TMI Blog2010 (9) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... ound as and when it is considered necessary to do so. 3. The facts of the case, in brief, are that the assessee filed its return of income on 30.10.2005 declaring nil income. Later on, the case was picked up for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee carried on the business of cold storage i.e. preserving potato and realizing rent against potato preservation. The AO also noticed that the assessee had shown rent receipt from upliftment of 1,51,708 bags of potatoes. The said upliftment was over in the month of December, 2004. Thereafter loading of potatoes started in the month of January, 2005, which continued upto March,2005. According to the AO, the loading of 1,83,416 bags was done during this year but the expenses debited in the Profit and Loss Account included the expenses of April, 2004 to December,2004, which were related to upliftment of 1,51,708 bags, corresponding income for the same had been duly credited in the Profit and loss Account. However, the expenses debited in the Profit and Loss Account also included expenses of January, 2005 to March, 2005, which were related to loading and upkeeping of 183416 bags, correspo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO did not accept the contention of the assessee and made the addition of ₹ 26,76,039 by observing as under : (a) The assessee company's submission that it is following mercantile system of accounting is factually incorrect because the expenses relating to the potatoes stored during January to March 2005 have been booked/debited during the current year, whereas, the matching income has not been accounted for on mercantile basis. During the year, the assessee company has shown rent receipt from upliftment of 151708 bags. The upliftment of potatoes was over in the month of December 2004. Thereafter loading of potatoes starts in the month of Jan.2005 which continues upto March 2005. This year loading of 163416 bags was done. Now the expenses debited in the P L a/c includes expenses of April 2004 to December 2004, which were related to upliftment of 151708 bags, corresponding income for which has been duly credited in the P L A/c. However the expenses debited in the P L a/c also includes expenses of Jan.2005 to March 2005, which were related to loading and upkeeping of 183416 bags corresponding income of which has not been duly credited in the P L a/c. The expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. In the assessee company's line of business first act starts with the loading of potatoes staring from January to March, The period of storage of potato extends to roughly six months. Therefore, this period can be taken as Second and Third act. During this 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 potato starting from the month of September to November. (c) The assessee company's submission that the revenue is recognized at the time of upliftment/exit of potato in good marketable condition otherwise assessee company will have to pay claim against perished potato. In this regard the assessee company was specifically asked to submit the details of damage/spoilage of potato during last two years. The assessee company vide its reply dated 10.10.2007 submitted that there had not been any damages/spoilage of potato during last two years. Therefore, assessee company's submission that significant uncertainty exist is also not correct. From the perusal of accounting standards, as discussed above, it is clear that the assessee company should have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ₹ 28,88,794 incurred from January 2005 to March 2005 in respect to 183416 loaded in this period has been debited in P L A/c as discussed in Para 3(a) above, whereas matching income on mercantile basis has not been credited in P L a/c. Thus, in view of the facts as discussed above, the books of accounts maintained by the assessee company does not give true and correct picture of the income, as such, they are being rejected u/s 145A of the Income Tax Act 1961. The rental income of 183416 bags for 3 months i.e. January 2005 to March 2005 is being worked out as under: Rental income of 151708 bags as shown by the assessee company = ₹ 88534788 Rental income per bags works out = ₹ 58.36 Rental income of 183416 bags for cycle = ₹ 58.36x183416/4 = ₹ 26,76,039. Since the assessee company was required to have shown rental income of 183416 bags [on proportionate basis] as per the matching concept of revenue recognition. Therefore, rental income [one fourth] of 183416 bags amounting to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A), after considering the submissions of the assessee, deleted the addition by observing as under : (i) The appellant has been following Mercantile method of accounting and there is no change in the accounting method applied by the appellant from year to year. ii) The A.O. has observed that we are not changing the system of accounting followed by the assessee company but the principles of mercantile system as prescribed by accounting standards are being applied correctly i.e. matching 'expenses and income' should be shown simultaneously. But at the same time it is also true that the matching principle cannot be applied in isolation without further making adjustment in the earlier and subsequent years in respect of the effect of such matching principle. In that case, the whole books of accounts of the earlier and subsequent years are liable to be adjusted. In any case there is no addition in the income of appellant. rather it is only adjustment for setting off income of the current year as computed by the A.O., in the earlier and subsequent years. iii) It is also on record that action u/s 147/148 was initiated for A.Y. 2000-01 on the similar groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge (P) Limited Vs ITO 6(1), Kanpur in ITA No. 680/luc/09 is distinguishable on undernoted points and therefore not applicable to the instant case of respondent: (a) In the respondent's case, the method of accounting has been accepted by the department in the earlier years, first in the AY 2000-2001 the case of the assessee was reopened u/s 148 of the Income Tax Act, 1961 on the aspect of method of accounting only, however the proceedings were dropped considering the method of accounting adopted by assessee as correct. Similarly in AY 2001-02 in the assessment u/s 143(3)of the Income Tax Act, 1961 the method of accounting was considered correct by the Department hence as a principle of consistency the method of accounting cannot be changed by the department since the facts remains the same. (b) In the case of MB Cold Storage (P) Limited (Supra), since the relevant material and contractual terms of the transactions were not placed before the Hon'ble ITAT bench, Lucknow, it has not been decided at what point of time an enforceable debt has come into existence in favour of the assessee and consequently when he had acquired the right to receive the income. This aspec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are similar. We, therefore, are of the confirmed view that this issue is squarely covered vide order dated 19.5.2010 passed in I.T.A.No.680(Luc.)/2009 in the case of M/s. M.B. Cold Storage Pvt. Ltd., Kanpur (Supra). The relevant findings given in the said order read as under : 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 I.T. Act, 1961 which means the financial year immediately preceding the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or dates, though the principal in fact has made no payment. If interest is payable by a merchant to his creditors on a certain date, the merchant would debit himself on that date in his accounts, though, in fact, 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. vs. 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, immediat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... December, 2006. Therefore, we are of the view that the assessee should have shown the proportionate rental income for the period January to March 2006 also in the assessment year under consideration. At the same time the income of the preceding year i.e. from January, 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 vie that the Assessing Officer was fully justified in working out the income of ₹ 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 ₹ 36,74,610/- for the potatoes uplifted in the financial year 2005-2006 which also included the period of 1st January, 2005 to 31st March, 2005, therefore, the assessee is ..... 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