M/s. L.C. Kailash & Associates, New Delhi V. ITO, New Delhi

ITA 2399/DEL/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 7111 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 21-07-2010
• Assessment Year: 2007-2008
• Appeal Filed On: 20-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARUN KUMAR GURJAR
• Keywords: TDS
• Section: 143(3); 40(a)(ia); 194C; 143(1); 143(2); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D NEW DELHI) BEFORE G.E. VEERABHADRAPPA, HON'BLE VICE-PRESIDENT AND SHRI RAJPAL YADAV: HONBLE JUDICIAL MEMBER I.T.A. NO. 2399/DEL/2010 ASSESSMENT YEAR: 2007-08 L.C. KAILASH & ASSOCIATES, VS. INCOME-TAX OFFICE R, NBR HOUSE, C-124, WARD 37(1), PREET VIHAR, NEW DELHI. PAN: AAAFL 1601J (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SANJEEV JAIN, CA RESPONDENT BY: SHRI ARUN KUMAR GURJAR, SR.DR ORDER PER RAJPAL YADAV: JUDICIAL MEMBER THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE OR DER OF LEARNED CIT(APPEALS) DATED 15.3.2010 PASSED FOR ASSESSMENT YEAR 2007-08. IN GROUND NO.1, IT IS PLEADED BY THE ASSESSEE THAT LEA RNED CIT(APPEALS) HAS ERRED IN UPHOLDING THE ADDITION OF RS.3,40,501 OUT OF THE TOTAL ADDITION OF RS.5,74,087 MADE BY THE ASSESSING OFFICER. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A PARTNERSHIP FIRM CARRYING OUT PROFESSION OF CHARTERED ACCOUNTANCY AN D ENGAGED IN PROFESSION OF AUDITING. IT HAS FILED ITS RETURN OF INCOME ON 1 5.11.2007 DECLARING AN INCOME OF RS.89,558. THE RETURN WAS PROCESSED UNDER SEC. 143(1) OF THE ACT. 2 THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT AND A NOTICE UNDER SEC. 143(2) OF THE INCOME-TAX ACT, 1961 WAS ISSUED AND SERVED U PON THE ASSESSEE. IN RESPONSE TO THE NOTICE OF HEARING, SHRI SP JAIN, FC A AND SHRI LEARNED CIT(APPEALS) GUPTA, SENIOR PARTNERS OF THE ASSESSEE FIRM ATTENDED THE PROCEEDINGS FROM TIME TO TIME AND SUBMITTED THE NEC ESSARY DETAILS. 3. ON SCRUTINY OF ACCOUNTS SUBMITTED BY THE ASSESSE E, IT REVEALED TO THE ASSESSING OFFICER THAT IN THE TAX AUDIT REPORT FURN ISHED BY THE ASSESSEE FIRM, THE AUDITOR HAS REPORTED THAT ASSESSEE IS FOLLOWING HYBRID SYSTEM OF ACCOUNTING I.E. EXPENDITURE ON ACCRUAL BASIS AND PR OFESSIONAL FEE ON RECEIPT BASIS. ASSESSING OFFICER ISSUED A SHOW-CAUSE NOTICE TO THE ASSESSEE INVITING ITS EXPLANATION AS TO WHY ITS BOOKS OF ACCOUNT SHOU LD NOT BE REJECTED AS THEY ARE NOT FOLLOWING EITHER MERCANTILE SYSTEM OR CASH SYSTEM OF ACCOUNTING AS REQUIRED UNDER SEC. 145(1) OF THE ACT. THE ASSESSEE HAS SUBMITTED A REPLY WHICH HAS BEEN REPRODUCED BY THE ASSESSING OFFICER. ON AN ANALYSIS OF SECTION 145 IN THE LIGHT OF ASSESSEES REPLY, HE OB SERVED THAT METHOD OF ACCOUNTING FOR DETERMINING THE INCOME OF THE ASSESS EE IS TO BE TAKEN AS CASH BASIS. HE PASSED THE ASSESSMENT UNDER SEC. 143(3) A ND DETERMINED THE TAXABLE INCOME OF RS.10,42,985 ON SUCH METHOD OF AC COUNTING AGAINST THE INCOME OF RS.89,558 DISCLOSED BY THE ASSESSEE. 