TMI Blog2012 (8) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent year that change in method of accounting was made for complying with the statutory requirement of Section 145(1)- that an Assessing Officer cannot base the computation of income solely on the basis of report of auditors - even after change in the method of accounting from hybrid to mercantile during the year under consideration, the assessee had shown positive gross profit in comparison to gross loss in the assessment year 2005-06 and 2004-05, thus nothing on record to suggest that assessee had changed method of accounting to show lower profit during the year as compared to earlier year - direction to delete the addition made on account of change in method of accounting and auditors’ report regarding reduction in net profit - in favour of assessee. Disallowance for depreciation on assets - Held that:- the assessee has failed to produce any fixed assets registers, therefore, existence of various assets and utilization thereof in the relevant previous year was prior to assessment year 2003-04 was not verifiable - confirm the action of the Assessing Officer for decline of claim of depreciation - against assessee. - I.T.A.No. 73/Ind/2012 - - - Dated:- 19-6-2012 - SHRI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting, the Assessing Officer observed that in the audit report point no.11(a) auditor has mentioned that method of accounting in the previous year was mercantile system of accounting . There was change in accounting system during the year. Earlier the cash basis of accounting were employed however sales and interest income on FDRs were accounted for on accrual basis. In the previous year 2005-06, the mercantile system of accounting were adopted and all the major income and expenses were accounted for on accrual basis. Assessing Officer observed that due to said change the net profit of the assessee have been reduced by Rs. 16,00,92,318/-. Vide questionnaire dated 7.08.08 assessee was asked to justify the change in method of accounting due to said change net profit have been reduced. It was further asked to explain the purpose of changing the method of accounting. Assessee vide its written submission dated 15.12.08 stated that :- "Madam in the clause 11 (6) of the audit report in form no. 3CD obtained by the assessee Authority under section 44AB of the Income Tax Act, 1961 previous tax auditors of the assessee Authority have stated that there had been a change in the method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee Authority has adopted Mercantile System of accounting both in respect of its income and expenditure. Such change in the method has consistently been observed by the .assessee Authority in the subsequent years too. It shall thus be appreciated by your good self that the sole purpose for bringing change in the method of accounting was to strictly comply with provisions of section 145 of the Income Tax Act, 1961. Since, the change in the method was bona fide and therefore it has to be regarded as justified irrespective of its result. 6. The Assessing Officer did not accept the assessee s contention and after observing that assessee was following cash system of accounting in previous year and only sales and interest income from FDRs were being booked on accrual basis as per audit report. Accordingly, he made an addition of Rs. 16,00,92,318/- to the taxable income of the assessee. 7. By observing that the assessee failed to produce any fixed assets register therefore existence of assets and utilization thereof in relevant previous year before assessment year 2003-04 is not verifiable. The claim of depreciation was therefore, held to be not allowable as claimed by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NTAINED I. That, the appellant Authority has maintained regular books of account in the ordinary course of carrying on its activities in which all the transactions relating to income and expenses such as income from sales, interest income, lease rent income, land acquisition expenses, land development expenses and other expenses have been fully and truly recorded. BOOKS WERE AUDITED BY QUALIFIED CHARTERED ACCOUNTANTS [Relevant Paper Book Page No.4 to 17] II. That, the books of account of the appellant Authority were subjected to audit by an independent firm of qualified Chartered Accountants duly appointed under the provisions of section 44AB of the Income-Tax Act, 1961. The appellant Authority had obtained an Audit Report from such Auditors in the prescribed Form No. 3CB 3CD, which were duly placed on the record of the learned Assessing Officer [kindly refer PB Page No.4 to 17 of the compilation NO DISCREPENCIES IN BOOKS FOUND BY THE TAX AUDITORS ONLY A REMARK ON THE IMP ACT OF CHANGE IN THE METHOD GIVEN [PB Page No.4 6] II. That, the Auditors conducting the audit, as aforesaid, had not found any discrepancy in the books of account regularly maintained by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing inventory both in respect of developed properties and work-in-progress along with valuation thereof. Kindly refer submission letter dated 01-12-2008 [PB Page No. 48 to 50] and letter dated 19-12-2008 [PB