TMI Blog2011 (9) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... icability of Accounting Standard (AS-9) - Held that: - those accounting standards are applicable only to the assesses, who follow mercantile system of accounting. Since the assesse, in the present case follows cash system of accounting, we are of the view that the rejection of books of accounts on this basis cannot be upheld. Principle of consistency - Held that: - right from A.Y 1983-84 till A.Y 2003-04 the revenue has accepted the cash system of accounting followed by the assessee and has completed the assessment on that basis. In A.Y 2004-05 the AO cannot be allowed to take a different stand. As rightly contended on behalf of the assessee there should be finality and certainty in all litigation including litigation arising out the Act. - 5617/MUM/2009, ITA NO.6062/MUM/2009, ITA NO.6063/MUM/2009 - - - Dated:- 9-9-2011 - N. V. Vasudevan And R. K. Panda, JJ. Appellant by : B. Jayakumar Respondent by : Mahesh C. Mathur ORDER Per N. V. Vasudevan, J.M. ITA No.5617/Mum/09 is an appeal by the Revenue against the order dated 26.6.2009 of CIT(A)-XXXII, Mumbai, relating to AY 04-05. ITA No.6062 6063/Mum/09 are also appeals by the Revenue against two orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is less than 7.5% of the book profits then the book profit shall be deemed to be the total income of the Assessee and tax payable by the Assessee on such total income shall be the amount of income tax at 7.5% of book profits. The percentage of 7.5% has undergone changes in different Assessment Years but this will not be of any material consequence in the present case. 7.5% of book profits in the case of the Assessee for AY 04-05, was ₹ 56,16,849. Since the tax payable on 7.5% of the book profits was less than the tax payable on total income of ₹ 4,76,57,440/- computed by the Assessee as per profit and loss account maintained by it on the cash system of accounting, the Assessee declared total income at ₹ 4,76,57,440/-. Sec.115JB (2) of the Act provides that every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. While preparing the annual accounts including profit and loss account,- (i) the accounting policies ; (ii) the accounting standards adopted for preparing such accounts inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out that ever since AY 83-84, the Assessee has been maintaining its books of accounts on cash system of accounting and filing returns of income on the basis of such books of accounts. The Assessee pointed out that the Income Tax Department has accepted such a change in the system of accounting and that its assessments are being completed on the basis of Cash system of accounting ever since the AY 83-84. 5. The Assessee pointed out the reasons for the changed system of accounting as follows: 1. The Assessee renders professional services/consultancy services in the field of civil/structural engineering and architecture by providing design, supervision and project management. The income is in the form of fees for services rendered and the Assessee does not indulge in any trading. 2. Since the Assessee s nature of income is from rendering professional services akin to Doctors, Lawyers etc., the cash system of accounting was felt to be more appropriate. 3. Bills raised on parties are subject to settlement and in many cases, they are revised. Thus there was uncertainty of the correct income figures. 4. The realization of payment also takes time, normally from 4 to 6 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t are never treated as correct for paying income tax., though accounts are prepared under mercantile method of accounting. 7. It was submitted that under the Companies Act,1956, Companies are allowed to have their annual accounts on a date other than 31st March, but for Income Tax purposes, such companies have to prepare another set of accounts for the period of 12 months ending 31st March, as under the Act, the definition of previous year is the period ending 31st March. Thus to have two sets of accounts, one for the Companies Act and another for Income Tax purposes is not new to the Income Tax Department. 8. The AO however did not accept the submissions made on behalf of the Assessee. He held that under Section 209(3) of the Companies Act, 1956, every company was obliged to maintain its books of accounts under the mercantile system of accounting. According to the AO, the provisions of Sec.209(3) of the Companies Act, 1956 overrides the provisions of Sec.145 of the Act which provides that the Income chargeable under the head Profits and gains of business or profession or Income from other sources shall be computed in accordance with the method of accounting regularly emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the share-holders etc. and also for the purpose of filing returns under the Income-tax Act, the assessee followed cash system of accounting which was admittedly accepted in past. However, from the current year the assessee changed over to method of mercantile system of accounting for all practical purposes other than meeting its liability under the Income-tax Act. This is not permissible as the same is not in accordance with law while interpreting the