3 4. FIRST ITEM OF ADDITION IS RS.5,74,087. IT CONTAI NS TWO COMPONENTS. RS.4,13,586 RELATES TO M/S. DAS GUPTA MANAGEMENT SE RVICES (P) LTD. THE REMAINING AMOUNT RELATES TO ADVANCE AGAINST TRAVELL ING EXPENSES RECEIVED BY THE ASSESSEE FROM VARIOUS CONCERNS. ACCORDING TO TH E ASSESSING OFFICER, THE ASSESSEE HAS NOT EXTENDED THE SERVICES FOR WHICH IT HAS ALLEGED TO HAVE BEEN RECEIVED TRAVELLING ADVANCES. HE TREATED SUCH ADVAN CES AS REVENUE RECEIPTS AND INCLUDED THEM IN THE TOTAL TAXABLE INCOME OF TH E ASSESSEE. WITH REGARD TO THE AMOUNTS RELATABLE TO M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD., THE ASSESSING OFFICER HAS OBSERVED THAT ASSESSEE HAS FA ILED TO PROVE THIS PAYMENT TO M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD. HENCE UNDER CASH SYSTEM OF ACCOUNTANCY IT CANNOT BE ALLOWED AS A DEDUCTION, HE MADE AN ADDITION OF RS.4,13,586. 5. DISSATISFIED WITH THE ACTION OF THE ASSESSING OF FICER, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT(APPEALS ). 6. IT WAS CONTENDED BY THE ASSESSEE THAT IN THE TAX AUDIT REPORT, THE AUDITOR HAS STATED THAT PROFESSIONAL FEE RECEIVED I S ACCOUNTED FOR ON REALIZATION BASIS AND THE EXPENSES ARE ACCOUNTED FO R ON MERCANTILE BASIS. FROM THIS NARRATION, ASSESSING OFFICER DREW AN INFE RENCE THAT ASSESSEE FIRM 4 WAS APPLYING HYBRID METHOD OF ACCOUNTANCY AND WAS T HUS NOT FOLLOWING EITHER CASH METHOD OF ACCOUNTING OR ACCRUAL METHOD OF ACCOUNTING. ACCORDING TO THE ASSESSING OFFICER, AS PER SECTION 145 OF THE ACT, THE ASSESSEE COULD HAVE ONLY APPLIED EITHER CASH METHOD OF ACCOUNTING OR MERCANTILE METHOD OF ACCOUNTING AND COULD NOT HAVE APPLIED A MIXED METHOD OF ACCOUNTING OR HYBRID METHOD OF ACCOUNTING . HE PROCEEDS TO DETERMINE THE TAXABLE INCOME OF THE ASSESSEE BY ADO PTING CASH METHOD OF ACCOUNTING. ACCORDING TO THE ASSESSEE, ASSESSING OF FICER HAS MISREAD AND MISCONSTRUED THE ACCOUNTING POLICY AS WELL AS BOOKS OF ACCOUNT. HE HAS ERRED IN DRAWING ADVERSE INFERENCE AGAINST THE ASSE SSEE REGARDING THE METHOD OF ACCOUNTANCY FOLLOWED BY IT. IT WAS EXPLAINED TO THE LEARNED CIT(APPEALS) THAT, IN FACT, IT IS FOLLOWING ONLY MERCANTILE METH OD OF ACCOUNTING. THE RETURNS HAVE BEEN FILED ON THE BASIS OF SAME METHOD IN THE PAST AND THAT HAS NEVER BEEN DISTURBED. IN ASSESSMENT YEAR 2006-07, I .E. PRECEDING ASSESSMENT YEAR, AN ASSESSMENT WAS FRAMED UNDER SEC. 143(3) AN D THE ASSESSING OFFICER DID NOT DISTURB THE METHOD OF ACCOUNTING FOLLOWED B Y THE ASSESSEE. ALL THE PROFESSIONAL BILLS RAISED DURING THE PARTICULAR YEA R ARE REALIZED BY THE ASSESSEE WITHIN THAT YEAR ITSELF AND HAVE ACCOUNTED FOR AS INCOME BY THE ASSESSEE. DURING THE PRESENT YEAR ALSO, THE ASSESSE E FIRM HAD REALIZED ALL THE 5 