Page No. 59 to 62]. A copy of such inventories, which have also been made a part of the order by the learned CIT(A), are placed at Page No. 66, 66A 67 of our compilation. COPIES AND DETAILS OF ALMOST ALL THE GENERAL LEDGER ACCOUNTS WERE ALSO PRODUCED BEFORE THE AO [PB Page Nos. 47 49 and 50] " VII That, during the course of assessment proceedings, the appellant Authority had produced copy of account of almost all the general ledger accounts before the learned Assessing Officer. The appellant had, inter alia produced details of sales premium [Kindly refer to PB Page No.4 7], details of land acquisition expenses, details of land development expenses and details of construction expenses [Kindly refer to PB Page No. 49 50]. PROPERTY REGISTERS CONTAINING QUANTITATIVE DETAILS OF INVENTORIES WERE ALSO PRODUCED AND AO FOUND NO DISCREPENCY [Please refer Para 2 at page No.3 of the AO's order] VIII. That, during the course of assessment proceedings, the appellant had also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad not followed one of the recognized methods of accounting. CHANGE IN THE METHOD WAS MADE FOR MEETING THE STATUTORY REQUIREMENT OF SECTION 145(1) OF THE ACT AND, FURTHER, SUCH CHANGE WAS BONAFIDE XII. As regard change in the method of accounting effected during the relevant previous year, it shall be appreciated by Your Honours that change in the method of accounting from Hybrid to Mercantile was bonafide and the same was purported only to bring the method in consonance with the statutory requirement of sub-section (1) of section 145 of the Act. GENUINE INABILITY OF THE APPELLANT TO FURNISH PROJECT - WISE INCOME EXPENDITURE OR CONSOLIDATED STOCK REGISTER COULD NOT BE A BASIS FOR REJECTION OF BOOKS OF ACCOUNT XIII. It is submitted that, merely for genuine inability of the appellant to furnish details of project-wise income expenditure and a consolidated stock register, the books of account of the appellant should not have been rejected by the learned AO by invoking provisions of sub-section (3) of section 145 of the Act. It has been judicially pronounced by various authorities that non-maintenance of closing stock could not be a sole and valid reason for rejectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the opening stock, there was no necessity for verifying the cost of acquisition of land, land development expenses, etc. incurred by the appellant in earlier years and merely on the basis of its valuation made at the end of the earlier year, the learned AO could have verified the correctness of the valuation of closing stock shown by the appellant. NON-MAINTENANCE OF PROJECT-WISE INCOME EXPENDITURE CANNOT LEAD TO REJECTION OF BOOKS OF ACCOUNT - BOOKS OF ACCOUNT SHOULD NOT BE REJECTED LIGHT - HEARTEDLY XV. Further, it is not necessary that every entity engaged in the business of development of properties should separately keep the project-wise income and expenditure. It is submitted that there are many expenditure which are common in the nature and which cannot be allocated to any particular project and, therefore, it is neither practicable nor possible for a quasi government authority alike the appellant to maintain such project-wise income and expenditure account. It is submitted that in the case of all the private colonizers, the revenue never insisted for maintenance of such type of project-wise details. In these circumstances, it will be appreciated by Your Honours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T YEAR UNDER CONSIDERATION IS DISTINGUISHABLE FROM THAT OF THE EARLIER YEARS - DISCREPENCIES NOTICED BY HON'BLE ITAT IN AY 2003-04 AND 200405 GOT REMOVED IN THE YEAR [kindly refer PB Page No.92 - Para 15] XVIII. It is submitted that the facts of the appellant for the assessment year under consideration are clearly distinguishable from its own facts for the assessment year 2003-04 to 2005-06 In the assessment year 2003-04, the appellant did not incorporate the valuation of the work-in-progress in its books of account and, further, for such assessment year, the appellant had observed hybrid system of accounting. In such circumstances, this Hon'ble Bench, in the appellant's Appeal No. ITA-233/1nd/2008, at para 15 of the order dated 31-08-2010, had upheld the rejection of books of account [Kindly refer PB Page No. 92]. This Hon'ble Bench, vide the same common order, at para 27 [Kindly refer PB Page No. 102], upheld the rejection of books of account for A.Y. 2004-05 too. However, for A.Y. 2005-06, this Hon'ble Bench has not given any specific finding on the rejection of books of account. In such circumstances, it shall be appreciated by Your Honours that the learned CIT (A) was not j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kindly refer to Page No. 58 of Paper Book]. Such fact is also apparent from the Page No.3 of the assessment order passed by the learned Assessing Officer. The appellant by producing the registers of the properties before the learned Assessing Officer had demonstrated the method and basis for arriving at the quantity of the closing stock. It was shown to tile learned Assessing Officer that the appellant had been maintaining separate registers of developed properties