accounting. According to the Assessing Officer, as per section 145 of the Act, the assessee could have only applied either cash method of accounting or mercantile method of accounting and could not have applied a mixed method of accounting or hybrid method of accounting. He proceeds to determine the taxable income of the assessee by adopting cash method of accounting. According to the assessee, Assessing Officer has misread and misconstrued the accounting policy as well as books of account. He has erred in drawing adverse inference against the assessee regarding the method of accountancy followed by it. It was explained to the Learned CIT(Appeals) that, in fact, it is following only mercantile method of accounting. The returns have been filed on the basis of same method in the past and that has never been disturbed. In assessment year 2006-07, i.e. preceding assessment year, an assessment was framed under sec. 143(3) and the Assessing Officer did not disturb the method of accounting followed by the assessee. All the professional bills raised during the particular year are realized by the assessee within that year itself and have accounted for as income by the assessee. During the present year also, the assessee firm had realized all the 5 professional bills raised by it in the year itself and the amounts have been duly accounted for in the professional receipts declared in the P & L account. It was further contended that assessee firm is engaged mainly in auditing services and all the bills for audit and certification work have been raised by it during the instant year itself and have also been realized by it during the instant year itself. There is neither any outstanding fee nor there is any such service rendered during the year for which bill has been raised but has not been realized till the close of the year. To buttress this contention, assessee has filed copies of all the bills and other relevant material.
7. In order to explain the merit, it was contended that out of the total amount worked out by the Assessing Officer at Rs.5,74,087, Rs.1,59,871 represent the travelling advance received by the assessee. The details of such advance has been explained by the assessee in its written submissions filed before the Learned CIT(Appeals). It is pointed out in the submissions that a sum of Rs.34,793, Rs.33,672, Rs.79,690 and Rs.12,346 was received by it from Jai Prakash Enterprises Ltd. (JEL), Jai Prakash Hotels Ltd. (JHL), Jai Prakash Ventures Ltd. (JPVL) and Jai Prakash University of Institute (JUIT). The travelling advances were incurred by the assessee in the succeeding year when audit of these concerns was taken up and, therefore, 6 the same could not be said to be income of the assessee either on cash basis or on mercantile basis. According to the assessee, this income has not arisen to it. In support of its contention, assessee has relied upon the judgment of Hon'ble Supreme Court in the case of CIT vs. Shoorji Ballabh Dass & Co. reported in 46 ITR 144 and order of the ITAT, Delhi Bench in the case of KK Khullar Vs. DCIT reported in 116 ITD 301. With regard to the balance amount of Rs.4,13,586, assessee made an elaborate explanation. Its submission has been reproduced by the Learned CIT(Appeals) which read as under:
"It is respectfully submitted that the learned Assessing Officer has erred both in law as well as in facts of the case in drawing adverse influence against the assessee on this ground. The copy of letter dated 11.12.09 as submitted before the Assessing Officer along with copy of accounts of M/s. Dass Gupta Management Services (P) Ltd. in its books of account is enclosed. It is submitted that the assessee has duly furnished copy of account of M/s. Dass Gupta Management Services (P) Ltd. in its books of account for financial year 2006-07 and this allegation that it has not been furnished is not borne out of material on record. It is further submitted that the perusal of the audited accounts would show that another amount of Rs.50,000 was paid by the assessee during the year to the above company and was wrongly debited to another account and shown under loans and advances. The copy of this account as per books is also enclosed. The above copies 7 of account M/s. Dass Gupta Management Services (P) Ltd. would show that the transaction therein can be submitted as under:
Opening balance as per accounts of 2,55,586.80
M/s. Dass Gupta Management Services
(P) Ltd.
Add: Credits on account of printing
And stationery charges
Job Work 48,000
Stationery 1,32,000 1,80,000
Add: Amount received from M/s. Dass
Gupta Management Services (P) Ltd. 25,000.00
4,60,586.80
Less: Amount paid
i) As per copy of account
Enclosed (1) 47,000
ii) As per separate account
Debited in Loan & Advances (II) 50,000 97,000.00
3,63,586.80
Balance as per Account (1) = Rs.4,13,586.80 cr.
Balance as per Account (ii) = Rs.50,000.00 Dr.