PROFESSIONAL BILLS RAISED BY IT IN THE YEAR ITSELF AND THE AMOUNTS HAVE BEEN DULY ACCOUNTED FOR IN THE PROFESSIONAL RECEIPTS DEC LARED IN THE P & L ACCOUNT. IT WAS FURTHER CONTENDED THAT ASSESSEE FIR M IS ENGAGED MAINLY IN AUDITING SERVICES AND ALL THE BILLS FOR AUDIT AND C ERTIFICATION WORK HAVE BEEN RAISED BY IT DURING THE INSTANT YEAR ITSELF AND HAV E ALSO BEEN REALIZED BY IT DURING THE INSTANT YEAR ITSELF. THERE IS NEITHER AN Y OUTSTANDING FEE NOR THERE IS ANY SUCH SERVICE RENDERED DURING THE YEAR FOR WHICH BILL HAS BEEN RAISED BUT HAS NOT BEEN REALIZED TILL THE CLOSE OF THE YEAR. T O BUTTRESS THIS CONTENTION, ASSESSEE HAS FILED COPIES OF ALL THE BILLS AND OTHE R RELEVANT MATERIAL. 7. IN ORDER TO EXPLAIN THE MERIT, IT WAS CONTENDED THAT OUT OF THE TOTAL AMOUNT WORKED OUT BY THE ASSESSING OFFICER AT RS.5, 74,087, RS.1,59,871 REPRESENT THE TRAVELLING ADVANCE RECEIVED BY THE AS SESSEE. THE DETAILS OF SUCH ADVANCE HAS BEEN EXPLAINED BY THE ASSESSEE IN ITS W RITTEN SUBMISSIONS FILED BEFORE THE LEARNED CIT(APPEALS). IT IS POINTED OUT IN THE SUBMISSIONS THAT A SUM OF RS.34,793, RS.33,672, RS.79,690 AND RS.12,34 6 WAS RECEIVED BY IT FROM JAI PRAKASH ENTERPRISES LTD. (JEL), JAI PRAKAS H HOTELS LTD. (JHL), JAI PRAKASH VENTURES LTD. (JPVL) AND JAI PRAKASH UNIVER SITY OF INSTITUTE (JUIT). THE TRAVELLING ADVANCES WERE INCURRED BY TH E ASSESSEE IN THE SUCCEEDING YEAR WHEN AUDIT OF THESE CONCERNS WAS TA KEN UP AND, THEREFORE, 6 THE SAME COULD NOT BE SAID TO BE INCOME OF THE ASSE SSEE EITHER ON CASH BASIS OR ON MERCANTILE BASIS. ACCORDING TO THE ASSESSEE, THIS INCOME HAS NOT ARISEN TO IT. IN SUPPORT OF ITS CONTENTION, ASSESSEE HAS R ELIED UPON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SHOORJ I BALLABH DASS & CO. REPORTED IN 46 ITR 144 AND ORDER OF THE ITAT, DELHI BENCH IN THE CASE OF KK KHULLAR VS. DCIT REPORTED IN 116 ITD 301. WITH R EGARD TO THE BALANCE AMOUNT OF RS.4,13,586, ASSESSEE MADE AN ELABORATE E XPLANATION. ITS SUBMISSION HAS BEEN REPRODUCED BY THE LEARNED CIT(A PPEALS) WHICH READ AS UNDER: IT IS RESPECTFULLY SUBMITTED THAT THE LEARNED ASSE SSING OFFICER HAS ERRED BOTH IN LAW AS WELL AS IN FACTS OF THE CASE I N DRAWING ADVERSE INFLUENCE AGAINST THE ASSESSEE ON THIS GROUND. THE COPY OF LETTER DATED 11.12.09 AS SUBMITTED BEFORE THE ASSESSING OFFICER ALONG WITH COPY OF ACCOUNTS OF M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD. IN ITS BOOKS OF ACCOUNT IS ENCLOSED. IT IS SUBMITTED THAT THE ASSESSEE HAS DULY FURNISHED COPY OF ACCOUNT OF M/S. DASS GUPTA MANAGE MENT SERVICES (P) LTD. IN ITS BOOKS OF ACCOUNT FOR FINANCIAL YEAR 2006-07 AND THIS ALLEGATION THAT IT HAS NOT BEEN FURNISHED IS NOT BO RNE OUT OF MATERIAL ON RECORD. IT IS FURTHER SUBMITTED THAT THE PERUSAL OF THE AUDITED ACCOUNTS WOULD SHOW THAT ANOTHER AMOUNT OF RS.50,000 WAS PAI