in respect of each of the schemes implemented by it. In such registers, at the time of commencement of implementation of any particular scheme, the total number of properties available for disposal are entered into and subsequently on each and every disposal of the property appropriate entries are made and on the basis of such entries, quantity of the developed properties available at the end of every financial year is taken by the appellant. The learned Assessing Officer had, on test basis, checked the registers in respect of Scheme No. 94 and Scheme No. 99 implemented by the appellant. The learned Assessing Officer could not find any discrepancy in the quantity stated in such registers. The learned Assessing Officer ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lots admeasuring 2,45,754 sq. meters which works out to be Rs. 1352/- per sq. meter which is more and less at the same average rate at which it was holding the plots in earlier years. Likewise, it has shown the closing stock of flats and quarters at the same rate at which it was carrying them as opening stock. Such fact may kindly verified by Your Honours by having a comparison between the opening stock statement of flats, quarters etc. placed at Page No. 72 and closing stock statement thereof placed at Page No. 66-A of the Paper Book. It shall thus be appreciated by Your Honours that the appellant, following the consistent method of valuation of stock at cost basis had rightly made valuation of its closing stock which was broadly based upon the valuation made in the earlier years. It would be pertinent to note that the learned AO has not found any discrepancy in the valuation details furnished by the appellant. AD-HOC ADDITION MADE BY THE LEARNED AO WITHOUT ANY BASIS V. That, the learned assessing officer without properly considering the appellant's submissions, chosen to substitute valuation of finished properties [vacant land, flats, shops and quarters] and Schemes in pipe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that merely non-maintenance of project-wise income and expenditure cannot become a basis for making a higher valuation of closing stock shown by an assessee. It would be pertinent to note that during the course of assessment proceedings, the appellant had produced its all books of accounts along with vouchers in evidence of expenditure incurred by it. Besides producing such books and evidences, the appellant had also furnished the details of closing stock and the learned Assessing Officer could not find any specific discrepancy in the list so furnished. The learned assessing officer has made the entire addition merely on guess work, surmises and conjectures and therefore, the same deserves to be deleted in toto. It has been judicially pronounced in a number of cases that an addition made merely on the guess work and surmises cannot be sustained. Reliance is placed on the following judicial pronouncements. i) Brij Bhushanlal Praduman Kumar vs. CIT (1978) 115 ITR 524 (SC) ii) Dhakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC) iii) Umacharan Shaw Bros vs. CIT (1959) 37 ITR 271 (SC) SPECIFIC FINDING REGARDING THE LOWER RATE OF VALUATION WAS REQUIRED TO BE GIVE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Oil Mills vs. CIT (1997) 108 ITR 372 (Cal) ii) Gurmukh Singh vs. CIT (1944) 12 ITR 393 (Lah) (para 64) iii} State of Kerala vs. C. Velukutty (1966) 60 ITR 239 (SC) APPELLANT SHOWN BETTER TRADING RESULTS AND AS ALSO NET PROFIT [Refer PB Page No. 68 to 70] XII. That, without prejudice to the above, it is submitted that the appellant is a Statutory Authority constituted u/s. 38 of the 'Madhya Pradesh Nagar Tatha Gram Nivesh Adhiniyam, 1973'. The main objects of the appellant Authority is to prepare and implement schemes for development, improvement and maintenance of land and other infrastructure facilities in the notified town for public utility. Under the provisions of section 49 of such Act, a Town Development Scheme may inter-alia make provisions for remodeling of road and street patterns, development of playgrounds, parks, reconstruction of drains, sewage lines and other similar amenities. All such activities are required to be carried on without any profit motive. As such, it would be appreciated that the appellant Authority is not supposed to profiteering. However, it may generate reasonable surplus from its activities which again has to be deployed wholly for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 ITR 71 (Raj). It is submitted that this Hon'ble Bench has also in the case of Agrawal Jewellers, Bhopal vs. ACIT (2008) 10 ITJ 10, has held the same view. It shall be appreciated by Your Honours that for the assessment year under consideration, the appellant had shown the better trading results than that of the earlier years, assessments whereof were completed under s. 143(3) and therefore, despite rejecting the books of account, the AO was not justified in disturbing the trading results without any cogent basis or material on record. ADDITION MADE IS QUITE ARBITRARY AND EXCESSIVE CONSIDERING THE FINDINGS OF THIS HON'BLE BENCH IN THE APPELLANT'S OWN CASE FOR EARLIER YEARS [Kindly refer PB Page No.75 to 