INDER SINGH & SONS,GWALIOR V. ITO , GWALIOR

ITA 29/AGR/2023

AI Insights

The case involves Inder Singh & Sons, who appealed against the order of the CIT(Appeals), which upheld the addition of accrued interest income to their total income for the assessment year 2018-19. The assessee had changed their method of accounting from mercantile to cash basis due to uncertainties in the receipt of interest income, which they argued was not received and had become doubtful, thus should not be taxed. The Assessing Officer and CIT(A) did not accept this change, leading to the addition of Rs. 21,73,050 to the assessee's income. The Tribunal found that the contentions of the assessee regarding the uncertainty of interest income and the consistency of the accounting method used needed further verification and consideration.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 474811 (ITAT-AGRA)
• Duration Of Justice: 1 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 08-10-2024
• Assessment Year: 2018-2019
• Appeal Filed On: 15-02-2023
• Other Referred Cases: DCIT vs. M/s. Harshvardhan Land Ltd.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Department Lawyers: SHAILENDRA SRIVASTAVA
• Keywords: Bad and doubtful debts
• Section: 143(3); 145

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA BEFORE: SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER AND SHRI P.C. YADAV, JUDICIAL MEMBER ITA No. 29/Agr/2023 Assessment Year: 2018-19 Inder Singh & Sons, C/o J.P. Singh, N-10, Site No. 1, City Centre, Gwalior (M.P.). PAN:AAAFI4367E v. Income-tax Officer, Ward-3, Gwalior. (Appellant) (Respondent) Assessee by : None (Adj. Application filed) Revenue by : Sh.Shailendra Srivastava, Sr.DR Date of hearing : 08/10/2024 Date of Pronouncement: 07/11/2024 ORDER PER RAMIT KOCHAR, AM: This appeal has been filed by the assessee challenging the order dated 20.12.2022 of learned CIT(Appeals), National Faceless Appeal Centre (NFAC), Delhi (DIN & Order No. ITBA/NFAC/S/250/2022-23/1048107305(1) for assessment year 2018-19, which in turn, has arisen from the assessment order dated 30.04.2021 passed by the Assessing Officer u/s. 143(3) read with ITA No. 29/Agr/2023 2 section 144B of the Income-tax Act, 1961. Grounds raised in appeal read as under : “Ground No 1- Addition of Accrued interest of Rs. 47,29,050 after allowing accrued interest expenses of Rs. 25,56,000 thus making addition of Rs. 21,73,050 to the total income. The assessee has changed method of accounting from mercantile system to cash system because during the year interest accrued on various advances was not received as they have became due and are getting delay and converted into doubtful debts. There was also large delay in payment of interest by parties. Interest Income amounting to Rs. 47,29,050 was although accrued but was not received and paying of tax on such huge amount would cause hardship to the firm. Hence assessee shifted to cash basis of accounting. Also due to same circumstances we were unable to pay Interest expenses accrued to the firm of Rs. 25,56,000. The change in method of accounting is more accurate and scientific in this case. Assessee has continuously followed cash system of accounting from assessment year 2018- 19 to till date, while filling the income tax return assessee mistakenly selected the mercantile system instead of cash system in the next assessment year A.Y 2019-20 and A.Y 2020-21. Books of accounts is maintained on the basis of cash system of accounting and books of accounts is also produce before Assessing officer to verify system of accounting. Therefore the addition made by CIT (A) is incorrect and bad in law. Ground of appeal No.2(Other points) The applicant carves leave to add or amend or modify the grounds of appeal.” 2. Brief facts of the case are that the assessee filed return of income on 28.10.2018 declaring Nil income. Case was selected for ITA No. 29/Agr/2023 3 complete scrutiny on the issue of method of accounting. Assessee firm is engaged in the business of lending money to the people against interest and construction activities. Assessing Officer has observed that the assessee has changed the method of accounting for interest income from mercantile system to cash system during the year under consideration and the profits have reduced significantly. Assessing Officer further observed that in the subsequent assessment year, assessee has followed mercantile system of accounting as per return of income for earning interest income. The assessee submitted that there was an uncertainty of receipt of interest and hence, the interest income is accounted for on cash basis. The assessee produced certificate from Rakesh Rajpal/Savi Rajpal. Assessee also submitted that the assessee is also accounting for interest expenses on cash basis. It was also submitted that in subsequent assessment years, while filing return of income, wrong column was filled in wherein the accounting for interest income was on mercantile