D BY THE ASSESSEE DURING THE YEAR TO THE ABOVE COMPANY AND W AS WRONGLY DEBITED TO ANOTHER ACCOUNT AND SHOWN UNDER LOANS AN D ADVANCES. THE COPY OF THIS ACCOUNT AS PER BOOKS IS ALSO ENCLOSED. THE ABOVE COPIES 7 OF ACCOUNT M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD. WOULD SHOW THAT THE TRANSACTION THEREIN CAN BE SUBMITTED AS UNDER: OPENING BALANCE AS PER ACCOUNTS OF 2,55,586.80 M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD. ADD: CREDITS ON ACCOUNT OF PRINTING AND STATIONERY CHARGES JOB WORK 48,000 STATIONERY 1,32,000 1,80,000 ADD: AMOUNT RECEIVED FROM M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD. 25,000.00 4,60,586.80 LESS: AMOUNT PAID I) AS PER COPY OF ACCOUNT ENCLOSED (1) 47,000 II) AS PER SEPARATE ACCOUNT DEBITED IN LOAN & ADVANCES (II) 50,000 97,000.00 3,63,586.80 BALANCE AS PER ACCOUNT (1) = RS.4,13,586.80 C R. BALANCE AS PER ACCOUNT (II) = RS.5 0,000.00 DR. RS.3,63,586.80 THE LEARNED ASSESSING OFFICER HAS ADDED THE WHOLE A MOUNT OF RS.4,13,586 AS INCOME OF THE ASSESSEE ON THE GROUND THAT THIS BALANCE 8 IS IN THE NATURE OF REVENUE ACCOUNT AND SINCE THE A SSESSEE IS FOLLOWING CASH METHOD OF ACCOUNTING THEREFORE THE AMOUNT CANN OT BE ALLOWED TO THE ASSESSEE DURING THE INSTANT YEAR AS IT HAS NOT PAID THE AMOUNT AND THE AMOUNT IS SHOWN AS PAYABLE. IT IS RESPECTFULLY SUBMITTED THAT THE PERUSAL OF THE COPY OF ACCOUNT AS WELL AS THE AFORE SAID SUMMARY OF ACCOUNT WOULD SHOW THAT THE AMOUNT OF RS.2,55,586.8 0 WAS THE BALANCE BROUGHT FORWARD FROM EARLIER YEARS AND CANN OT BE SAID TO BE REVENUE IN NATURE AS THE ASSESSEE HAS NOT CLAIMED A NY EXPENSES AGAINST THIS AMOUNT DURING THE INSTANT YEAR AND THEREFORE N O ADDITION COULD BE MADE TO THE EXTENT OF RS.2,55,586.80. IT WOULD FURT HER BE SEEN THAT THE AMOUNT OF RS.25,000 HAS BEEN RECEIVED FROM THAT COM PANY BY AN ACCOUNT PAYEE CHEQUE AND AGAINST THIS AMOUNT ALSO T HE ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE AND THEREFORE THIS AMOU NT ALSO CANNOT BE ADDED AS INCOME OF THE ASSESSEE AS THE AMOUNT IS IN THE NATURE OF LOAN ONLY. IT IS FURTHER SUBMITTED THAT OUT OF THE BALAN CE AMOUNT OF RS.1.80 LACS WHICH HAS BEEN CREDITED TO THE ACCOUNT OF M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD., THE ASSESSEE HAS ACTU ALLY PAID AN AMOUNT OF RS.97,000 (47,000 50000) DURING THE INS TANT YEAR ITSELF AND TO THIS EXTENT ALSO NO ADDITION COULD BE MADE B Y THE ASSESSING OFFICER EVEN UNDER THE CASH METHOD OF ACCOUNTING. T HE ONLY ADDITION THAT THE LEARNED ASSESSING OFFICER COULD HAVE MADE ON THE GROUND THAT CASH METHOD IS APPLIED IS TO THE TUNE OF RS.83,000 (RS.1,80,000 (-) RS.97,000 ). IT IS RESPECTFULLY SUBMITTED THAT EVEN THIS DISALLOWANCE CANNOT BE JUSTIFIABLY MADE. AS EXPLAINED ABOVE THE ACTUAL METHOD OF ACCOUNTING APPLIED BY THE ASSESSEE DURING THE INSTA NT YEAR