Rs.3,63,586.80
The learned Assessing Officer has added the whole amount of Rs.4,13,586 as income of the assessee on the ground that this balance 8 is in the nature of Revenue account and since the assessee is following cash method of accounting therefore the amount cannot be allowed to the assessee during the instant year as it has not paid the amount and the amount is shown as payable. It is respectfully submitted that the perusal of the copy of account as well as the aforesaid summary of account would show that the amount of Rs.2,55,586.80 was the balance brought forward from earlier years and cannot be said to be revenue in nature as the assessee has not claimed any expenses against this amount during the instant year and therefore no addition could be made to the extent of Rs.2,55,586.80. It would further be seen that the amount of Rs.25,000 has been received from that company by an account payee cheque and against this amount also the assessee has not claimed any expenditure and therefore this amount also cannot be added as income of the assessee as the amount is in the nature of loan only. It is further submitted that out of the balance amount of Rs.1.80 lacs which has been credited to the account of M/s. Dass Gupta Management Services (P) Ltd., the assessee has actually paid an amount of Rs.97,000 (47,000 50000) during the instant year itself and to this extent also no addition could be made by the Assessing Officer even under the cash method of accounting. The only addition that the learned Assessing Officer could have made on the ground that cash method is applied is to the tune of Rs.83,000 (Rs.1,80,000 (-) Rs.97,000 ). It is respectfully submitted that even this disallowance cannot be justifiably made. As explained above the actual method of accounting applied by the assessee during the instant year as well as in the preceding years is accrual method of accounting only. All the 9 income as well as expenses are strictly accounted for on the basis of accrual method of accounting and therefore, once no discrepancy is found in the fact of expenses having been incurred then there is no justification for making this disallowance by arbitrarily applying cash method of accounting. The learned Assessing Officer has erred in arbitrarily assuming that cash method of accounting has to be applied in the case of the assessee without appreciating the actual facts and circumstances of the case. It is respectfully submitted that the learned Assessing Officer ought to have appreciated the fact that the actual method of accounting employed by the assessee is mercantile method of accounting and accordingly this expenditure deserves to be fully allowed. In view of above submissions it is prayed that the addition of Rs.5,74,087 deserves to be deleted".
8. Learned CIT(Appeals) has considered all these aspects, however, did not agree with the assessee. He confirmed the stand of Assessing Officer in principle. He has excluded some of Rs.2,55,586 from the amount of Rs.4,13,586 on the ground that it is the opening balance in the account of M/s. Dass Gupta Management Services (P) Ltd. This amount does not represent any expenditure claimed by the assessee during the year which has not been paid by the assessee hence according to the Learned CIT(Appeals) it cannot be added during the year consideration.
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9. Before us, learned counsel for the assessee reiterated the stand taken before the Learned CIT(Appeals) whereas Learned DR relied upon the orders of the Revenue Authorities Below.
10. We have duly considered the rival contentions and gone through the record carefully. In the scheme of Income-tax Act, 1961,section 4 has been incorporated in the Act as charging section. It provides that tax shall be charged for any assessment year at 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 demand receipt etc. Section 145 of the Income-tax Act, 1961 provides the method of accountancy in respect of profit and gains of business or profession or income from other sources. A conjoint reading of all these three provisions would reveal that sections 4 and 5 deals with the scope of income and its charges to income-tax. Whereas section 145 is a procedural section regarding the method to be followed for recording of income in the books of account. Undisputedly, from assessment year 1997-98 and onwards the assessee is bound to follow either cash or mercantile system of accountancy. The mixed system of accounting or hybrid system of accounting his 11 prohibited. We have gone through the note on accounting policy submitted by the assessee with its audited accounts whose copy is available at page 70. In this note, assessee has disclosed that it is consistently following this method of accounting from the last twenty years. Before the Learned CIT(Appeals), it was also pointed out by the assessee that in assessment year 2006-7, an assessment was made under sec. 143(3) and this accounting policy has been accepted. In the past also, its accounting method has not been disputed by the Assessing Officer. The argument of the assessee is that from its method true income is deduceable.
11. Before the Learned CIT(Appeals), the assessee has raised mainly two fold submissions. It firstly contended that, in fact, it is following mercantile system of accountancy and for buttressing this contention assessee pointed out that whatever services it has rendered during this year, it has raised the bills and realized all those bills in the accounting year itself. There was no outstanding bill. Learned CIT(Appeals) instead of appreciating this aspect based on factual details, proceed to reject this argument on the basis of the note appended in the audit report. Learned CIT(Appeals) has not assigned any reason as to why this contention of the assessee cannot be 12 accepted. It is based on the details submitted during the course of assessment proceedings. The apprehension of the Learned CIT(Appeals) may be that in this year assessee might have raised the bills for all the services it has rendered and able to realize them, but that would not suggest that it is following mercantile system of accountancy. In our opinion, this is based on surmises and conjecture. There is no material pointed out by the Assessing Officer or by the Learned CIT(Appeals) to substantiate this reasoning. As a matter of fact, it comes out that there is no pending bill, which does not suggest that assessee only accounting the bills which have been realized. In fact, it is following mercantile system of accountancy.
12. Apart from the above conclusion, we have examined the issue with the other angle also. Hon'ble Supreme Court in the case of Shoorji Ballabhdass has pointed out that the Income-tax Act, 1961 takes into account two points of time on which the liability to tax is attracted, namely, No.1 accrual of income or 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 13 substance of the matter is income. The amounts received by the assessee as travelling advance cannot be shown as income even under cash system of accounting. The ITAT has examined this aspect in the case of KK Bhullar who is an advocate and who was following cash system of accountancy. He had received retainership fee for rendering services but did not account the total amount as income on the ground that right to receive the total income has not accrued. The ITAT while dealing with this aspect has observed as under:
"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(Appeals) erred in finding that the assessee was following hybrid system of accounting on the ground 14 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".
