TMI Blog2010 (5) TMI 577X X X X Extracts X X X X X X X X Extracts X X X X ..... ounted for on accrual basis for taxing the income in assessment year 2006-07 but the assessee is entitled to set-off of the income relating to the period 1-1-2005 to 31-3-2006 which had been received in the financial year 2005-06 and included in the taxable income, considering that the mercantile system of accounting has been adopted by the assessee - 680 (LUCK.) OF 2009 - - - Dated:- 19-5-2010 - H.L. KARWA, N.K. SAINI, JJ. Rakesh Garg for the Appellant. Anadi Verma for the Respondent. ORDER Per N.K. Saini, Accountant Member. This appeal filed by the assessee is directed against the order, dated 30-9-2009 of CIT(A)-II, Kanpur relating to assessment year 2006-2007. In this appeal the assessee has raised the following grounds : "1. Because the CIT(A) has erred on facts and in law in upholding the rejection of books of account maintained by the appellant and arbitrarily making an addition of Rs. 11.15.482 on account of 1/4th rental income of 49,577 bags deemed to have occurred, on mercantile basis which addition is contrary to facts, bad in law and be deleted. 2. The Books of account having been audited, as per the method regularly employed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the expenses debited in the profit loss account included expenses of April, 2005 to December, 2005, which were related to upliftment of 40,829 bags, corresponding income for which had been duly credited in the profit loss account. The Assessing Officer pointed out that the expenses debited in the profit loss account also included expenses of January, 2006 to March, 2006, which were related to loading and up keeping of 49,577 bags, corresponding income of which had not been duly credited in the profit and loss account. He was of the view that the expenditures of loading, Repairs and Maintenance, Wages and fuel incurred during January 2006 to March 2006 were wholly and exclusively attributable to 49,577 bags, which have been debited in the current assessment year. The Assessing Officer further pointed out that the quantum of excess expenses debited on account of loading, Repairs and Maintenance, Wages and fuel were Rs. 1,77,948, Rs. 2,33,175, Rs. 54.000 and Rs. 5,11.804 respectively, which were exclusively for loading of 49,577 bags and besides the expenses of loading. Repairs and Maintenance, Wages and other expenses of the period starting from January to March 2006 have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was accepted then the correct picture of profit could not be arrived at because booking of excess expenditure on account of 8748 excess bags [49577 - 40829] stored during the year, will definitely give suppressed profit. The reliance was placed on the judgment of Hon ble Supreme Court in the case of CIT v. Realest Builders Services Ltd. [2008] 170 Taxman 218. The Assessing Officer further observed that in the line of business of the assessee first act starts with the loading of potatoes starting from January to March and the period of storage of potato extends to roughly six months. Therefore, this period can be taken as second and third act. During the period, the potatoes are kept in the cold storage for a period of five to six months without any loading or upliftment. Fourth and final act involves upliftment of potatoes starting from the month of September to November. The Assessing Officer pointed out that as per the provisions of section 145, the assessee has to follow either cash system of accounting or mercantile system of accounting and the assessee in its Audit Report had mentioned that it was following mercantile system of accounting, however, if the pattern of reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge rental from the growers and/or to recover the same; (d) The appellant has also been following the said practice year after year and the receipts as collected by it at the time of unloading potatoes used to be accounted for as income, at that point of time only. (e) The said system of accounting was accepted without any exception and "returns" filed by the assessee/appellant, year after year, were duly accepted as such." 4.1 The learned CIT(A), after considering the submissions of the assessee, observed that under section 211(2) of the Company Act. Accounting Standards AS-9 prescribed by ICAI was bound to be followed by the assessee. As regards to the assessee s plea that it had been following this method since its inception, the learned CIT(A) observed that the said plea may be true but in view of the mandatory accounting standard, the preparation of accounts has to shift to be in compliance with the Accounting Standards and while making a shift, it was quite possible that in one year the income might have increased or it might decrease : but overall, it would be revenue neutral since the assessee would have to include this revenue next year. The reliance was pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect to the system of accounting and the Assessing Officer nowhere had alleged that the system of accounting i.e., mercantile had not been regularly followed by the assessee. It was further stated that the conditions laid down in section 145 are fully complied with, hence there was no occasion with the Assessing Officer to compute income otherwise. It was pointed out that the assessee was incorporated in 1999 and ever since its incorporation it has been regularly following the same system of accounting and the income returned on the basis of said method of accounting had been accepted year after year by the department. As regards to the observation of the Assessing Officer that Accounting Standard AS-9 issued by the Institute of Chartered Accountants of India is mandatory, the learned counsel for the assessee submitted that the said observation was without any basis or force because in the entire Income-tax Act, nowhere it has been mentioned that the Accounting Standard as drafted are compulsory or must for any assessee, except in section 145(2) which says that the Central Government may notify in the official gazette from time to time Accounting Standard to be followed by any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial results/achievements. The reliance was placed on the following case laws : (i) Juggilal Kamlapat Udyog Ltd. v. CIT [2005] 278 ITR 523 (Cal.) (ii) K.S. Mehta (HUF) v. CIT [2005] 278 ITR 594 (Cal.) (iii) CIT v. Eicher Goodearth Ltd. [2008] 296 ITR 125 (Delhi) (iv) MKB (Asia) (P.) Ltd. v. CIT [2007] 294 ITR 6555 (Gauhati) (v) ITAT Lucknow order in the case of Hari Om Builders [IT Appeal No. 81 (Luck.) of 2008, dated 29-4-2009] 5.1 The learned counsel for the assessee further submitted that the assessee did not receive any advance rent and the rent was charged at the time of uplifting of the potatoes since inception and this method of accounting was followed consistently and if the method was to be changed then effect was to be given for the earlier year also. But this exercise was not done by the Assessing Officer, therefore, the addition of Rs. 11,15,482 was not justified. 