AS WELL AS IN THE PRECEDING YEARS IS ACCRUAL METHOD OF ACCOUNTING ONLY. ALL THE 9 INCOME AS WELL AS EXPENSES ARE STRICTLY ACCOUNTED F OR ON THE BASIS OF ACCRUAL METHOD OF ACCOUNTING AND THEREFORE, ONCE NO DISCREPANCY IS FOUND IN THE FACT OF EXPENSES HAVING BEEN INCURRED THEN THERE IS NO JUSTIFICATION FOR MAKING THIS DISALLOWANCE BY ARBIT RARILY APPLYING CASH METHOD OF ACCOUNTING. THE LEARNED ASSESSING OFFICER HAS ERRED IN ARBITRARILY ASSUMING THAT CASH METHOD OF ACCOUNTING HAS TO BE APPLIED IN THE CASE OF THE ASSESSEE WITHOUT APPRECIATING TH E ACTUAL FACTS AND CIRCUMSTANCES OF THE CASE. IT IS RESPECTFULLY SUBMI TTED THAT THE LEARNED ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THE FAC T THAT THE ACTUAL METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE IS ME RCANTILE METHOD OF ACCOUNTING AND ACCORDINGLY THIS EXPENDITURE DESE RVES TO BE FULLY ALLOWED. IN VIEW OF ABOVE SUBMISSIONS IT IS PRAYED THAT THE ADDITION OF RS.5,74,087 DESERVES TO BE DELETED. 8. LEARNED CIT(APPEALS) HAS CONSIDERED ALL THESE AS PECTS, HOWEVER, DID NOT AGREE WITH THE ASSESSEE. HE CONFIRMED THE STAND OF ASSESSING OFFICER IN PRINCIPLE. HE HAS EXCLUDED SOME OF RS.2,55,586 FROM THE AMOUNT OF RS.4,13,586 ON THE GROUND THAT IT IS THE OPENING BA LANCE IN THE ACCOUNT OF M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD. THIS A MOUNT DOES NOT REPRESENT ANY EXPENDITURE CLAIMED BY THE ASSESSEE D URING THE YEAR WHICH HAS NOT BEEN PAID BY THE ASSESSEE HENCE ACCORDING TO TH E LEARNED CIT(APPEALS) IT CANNOT BE ADDED DURING THE YEAR CONSIDERATION. 10 9. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE REIT ERATED THE STAND TAKEN BEFORE THE LEARNED CIT(APPEALS) WHEREAS LEARNED DR RELIED UPON THE ORDERS OF THE REVENUE AUTHORITIES BELOW. 10. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. IN THE SCHEME OF INCOME-TAX ACT, 1961,SECTION 4 HAS BEEN INCORPORATED IN THE ACT AS CHARGING SECTION. IT PRO VIDES THAT TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT RATES PROVIDED I N ANY CENTRAL ACT IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON. SECTION 5 DEALS WITH THE SCOPE OF TOTAL INCOME, WHICH IS DE FINED IN RESPECT OF ANY PREVIOUS YEAR IN TERMS OF ACCRUAL, DEEMED ACCRUAL, RECEIPT AND DEMAND RECEIPT ETC. SECTION 145 OF THE INCOME-TAX ACT, 196 1 PROVIDES THE METHOD OF ACCOUNTANCY IN RESPECT OF PROFIT AND GAINS OF BUSIN ESS OR PROFESSION OR INCOME FROM OTHER SOURCES. A CONJOINT READING OF AL L THESE THREE PROVISIONS WOULD REVEAL THAT SECTIONS 4 AND 5 DEALS WITH THE S COPE OF INCOME AND ITS CHARGES TO INCOME-TAX. WHEREAS SECTION 145 IS A PRO CEDURAL SECTION REGARDING THE METHOD TO BE FOLLOWED FOR RECORDING O F INCOME IN THE BOOKS OF ACCOUNT. UNDISPUTEDLY, FROM ASSESSMENT YEAR 1997-98 AND ONWARDS THE ASSESSEE IS BOUND TO FOLLOW EITHER CASH OR MERCANTI