system, but actually it was on cash basis. It was further submitted that there was a bona fide change of accounting policy. Assessee cannot be faulted for the same as certainty of accrual of ITA No. 29/Agr/2023 4 interest income had become doubtful/uncertain and, hence, the change in method of accounting which was consistently followed in the subsequent assessment years also. Assessing Officer did not accept the contention of the assessee and brought to tax interest income of Rs.47,29,050/- as the interest accrued on loans advanced to Rakesh Rajpal/Savi Rajpal, was not accounted for by the assessee in the year under consideration on account of change in method of accounting from mercantile system to cash system. Assessee filed first appeal, which was also dismissed by ld. CIT(Appeals). 3. Assessee being aggrieved, has filed this appeal before the Tribunal and none appeared on behalf of the assessee when the appeal was called for hearing. However, assessee had filed written submissions and paper book. The assessee has averred in the paper book that Shri Rakesh Rajpal/Savi Rajpal was passing through critical financial crisis and incurring losses and was not in position to pay interest to the assessee. Hence, recoverability of interest had become uncertain. The assessee has also relied upon Accounting Standard-9 issued by ICAI in respect of revenue recognition and since there existed uncertainties in collectability of interest income, ITA No. 29/Agr/2023 5 the same was not accounted for. Assessee also relied upon the decision of ITAT Jaipur in case of DCIT vs. M/s. Harshvardhan Land Ltd. (ITA Nos. 582, 583, 584/JP/2016 & 332/JP/2017) dated 22.11.2017 and other decisions are also cited by the assessee. 4. The main contention of the assessee is that this is a notional income and there was no certainty of receipt of income in the year under consideration as well as in subsequent assessment years. The same method of accounting was bonafidely followed in the subsequent assessment years also, but with the bona fide error that wrong column in ITR was clicked in as mercantile method. The assessee also produced certificate from Rakesh Rajpal/Savi Rajpal. 5. Learned Sr. DR, on the other hand, has relied upon the order of authorities below and submitted that the assessee has not changed the method of accounting bonafidely and the assessee was not pursuing the changed method consistently. 6. We have considered the submissions of ld. DR and perused the written submission and paper book filed by the assessee. We observe that the assessee was following mercantile system of ITA No. 29/Agr/2023 6 accounting while during the current year the assessee has changed method of accounting with respect to interest income to cash basis and the assessee has submitted that Rakesh Rajpal/Savi Rajpal was facing financial crisis and there was no certainty of receipt of interest income. The assessee has claimed that it is following this method of accounting consistently, although there was an error in filing the return of income by clicking wrong column. Assessee has claimed that the assessee in subsequent years has been consistently following cash system of accounting. We observe that section 145 permits the assessee to follow the cash or mercantile system of accounting. It is observed that ICDS interest income is to be charged to tax on time basis, i.e., in the year of accrual. The assessee has pleaded that there is no certainty of interest income from Shri Rakesh Rajpal/Savi Rajpal. The assessee has also filed certificate from Rakesh Rajpal to that effect. Assessee has also pleaded that the assessee has adopted accounting of interest expenditure during the year under consideration on cash basis. These contentions of the assessee have not been verified by any of the authorities below. They have simply ignored the contentions of the assessee. In our ITA No. 29/Agr/2023 7 view, contention of the assessee de hors section 145 and ICDs read with Accounting Standard-9 of revenue recognition needs consideration on merits to ascertain whether the contention of the assessee that Rakesh Rajpal/Savi Rajpal is facing financial difficulties and certainty of receipt of interest is doubtful. The fact whether the method of accounting being is being consistently followed by the assessee also needs verification although the assessee has submitted that there was a mistake while filing the return of income. It requires verification from the records. In view of this, we are of the opinion that the matter is restored back to the file of Assessing Officer for passing fresh assessment order in accordance with law after making proper verification in the light of above directions. 7. In the result, appeal is allowed for statistical purposes. Order pronounced in accordance with Rule 34(4) of the Income Tax Appellate Tribunal Rules,1963 at Agra/Bangalore on 07/11/2024. Sd/- Sd/- (P.C. YADAV) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 07/11/2024 *aks/- "