6. In his rival submissions, the learned D.R. strongly supported the orders of the authorities below and further submitted that the Assessing Officer was not correct in holding that since the assessee allegedly claims to keep its accounts on mercantile basis, the income has also to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting system in which expenses have been booked on cash basis for the period January to March, 2006, a practice allegedly utilized in the past as well. However the assessee cannot take recourse to the fact that principle of consistency should be applied since this issue has not been questioned in the past. The learned DR. commented upon the business activity of the assessee in the following words : "Cold storage business is in the same nature as warehousing, where the main essence of the transaction is letting out of storage space having appropriate facilities for preservation of goods. The income from cold storage is in the nature of rental income and should be accounted during the currency of the period for which goods are agreed to be stored therein. This is not only in accordance with the accrual system of accounting but also the matching concept which requires that costs should be accounted for in such quantum and period which is directly related to be income for which they are being incurred. The reverse also holds true. Therefore, since the costs are being incurred on the cold storage facility throughout the currency of the period for which it is let, the total ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... component of accrual basis of accounting. The object of another accounting standard, viz., AS22 is to reconcile the matching principle with the fair valuation principles. It may be noted that recognition, measurement and disclosure of various items of income, expenses, assets and liabilities is done only by Accounting Standards and not by the provisions of the Companies Act. The concept of timing difference introduced by AS 22 is of no help to the assessee here. This has to be read with the concept of deferred revenue expenditure and is a subject matter of different contemplation altogether. The provisions of section 154(1A) and other appellate effect provisions are sufficient to rectify the apparent distortions of subsequent years and create a true picture of profits of the assessee." 6.2 The learned D.R. submitted that the Assessing Officer worked out the addition by keeping in view the matching concept of income, therefore, the learned CIT(A) was justified in confirming the action of the Assessing Officer. 7. In his rejoinder, the learned counsel for the assessee submitted that no Accounting Standard has been prescribed in Income-tax Act, 1961 except as notified by the Cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e., the financial year in which these are unloaded (after April upto unloading). It was further stated that the Assessing Officer had also accepted that there was no concealment of income so it was only the way of imagination by which the Assessing Officer had preponed the income of the next year without any ground reality of the facts and only on the imaginations of his own mind. As regards to the contention of the learned D.R. that the income corresponding to January to March was not accounted for, the learned counsel for the assessee submitted that the loading of potatoes started in almost third week of February and only loading expenses were paid during that period which were based on bags loaded and the Power Fuel charges are in the nature of semi-variable which are used after the bags are loaded and up to the date of last unloading and those expenses were booked in the period when the income was being booked. Therefore, none of the income remained unaccounted for. As regards to the argument of learned D.R. that AS-9 is mandatory in view of the provisions contained in section 211(2) of the Company s Act, the learned counsel for the assessee submitted that section 211(2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003-04 26-1-2004 to 31-3-2004 39684 To 59195 78 4617210 8. We have considered the rival submissions and carefully gone through the material available on record. In the instant case it is noticed that the assessee is engaged in the business of running a cold storage which is a cyclic industry and the cycle starts with the storing of potatoes and ends with the return of stored potatoes. For storing the potatoes the assessee is charging rent. However, the rental income is accounted for at the time of uplifting of potatoes by the farmers. The cycle starts from the loading of the potatoes in the month of January to March. Thereafter, potatoes are stored for the month of April to September and lifting takes place from October to December. In the Income-tax matters, an income pertaining to a previous year is taxed in the assessment year, the previous year is defined in section 3 of the Income-tax Act, 1961 which means the financial year immediately preceding the assessment year. In the present case, the assessment year is 2006-07 which starts from 1-4-2006 and ends on 31-3-2007. The previous year, therefore, starts from 1-4-2005 and end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, he made no payment and would make a corresponding credit entry in his books in favour of the creditor the same day. That is to say, the assessee would credit himself with the monies as soon as he became entitled to demand payment, though he has not in fact received them, and likewise, he would debit himself with the monies as soon as he became liable to pay, though he has made no payment then. The profit thus computed is, obviously, the profit earned, not realized, and similarly, the loss computed is the loss sustained not paid. 8.2 The Hon ble Supreme Court in the case of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 observed that the mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system bring into credit what is due immediately it becomes legally due and before it is actually received and it brings into debit expenditure in respect of which a legal liability has been incurred before it is actually disbursed. The profits or gains of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005 to March, 2005 had been accounted for by the assessee since there was uplifting of 40,829 bags upto December, 2005, but no income related to 49,577 bags which got loaded from January, 2006 to March, 2006 had been shown. We are of the view that the Assessing Officer was fully justified in working out the income of Rs. 11,15,482 which is required to be considered for year under consideration. At the same time, the assessee is entitled to the set-off of the income which had already been included in this year i.e., income from January to March, 2005. We, therefore, direct the Assessing Officer that the benefit of the aforesaid set-off of the income is to be allowed against the addition made by him. Since the assessee had realized rent of Rs. 36,74,610 for the potatoes uplifted in the financial year 2005-06 which also included the period of 1-1-2005 to 31-3-2005, therefore, the assessee is entitled to the set-off of Rs. 9,18,652 (1/4th of Rs. 36,74,610) against the addition of Rs. 11,15,482 (1/4th of Rs. 44,61,930) which has been worked out by the Assessing Officer out of rent realized at Rs. 44,61,930 for 49,577 bags loaded in the financial year 2006-07. The said income of Rs. 11, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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