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2020 (3) TMI 940 - AT - Income TaxRejection of books of account - Correct method of accounting - AO invoked the provisions of section 145(3) rejected the cash system of accounting and directed adoption of the accrual system of accounting - activities of the Assessee were not carried forward from one accounting year to the next and A.O. thus, held that the accounts should be in the nature of ‘venture account’ and the correct profitability could be arrived at by following the accrual method of accounting only - whether correct profit/s of the assessee can be deduced or not from the books of account which the assessee has maintained on cash basis of accounting? - HELD THAT:- As relying on own case [2019 (7) TMI 528 - ITAT DELHI] cash method of accounting, which is followed by the assessee consistently and also for the impugned assessment year, cannot be rejected and the income of the assessee should not be computed on mercantile method of accounting. Accordingly, ground number 2 of the appeal of the assessee is allowed. Cash system of accounting of the Assessee and directed the assessee to follow the accrual system of accounting - The business of any company cannot be said to be defunct until and unless the company has been wound up or has surrendered the Certificate of Incorporation in accordance with law. The status of the assessee company as per the MCA website is, undisputedly, active till date. Therefore, the company cannot be considered as a defunct company. Since, the assessee company is active, it has to incur some expenditure to maintain its daily operations and accounts such as salary to staff, audit fees, legal and professional fees, rent, repairs and maintenance, bank charges, professional tax, interest on loan taken in earlier years, depreciation, etc. Such expenditure cannot be disallowed only on the ground that there was no business activity during the year especially in the case of companies. It is also seen that the AO has nowhere examined the expenses claimed by the assessee in the accrual system of accounting. He has not cared to discuss and examine any of the expenses claimed by the Assessee on accrual basis but has simply disallowed the said expenses and added back to the income of the assessee without carrying out the necessary enquiry and verification. In our considered view, it was the responsibility of the assessing officer to verify the expenditure individually head wise. Instead of doing so the AO assessed income on an overall basis and disallowed the entire expenditure. The A.O., to our mind, has grossly erred in understanding the concept of rejection of the books of the Assessee, the concept of adoption of a particular method of accounting and also the concept of disallowance of expenses. The action of the A.O. in rejecting the Cash system of accounting, as followed by the Assessee, and his subsequent computation of the income is grossly incorrect and is, therefore, rejected. - Decided in favor of assessee.
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