TMI Blog2009 (9) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act was carried out on 24-4-2006 on the locker No.129D with Bhavnagar Nagrik Sahkari Bank Ltd., Vada Branch, Bhavnagar. During the course of search gold ornaments belonging to Ninaben Vijaybhai Parekh weighing 392.280 grams was found which was not seized. Later on, on 15-11-2006, cash of ₹ 5,79,000/-, gold ornaments and diamonds were requisitioned u/s 132A of the Act from Police Department, Bhavnagar. In between, notices u/s 153 A of the Act were issued to both the assessee. Both the assessees filed their return of income in response to the said notices. The AO framed the assessment orders for the AY 2001-02 to 2006-2007 u/s 143(3) read with the section 153 A of the Act by making addition of accrued interest on investment in FDRs for AY 2001-02 to 2006-07. The AO also made addition on account of cash, diamonds and CDs found and seized by police in AY 2006-07.The AO took the view that investments in FDRs were shown as a result of search otherwise it would not have been offered for taxation. The AO also held that the following mercantile system of accounting and interest accrued in investments in FDRs is liable to be taxed and added to the total income. As regards cash and C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cash system of accounting in respect of income earned from business and agriculture. Whereas, he has rejected that method only in respect of interest on investment in FDRs and has taxed the interest income in FDRs on accrual basis by adopting mercantile system of accounting. It was also stated by the assessees before the CIT(A) that the AO has proceeded to chose the method of accounting in a very casual manner which is evident from Para 3 of the impugned order, which reads as under: The assessee ought to have followed mercantile system of accounting so that the income chargeable can be correctly charged. 5. It was also submitted by the assessees before the CIT(A) that the AO has rejected the regularly followed method of accounting in improper and unjustified manner, merely because as per the AO the other method would have been more correct and that too in respect of a single head of income. It was also submitted that without invoking the provisions of section 145 of the Act the AO has held that for computation of income, mercantile system is to be followed. In doing so, the AO has grossly failed to maintain consistency without bringing any proof or evidence/new fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on FDRs, inconsistently applied mercantile system of accounting against the spirit of applicable section i.e. section 145 of the Act. The appellant has also relied on the following decisions: i) Sanjeev Woolen Mills Vs CIT (2005) 279 ITR 434 (SC) ii) Jaggilal Kamlapat, Bankers Vs CIT (1975) 101 ITR 40 (All.) iii) J. K. Bankers Vs CIT 94 ITR 107 (All.) iv) CIT Bombay City I Vs Union Land and Building Society Pvt. Ltd. 83 ITR 794(Bom) As per ratio laid down by the different judicial authorities in the above quoted decisions is that the choice of method of accounting regularly employed by the assessee lies with the assessee but the assessee would be required to show that he has followed the chosen method regularly. Considering the facts of these cases in the light of the aforesaid judicial pronouncements, I have no hesitation in holding that the A. O. has wrongly rejected the cash system of accounting for a single source of income and thereby added the interest on accrual basis though not received or credited. The method of accounting regularly adopted, followed by the appellant and also accepted earlier by the department is to be accepted as the metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting lies with the assessee and it should be regularly employed by the assessee. The relevant observations made by the Hon ble Supreme Court in this regard are as under: The choice of method of accounting regularly employed by the assessee lies with the assessee but the assessee would be required to show that he has followed the chosen method regularly. The Department is bound by the assessee's choice of method regularly employed unless by this method the true income, profit of accounts cannot be arrived at. The assessee's regular method would not be rejected as improper merely because it gives him the benefit in certain years or that as per the Assessing Officer the other method would have been more preferable. The method of accounting can-not be substituted by the Assessing Officer merely because it is unsatisfactory. What is material for the purpose of section 145 is, the method to be such that the real income, profit and gain can be properly deduced therefrom. If the method adopted does not afford true picture of profit, it would be rejected, but then such rejection should be based on cogent evidence and would be done with caution. The power can be exercised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s CIT (supra) held that option regarding adopting a system of accounting is with the assessee and not with the income tax Department. The Department cannot compel the assessee to adopt mercantile system of accounting. If an assessee adopts the cash system in respect of income assessable u/s 12 (income Tax Act 1922), he cannot be assessed on accrual basis. 12. In view of the decisions referred to above, we are of the considered view that the AO was not justified in rejecting the cash system of accounting for a single head of income and thereby adding the interest on FDRs on accrual basis though not received or credited. The AO should have accepted the method of accounting regularly followed by the assessees. It is apparent from the record that the assessees were maintaining books of account on cash system basis. We do not find any cogent and valid reason for disturbing the method of accounting regularly followed by the assessees. It is also relevant to point out that in both the assessees case, an amount of ₹ 4,092/- for AY 2003-04 and ₹ 13,270/- for AY 2004-05 respectively has already been offered for tax on maturity basis of FDRs which has already been considered an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essees During the course of assessment proceedings, as regards statement of Nilesh M Parekh which was recorded on 16-12-2008, in reply to question NO.9, the assessee has categorically explained that the cash in question belongs to the trust. The AO did not accept the contention of the assessee and made the addition holding that the trust was not holding cash of such huge amount and the explanation is an afterthought. Rejecting the assessee s contention the AO apportioned the seized cash of ₹ 5,79,000/- in the ratio of returned income in the hands of two brothers (assessees). 