words 'method of accounting regularly employed by the assessee' it was held in the case of Sarangpur Cotton Mfg. Co. Ltd. that section related to a method of accounting regularly employed by the assessee for his own purposes, that is to say, for the purposes of his business and did not relate to a method of making up the statutory return for assessment to income-tax. Similar principle was laid down in the case of CIT v. Smt. Singari Bai [1945] 13 ITR 224 (All.) (FB) where it was held that the assessee could not for the purpose of more conveniently carrying on his own business adopt the mercantile basis and then for the purpose of income-tax assessment adopt the cash system of accounting. See pages 1159/60 of Kanga and Pal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew India to be paid to Staff. 6 Foreshore Co-op Hsg. Soc. 25,310 Transfer Charges for purchase of Flat. 7 Advance Rent A/c. 7,100 Rent paid in advance. 8 Deposit Received from Temple Tower 500,000 Against documents to receive for Chennai Office. 9 SBOI, Dividend A/c. for F.Y 2002-03 100 Bank charges 10 Suspense Account 4,149 Excess credit given in our A/c. by ICICI Bank Ltd. 11 Travel Advance 55,417 Paul Amarnath 42,252 Various parties 13,165 With bal Total 55,417 12 Misc. Advances* 919,169 Lea Associates 708,589 South Asia Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing year. There is always give and take on settling these accounts. In order to keep track of settlement accounts in which Staff had incurred more expenses than the advances given, they are shown separately, even though the Staff have cash advances with them for their successive trips. It may be seen that the staff are the hands through which the Company s activities are carried out and are used as a conduit pipe for incurring company s expenses. Thus, they are the facilitators and amounts due from them or paid to them are like imprest account and fall in the nature of financing the activity and so do not affect the accountability of expenses actually incurred on cash method of accounting. They are part of the system for disbursement. The money lying with them and due to them is treated as part of imprest account. The company has given advances under various heads for expenses. These are accounted as expenses when account thereof is rendered as per system of accounting followed consistently year after year, when the actual bills are presented. In case of staff who are traveling/ outstation and could not encash cheques on due dates on disbursement, their respective accounts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained on cash system of accounting and accept the books maintained on mercantile system of accounting as it gives true and fair account of the business of the assessee and are maintained as per law. The profit calculated as per mercantile system of accounting as has been declared by the assessee for the purpose of section 115JB is taken for normal Income Tax purpose also. The profit of ₹ 7,49,90,325/- as per the annual report is taken as the net profit and the total income is calculated accordingly. 11. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). Before CIT(A), the Assessee reiterated contentions as were put forth before the AO. The following were the contentions put forth by the Assessee. 1. The AO erred in assuming that the Assessee kept its books under the mercantile system of Accounting and converted its books into cash system of accounting for income tax purposes. The Assessee highlighted that it was keeping its books of accounts on the cash system of accounting. The Assessee maintained additional records so that it could also compute its profits under the mercantile system of accounting for the purpose of Companies Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intained its accounts for its day to day business on cash method and annual accounts are compiled on that basis. On analysis of such books of accounts maintained by the Assessee the CIT(A) found that expense and receipts are booked on actual receipt basis. 12. The next issue taken up for consideration by the CIT(A) was as to whether the provisions of Sec.209(3) of the Companies Act, 1956 overrides the provisions of the Act? On this issue the CIT(A) held that Sec.145 of the Act allows an Assessee to employ cash or mercantile system of accounting in respect of income chargeable under the head Profits and gains of Business or Profession or Income from other sources . He held that the choice of method of accounting is left to the Assessee and it is not a choice of the AO. The Act provides for maintenance of books of accounts by difference professions u/s.44AA of the Act and for audit of book of accounts for tax purposes u/s.44AB of the Act. Thus the Act contains provisions for books of accounts and method of accounting. He also held that the Act does not prohibit a company from maintaining its books of accounts under the cash system of accounting. In this regard he also found tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.,on which the AO placed reliance was distinguishable. The CIT(A) found that in the said decision the facts were that the Assessee was maintaining its books of accounts on day to day basis on mercantile basis. While filing return of income for the purpose of the Act, the Assessee prepared accounts on cash basis. He found that in the case of the Assessee in the present appeal, the the Assessee maintained its accounts for its day to day business on cash method and annual accounts are compiled on that basis. Thus the facts of the Assessee s case were totally different and therefore the ratio laid down in the said decision does not apply to the facts of the Assessee s case. For all the above reasons the CIT(A) held that the rejection of books of accounts of the Assessee and determination of income on the basis of the profits as per the mercantile system of accounting was not proper. The Total income declared by the Assessee as per the cash system of accounting was directed to be accepted. 