113} XV. Without prejudice to the above, it is submitted that the additions so made by the learned AO, on account of valuation of closing stock, is quite arbitrary and excessive, in comparison to the additions made and finally sustained by this Hon'ble Bench, in the appellant's own case for the earlier assessment years i.e. A.Y. 2003-04 to A.Y. 2004-05. Such fact can be verified by this Hon'ble Bench from the copy of the common order of this Hon'ble Bench in the appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax auditors have submitted their report under the provisions of s. 44AB of the Income-Tax Act, 1961. The tax auditors have given such report only on the basis of the books of account of the appellant Authority maintained for the year under consideration. TAX AUDITORS HAVE GIVEN"- CLEAN AND UNQUALIFIED REPORT [kindly refer PB Page No.4] EVEN THE SUBJECT REMARK WAS A QUANTIFICATION OF IMPACT OF CHANGE IN THE METHOD WORKED OUT BY THE AUDITOR HIMSELF : II. The tax auditors after examining the books have given a clear and unqualified report on the proper maintenance of books of account [Kindly refer PB Page No.4]. It is submitted that even the remark given by the Tax Auditors in Point 11 C was not an adverse remark but it was only a disclosure of the impact of bona fide change in the method of accounting noted and probably, worked out by the auditors. THE AO REJECTED THE BOOKS OF ACCOUNT III. That despite having on records the tax auditors' unqualified report, the learned AO has rejected the books of account by invoking provisions of s. 145(3) of the Act, as discussed in detail in preceding paras. REJECTION OF BOOKS RESULTED INTO REJECTION OF METHOD OF ACCOUNTING AS WE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stock and work-in-progress for which a separate addition has already been made by the learned AO. In nutshell, in the given circumstances where the books of account, and impliedly method of accounting, of the appellant have already been rejected, merely on the basis of a remark of the auditors, about the impact of bonafide change in the method of accounting from defective one (Hybrid) to correct one (Mercantile), no addition can be made. 11. With regard to addition made on account of change in method of accounting, contention of ld. Authorized Representative was as under :- CHANGE IN THE METHOD OF ACCOUNTING WAS MADE FOR COMPLYING WITH STATUTORY REQUIREMENT OF SECTION 145(1) - EVEN THIS HON' BLE BENCH HAS DISAPPROVED THE METHOD OF ACCOUNTING ADOPTED IN EARLIER YEARS [PB Page No.92 - Para 15} II. On a perusal of the comment of the Tax Auditors of the appellant Authority, as given at clause lI(c) of his report in Form No. 3CD [Kindly refer to Page No.6 of Paper Book], it shall be appreciated by Your Honours that according to the Tax Auditors there was a change in the method of accounting employed by the appellant Authority. The appellant Authority was observing 'Hybri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting effected by the appellant during the previous year under consideration. The learned AO has also not disputed bona fideness of the appellant in bringing such change. The learned AO has made the impugned addition of Rs.16,OO,92,318/- merely on the basis of impact of the change quantified by the Tax Auditors of the Authority. ONCE BONAFIDENESS OF CHANGE IN THE METHOD IS NOT DISPUTED. NO ADDITION CAN BE MADE EVEN IF THE CHANGED METHOD RESULTS INTO SOME LOSS TO REVENUE V. It shall be appreciated by Your Honours that it is a settled law that once the change in the method of accounting is not disputed by the AO then irrespective of the consequences of such change no addition can be made in the income of an assessee. Reliance is -placed on the following iudicial pronouncements: i) Indo-Commercial Bank Ltd. vs. CIT (1962) 44ITR 22 (Mad.) ii) CIT vs. Delta Plantations Ltd. (1993) 71 Taxman 329 (Cal) iii) CIT vs. Pandapura Sahakara SakkareKarkhana Ltd. (1993) 201 ITR 56 (Kar) iv) CITvs. Atul Products Ltd. (2002) 125 Taxman 727 (Guj) v) Forest Industries Travancore Ltd. vs. CIT (1964) 51 ITR 329 (Ker) APPELLANT W AS NOT IN AGREEMENT WITH THE COMMENTS OF THE TAX A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors on the issue by invoking powers vested in her under the law. The learned AO has made the impugned additions merely on the basis of two lines comments given by the Tax Auditors which cannot be held to be justified under any cannon of law. MERELY ON THE BASIS OF AUDITORS' REPORT, NO ADDITION CAN BE MADE RULING OF THE HON'BLE KARNATAKA HIGH COURT VIII. In the case of Karnataka State Forest Industries Corporation Ltd. Vs. CIT as reported in (1993) 201 ITR 674 (Kar.), their Lordships of the Hon'ble Karnataka High Court has held that an assessing officer cannot base the computation solely on the basis of the statutory auditor's report to the directors of the assessee company. In such case too, the assessing officer after discarding the assessee's changed method of accounting, had mechanically added a sum of Rs.lO,56,746/- as per the auditor's report to the income returned, without adopting any method or disclosing any valid basis for such additions. The Hon'ble High Court at para (7) has