13. In view of this ITAT's decision, at least advances received by the assessee from JEL, JHL, JPVL and JUIT cannot be treated as income of the assessee. As far as the addition in respect of M/s. Dass Gupta Management Services (P) Ltd. is concerned, we find that assessee has raised two fold submissions firstly it contended that these are amounts payable to M/s. Dass Gupta Management Services (P) Ltd. rendered by them. In alternatively, it was pointed out that some of the amounts is an old balance on account of loan raised. The assessee has explained how the loan was raised and how much the amount represent. We have already extracted the submissions of the assessee. On the strength of this reconciliation, assessee has pointed out that even under the cash method of accounting only Rs.83,000 can be added on account of non payment of the amount. Otherwise, assessee has explained the other entries how much it has paid and how much it was payable. Considering all these aspects, we are of the opinion that we have accepted the contention of the assessee that it is following mercantile system of accountancy, therefore, even if certain amount not actually paid this year but shown as payable assessee is entitled for deduction of that amount, since the 15 services have already been availed from M/s. M/s. Dass Gupta Management Services (P) Ltd., in this accounting year.
14. In the next ground of appeal, the grievance of assessee is that Assessing Officer has erred in making addition of Rs.1,80,000 with the help of section 40(a)(ia) of the Act.
15. With the assistance of learned representatives, we have gone through the record carefully. We have already discussed the facts in detail while considering ground No.1 of the assessee. This disallowance was made by the Assessing Officer on the ground that assessee failed to deduct the TDS while making payment of Rs.1,80,000 to M/s. Dass Gupta Management Services (P) Ltd. We find that Assessing Officer has recorded contradictory finding. On the one hand, he included this amount in the sum of Rs.4,13,586 discussed in ground No.1 on the ground that assessee has not paid this amount and it is following cash system of accountancy, therefore, its deduction cannot be allowed. On the other hand, he disallowed this amount on the ground that while making the payment assessee failed to deduct the TDS. On going through the record, we find that assessee had claimed the deduction of this amount on the ground that it was to pay typing charges and stationery charges to M/s. Dass Gupta Management Services (P) Ltd. and 16 associates. For typing charges, a sum of Rs.4,000 was being paid per month whereas rest of the amount was paid towards stationery charges. The amount paid towards job work charges is less than Rs.50,000 during the whole year and, therefore, assessee was not liable to deduct TDS under section 194C of the Act. Learned CIT(Appeals) has rejected the claim of assessee for three reasons, namely, there is no written agreement, the bill of M/s. Dass Gupta Management Services (P) Ltd. was not produced and it is unreliable that for the job work of Rs.48,000 an assessee would use stationery of Rs.1,32,000. On due consideration of the record, we find that assessee has submitted the details in respect of the invoice and other bills. No doubt, there is no written contract but it is true that M/s. Dass Gupta Management Services (P) Ltd. has been supplying printed material which was used in the auditing services. The assessee has filed their copies of account and confirmation. Assessing Officer has only pointed out peripheral defect. For the job work of less than Rs.50,000.Assessee was not supposed to deduct TDS. Assessing Officer is not justified to make the disallowance of this amount. We allow this ground of appeal and delete the disallowance.
16. Ground Nos. 4 and 5 are inter connected to each other. In these grounds, the grievance of assessee is that Learned CIT(Appeals) has erred in 17 confirming the disallowance of Rs.81,970 and Rs.1,11410. The details of these amounts have been noted by the Learned CIT(Appeals) while taking cognizance of the assessee's written submissions in paragraph No.4.1 of his order. The assessee claimed the deduction of these amounts on the ground that these were expenses relatable to the business of the assessee. Assessing Officer has disallowed the claim of assessee on the ground that these expenses remained unpaid. On due consideration of the facts and circumstances of the case, we are of the opinion that as far as details of expenses shown as payable by the assessee are concerned, Assessing Officer did not find any defect. He disallowed the expenses on the ground that assessee's income has to be computed on cash method of accountancy. In the earlier part of the order, we have held that assessee, in fact, is following mercantile system of accountancy and, therefore, the expenses are to be allowed. In other words, there is no dispute about the nature of expenses and their admissibility. The area of dispute is the method of accountancy only. Under the cash system of accountancy, expenses cannot be allowed unless they are actually paid during the accounting year whereas under mercantile system of accountancy if assessee made a provision and avail the services then expenses relatable to those services is to be allowed. In view of our 18 finding on ground No.1, we allow these grounds of appeal and delete the disallowance.
17. In the result, the appeal of the assessee is allowed.
Decision pronounced in the open court on 24 .09.2010
( G.E. VEERABHADRAPPA) ( RAJPAL YADAV )
VICE-PRESIDENT JUDICIAL MEMBER
Dated: 24/09/2010
Mohan Lal
Copy forwarded to:
1) Appellant
2) Respondent
3) CIT
4) CIT(Appeals)
5) DR:ITAT
ASSISTANT REGISTRAR