14. The facts in AY 05-06 are identical to AY 04-05. In AY 06-07, the AO also held that Accounting Standard (AS) 9 issued by the Institute of Chartered Accountants of India (ICAI) advocates follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel for the Assessee submitted that the Act is a self - contained code as far as maintenance of books of Accounts are concerned and is not dependent on any other provisions of law unless expressly provided in the Act. The following chart giving the various provisions in this regard was filed: Effective Date: Section Changes pertaining 01.04.1976 44AA(Rule 6F) Books of Accounts prescribed 01.04.1985 44AB Tax Audit Introduced 01.04.1988 115J MAT Introduced. Replaced by: 01.04.97 115JA 01.04.97 115JAA 01.04.01 115JB 15.06.1988 209(3) Companies Act-Amended 01.04.1989 3 Previous Year ending 31 st March 01.04.1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed and if the earlier decision is given after taking into consideration all material evidence. It was submitted that one should be extremely slow to depart from a finding given by an earlier Tribunal. It was also submitted that the effect of revising a decision in a subsequent year should not lead to injustice and the court must always be anxious to avoid injustice to the assesse. Reliance was placed on the decision of the Hon ble Supreme Court in the case of United Commercial Bank v. CIT 240 ITR 355(SC) wherein it was held that the method followed consistently for thirty years and accepted by Revenue Method was valid and could not be rejected Income Tax Act,1961. Reliance was also placed on the decision of the Hon ble Bombay High Court in the case of CIT v. Tisco 106 ITR 363 (Bom), wherein it was held that section 13 of the Act of 1922 lays down that income, profits and gains must be computed for the purpose of the Act in accordance with the method of accounting regularly employed by the assessee. The Tribunal had rightly st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been regularly followed by the assessee and its assessment is being completed on that basis ever since A.Y 1983-84. The assessee has been maintaining its accounts in relation to day to day business on cash system of accounting and annual accounts are compiled on that basis. The assessee has also maintained its books of account on mercantile system on accounting for the purpose of compliance with the provisions of Companies Act, 1956 (Section 209(3) of the said Act). In fact in the annual report given to its share holder the assessee has duly highlighted this aspect. i. System of accounting: (a) The company generally follows the mercantile system of accounting and recognized Income and Expenditure on accrual basis except; Bills/claims raised on account of escalation in cost and on account of variation in contract consultancy work are both recognized as revenueonly when and to the extent of the acceptance/ realization of the amount of the claim of variation. (b) Export incentives, if any, receivable in respect of Professional Services rendered outside India are accounting the year the same are received. (c) (i) Provision for taxation is being made in the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) will not be applicable. 24. On the otherhand the decision in the case of Chennai Finance Co. Ltd. (supra) it has held that the provisions of section 209(3) of the Company Act 1956 do not override provisions of section 145 of the Act. The other reasons given by the CIT(A) for coming to the conclusion that section 209(3) of the Companies Act 1956 does not override provisions of section 145 of the Act are also found to be justified. One aspect which we find missing in the CIT(A) order is the reasons given by the AO for rejecting the books of account of the assessee under section 145 of the Act. On this aspect we notice that the AO was of the view that when the assessee was following cash system of accounting there cannot be any sundry creditors appearing in the balance sheet. On this query of the AO the assessee has given a detailed reply. The AO has not dealt with that reply at all. In our opinion the reply given by the assessee justifies the action of the assessee in showing sundry creditors in the balance sheet. Therefore, this cannot be a valid basis for rejecting the books of account. We are of the view that the system followed by the assessee does not in any way detract fr ..... 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