15. Before the CIT(A), the assessees submitted the written submissions in respect of the impugned addition which reads as under: (i) that the assessee along with his brother were victimized by the local Police authority under the flimsy false charge of duplicate and pirated CDS and documents/cash, etc. were seized by the police authorities at their sweet will, partly selectively in order to frame them. (ii) As stated in reply to Q. No.9 (as reproduced in para 6.3 above), it is not true that the assessee di0d not explain the source of cash before the police authorities, for the reason tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO to prove, by bringing enough material on record. This provision of law has not been followed by the AO in passing the assessment order. In all fairness, the AO was duty bound to make some effort to bring some evidence on record to disbelieve the appellant s claim. The impugned addition is, therefore, in breach of the principles of natural justice . 16. As regards addition of ₹ 83,368/- in each case, the AO observed that vide order sheet note dated 28-11-2008, the assessee asked to show cause as to why the investment in CDs and investment valued at ₹ 1,66,735/- should not be treated as assessees undisclosed income and added to the total income. In response to the above, the asseseees submitted the CDs found were that of Modheshwari (Magangi) Devasthan Trust. During the course of assessment proceedings, the AO recorded the detailed statement of the assessee. In reply to question NO.16, it was submitted by the assessee s that the CDs seized were blank and hence, question of piracy does not arise. The purchase of CDs were worth ₹ 2,00,000/- have been entered into the books of accounts of the aforesaid trust on 18-3-2006. Also in the return of the trust for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Trust, the appellant has debited ₹ 2,55,601/- against the value of CDs and instruments shown at ₹ 1,66,735/- in the Police panchnama which is an undisputed fact. The value shown in the books is more than the addition made on this point. Therefore, in view of the facts circumstances of the case, it is held that the observation of the AO, in this regard, is based on suspicious conjecture and on the other hand, on the basis of clinching evidences available on record, the cash found and also CDs and instruments ought to have been accepted as that of the Modheshwari (Matangi) Devasthan Trust and not of the appellants as held by the A. O. The additions made, in this regard, in both the cases on both the counts are ordered to be deleted in full . 18. We have heard the rival submissions and have also perused the materials available on record. In the instant case, the AO observed that the police authority had recorded the statement of the assessees on 28- 3-2006 when the cash and CDs in question were seized. The AO has not brought on record the alleged statement of the assessee recorded on 28- 3-2006. Thus, the AO was not justified in taking adverse view in the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 2,00,000/- is actually cost of acquisition as evident from the details filed in response to reply to the question of the said statement. It is merely the difference of opinion in respect of addition on account of date and the actual cost of specific date. Therefore, the difference of ₹ 27,000/- should not be considered. The AO did not accept the above reply of the assessee. He, therefore, apportioning the same equally between the two brothers (assessees) ₹ 13,500/- considering the same to be unaccounted investment held by the assesees in the year under consideration and accordingly, he taxed the same u/s 69 of the Act. 22. The CIT(A) deleted the addition observing as under: 8.6 I have carefully considered the contentions of the learned counsel for the appellants and have also carefully gone through the assessment order as well as the submissions filed and orally made by them. It is observed that there are three difference dates which are relevant in the case to decide the issue regarding the valuation of diamonds: i. Actual date of each every transaction as recorded in the books of accounts as well as the diary relied upon by the appellant and acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per purchase made on 19-01-2006. The difference in total valuation of diamonds is only ₹ 27,000/- which has been divided by the AO for making the addition equally between the appellants and as a result of this process, only ₹ 13,500/- has been added in each case. In my considered opinion, the difference of ₹ 27,000/- is an honest difference of opinion between the actual cost of acquisition as on 19.1.2006 and the value determined as on 28.3.2006 by an unrecognized and unapproved valuer. Since for all purposes, the books of accounts and the book result have been accepted by the AO particularly having regard to the fact that the cost of ₹ 2 lacs debited is accepted to arrive at the difference of ₹ 27,000/- in the valuation of diamond and no defect in such books is found, the cost of acquisition should have been accepted as such by the AO. Since there is no difference between the weight and the particulars of the articles in question which remained the same and constant, the cost of acquisition on given date of such articles should be adopted as the value of investment and not the value estimated on a different date and therefore, the addition of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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