observed, as under: "What emerges from the above principles laid down by the Supreme Court is that when the assessing authority does not accept the assessee's method of accounting for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not be eligible for claim of expenditure pertaining to earlier years. It is submitted that such finding is not tenable in the eyes of the law for the reason that once a bonafide change in the method of accounting is made, an assessee becomes eligible for claim of deduction in respect of the expenditure which were not claimed in earlier years. It is submitted that the appellant Authority is subjected to highest rates of tax since A.Y. 2003-04 and therefore, non-making of claim for expenditure, on accrual basis, would not result into any loss to the revenue. It has been judicially held that in the year of change of method of accounting from cash to mercantile, an assessee can claim expenditure related to earlier years. For such preposition, reliance is placed on following judicial pronouncements: i) CITvs. West Coast Paper Mills Ltd. (1992) 193 ITR 349 (Bom) ii) CIT vs. Standard Radiators (P) Ltd. (2006) 286ITR 207 (Guj.) RULING OF JURISDICTIONAL HIGH COURT - ONCE THE CHANGE IN METHOD IS FOUND BONA FIDE, REVERSAL OF INCOME FOR EARLIER YEARS IS ALLOWABLE XI. The Hon'ble High Court of Madhya Pradesh in the case of CIT vs Madhya Pradesh Financial Corporation (2008) 299 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer was justified in rejecting books of account and thereby making addition on account of closing stock and work in progress. He further submitted that on the basis of auditor s report/comments, the Assessing Officer was also justified in making addition on account of change in method of accounting and also on account of depreciation on assets. The ld. CIT DR reiterated and invited our attention to the various observations made by the Assessing Officer and CIT(A) in its appellate order and contended that addition so made by the Assessing Officer deserves to be upheld. 13. We have considered the rival submissions and have gone through the orders of the authorities below and found from record that the assessee is a Development Authority, which is engaged in implementing the development plan preparing Town Development Schemes and acquisition and development of land. During the course of scrutiny assessment, the Assessing Officer observed that the assessee has produced relevant books of account comprising of cash book, ledger, journal and vouchers for expenses, which were test checked. The Assessing Officer found that as per audit report point No. 28(a), the auditors have co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h resulted in reduction in net profit by Rs. 16 crores. In this regard, we found that the tax auditor has given his audit report and form 3-CD remarked at point no.11-C to the effect that during the year the assessee has changed its method of accounting from hybrid system to the mercantile system and because of this change in method of accounting, there is reduction in net profit by Rs. 16 crores. We found that this change in method of accounting was bona fide which was consistently followed by the assessee in subsequent year. Even as per the statutory requirement, the assessee was supposed to follow mercantile system of accounting. We found that change in method of accounting was made for complying with the statutory requirement of Section 145(1). Even this Bench of I.T.A.T. in earlier assessment years of the assessee has disapproved hybrid system of accounting followed by the assessee. On over all perusal of the body of assessment order, we found that the Assessing Officer has not objected to the change in method of accounting adopted by the assessee during the previous year under consideration. Even the bonafideness in change of method is not disputed, no addition can be made ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 and 286 ITR 207. Even the Jurisdictional High Court in the case of MPFC, 299 ITR 297, held that the assessee changing the method of accounting from mercantile to cash was eligible to reverse the income of earlier years in the year of change. We also found that even after change in the method of accounting from hybrid to mercantile during the year under consideration, the assessee had shown positive gross profit of Rs. 57,32,910/- in comparison to negative gross profit i.e. gross loss of Rs. 1,41,30,803/- and Rs. 9,06,09,817/- respectively in the assessment year 2005-06 and 2004-05. We also found that the assessee had shown an increased amount of net profit in absolute and percentage terms during the year under consideration. There is nothing on record to suggest that assessee had changed method of accounting to show lower profit during the year as compared to earlier year. It is also not the case of Department that assessee had shown expenses of earlier year in this year nor there is any allegation of Department that income of current year has not been accounted for in the year under consideration due to change in the method of accounting. On the contrary, we found that by adopti ..... 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