LE SYSTEM OF ACCOUNTANCY. THE MIXED SYSTEM OF ACCOUNTING OR HYBRID SYSTEM OF ACCOUNTING HIS 11 PROHIBITED. WE HAVE GONE THROUGH THE NOTE ON ACCOUN TING POLICY SUBMITTED BY THE ASSESSEE WITH ITS AUDITED ACCOUNTS WHOSE COP Y IS AVAILABLE AT PAGE 70. IN THIS NOTE, ASSESSEE HAS DISCLOSED THAT IT IS CON SISTENTLY FOLLOWING THIS METHOD OF ACCOUNTING FROM THE LAST TWENTY YEARS. BE FORE THE LEARNED CIT(APPEALS), IT WAS ALSO POINTED OUT BY THE ASSESS EE THAT IN ASSESSMENT YEAR 2006-7, AN ASSESSMENT WAS MADE UNDER SEC. 143(3) AN D THIS ACCOUNTING POLICY HAS BEEN ACCEPTED. IN THE PAST ALSO, ITS ACC OUNTING METHOD HAS NOT BEEN DISPUTED BY THE ASSESSING OFFICER. THE ARGUMEN T OF THE ASSESSEE IS THAT FROM ITS METHOD TRUE INCOME IS DEDUCEABLE. 11. BEFORE THE LEARNED CIT(APPEALS), THE ASSESSEE H AS RAISED MAINLY TWO FOLD SUBMISSIONS. IT FIRSTLY CONTENDED THAT, IN FAC T, IT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTANCY AND FOR BUTTRESSING THIS CONT ENTION ASSESSEE POINTED OUT THAT WHATEVER SERVICES IT HAS RENDERED DURING T HIS YEAR, IT HAS RAISED THE BILLS AND REALIZED ALL THOSE BILLS IN THE ACCOUNTIN G YEAR ITSELF. THERE WAS NO OUTSTANDING BILL. LEARNED CIT(APPEALS) INSTEAD OF APPRECIATING THIS ASPECT BASED ON FACTUAL DETAILS, PROCEED TO RE JECT THIS ARGUMENT ON THE BASIS OF THE NOTE APPENDED IN THE AUDIT REPORT. LEA RNED CIT(APPEALS) HAS NOT ASSIGNED ANY REASON AS TO WHY THIS CONTENTION OF TH E ASSESSEE CANNOT BE 12 ACCEPTED. IT IS BASED ON THE DETAILS SUBMITTED DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS. THE APPREHENSION OF THE LEARNED CIT(AP PEALS) MAY BE THAT IN THIS YEAR ASSESSEE MIGHT HAVE RAISED THE BILLS FOR ALL THE SERVICES IT HAS RENDERED AND ABLE TO REALIZE THEM, BUT THAT WOULD N OT SUGGEST THAT IT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTANCY. IN OUR OPINION, THIS IS BASED ON SURMISES AND CONJECTURE. THERE IS NO MATERIAL POINT ED OUT BY THE ASSESSING OFFICER OR BY THE LEARNED CIT(APPEALS) TO SUBSTANTI ATE THIS REASONING. AS A MATTER OF FACT, IT COMES OUT THAT THERE IS NO PENDI NG BILL, WHICH DOES NOT SUGGEST THAT ASSESSEE ONLY ACCOUNTING THE BILLS WHI CH HAVE BEEN REALIZED. IN FACT, IT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTA NCY. 12. APART FROM THE ABOVE CONCLUSION, WE HAVE EXAMIN ED THE ISSUE WITH THE OTHER ANGLE ALSO. HON'BLE SUPREME COURT IN THE CASE OF SHOORJI BALLABHDASS HAS POINTED OUT THAT THE INCOME-TAX ACT , 1961 TAKES INTO ACCOUNT TWO POINTS OF TIME ON WHICH THE LIABILITY T O TAX IS ATTRACTED, NAMELY, NO.1 ACCRUAL OF INCOME OR RECEIPT OF INCOME. IT IS FURTHER MENTIONED THAT THE SUBSTANCE OF THE MATTER IS INCOME. IT MAY BE EMPH ASIZED THAT IT IS ACCRUAL OF INCOME OR RECEIPT OF INCOME THAT CAN BECOME THE SUBJECT MATTER OF TAX AND IT IS THE INCOME WHICH HAS TO BE RECORDED AS PER SY STEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IN VIEW OF SECTION 145 OF THE ACT, BECAUSE THE 13 SUBSTANCE OF THE MATTER IS INCOME. THE AMOUNTS RECE IVED BY THE ASSESSEE AS TRAVELLING ADVANCE CANNOT BE SHOWN AS INCOME EVEN U NDER CASH SYSTEM OF ACCOUNTING. THE ITAT HAS EXAMINED THIS ASPECT IN TH E CASE OF KK BHULLAR WHO IS AN ADVOCATE AND WHO WAS FOLLOWING CASH SYSTE M OF ACCOUNTANCY. HE HAD RECEIVED RETAINERSHIP FEE FOR RENDERING SERVICE S BUT DID NOT ACCOUNT THE TOTAL AMOUNT AS INCOME ON THE GROUND THAT RIGHT TO RECEIVE THE TOTAL INCOME HAS NOT ACCRUED. THE ITAT WHILE DEALING WITH THIS A SPECT HAS OBSERVED AS UNDER: COMING TO THE FACTS OF THIS CASE, THE ASSESSEE REC EIVED CERTAIN AMOUNTS FOR SERVICES TO BE PERFORMED OVER A PERIOD OF TIME. THE AMOUNT RELATABLE TO THE SERVICES RENDERED IN THE YE AR UNDER CONSIDERATION WAS SHOWN AS INCOME, THE REASON BEING THAT THE ASSESSEE BECAME ENTITLED TO RECEIVE THAT AMOUNT FROM THE CLI ENT IN RESPECT OF THE SERVICES RENDERED. IN OTHER WORDS, DEBT TO THE EXTE NT OF THE AMOUNT PERTAINING TO SERVICES RENDERED ONLY GOT VESTED IN THE ASSESSEE. THE REST OF THE AMOUNT WAS TAKEN AS LIABILITY TO BE ADJ USTED IN SUBSEQUENT YEAR AS AND WHEN THE SERVICE WAS RENDERED. IT IS BU T CLEAR THAT THE EXCESS AMOUNT WOULD HAVE TO BE RETURNED IN CASE THE SERVICE WAS NOT PERFORMED IN SUBSEQUENT YEAR AND, THEREFORE, IN RES PECT OF SUCH AMOUNT NO DEBT CAME INTO EXISTENCE IN FAVOUR OF THE ASSESSEE. THEREFORE, THIS AMOUNT DID NOT BECOME THE INCOME. A CCORDINGLY, WE ARE OF THE VIEW THAT THE LEARNED CIT(APPEALS) ERRED IN FINDING THAT THE ASSESSEE WAS FOLLOWING HYBRID SYSTEM OF ACCOUNTING ON THE GROUND 14 THAT THE WHOLE OF THE AMOUNT RECEIVED FROM THE CLIE NTS AS RETAINERSHIP FEES WAS NOT DECLARED AS INCOME IN THE YEAR OF RECE IPT OF THE AMOUNT. 13. IN VIEW OF THIS ITATS DECISION, AT LEAST ADVA NCES RECEIVED BY THE ASSESSEE FROM JEL, JHL, JPVL AND JUIT CANNOT BE TRE ATED AS INCOME OF THE ASSESSEE. AS FAR AS THE ADDITION IN RESPECT OF M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD. IS CONCERNED, WE FIND THAT ASSESS EE HAS RAISED TWO FOLD SUBMISSIONS FIRSTLY IT CONTENDED THAT THESE ARE AMO UNTS PAYABLE TO M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD. RENDERED BY THEM . IN ALTERNATIVELY, IT WAS POINTED OUT THAT SOME OF THE AMOUNTS IS AN OLD BALANCE ON ACCOUNT OF LOAN RAISED. THE ASSESSEE HAS EXPLAINED HOW THE LOA N WAS RAISED AND HOW MUCH THE AMOUNT REPRESENT. WE HAVE ALREADY EXTRACTE D THE SUBMISSIONS OF THE ASSESSEE. ON THE STRENGTH OF THIS RECONCILIATIO N, ASSESSEE HAS POINTED OUT THAT EVEN UNDER THE CASH METHOD OF ACCOUNTING ONLY RS.83,000 CAN BE ADDED ON ACCOUNT OF NON PAYMENT OF THE AMOUNT. OTHERWISE, ASSESSEE HAS EXPLAINED THE OTHER ENTRIES HOW MUCH IT HAS PAID AND HOW MUCH IT WAS PAYABLE. CONSIDERING ALL THESE ASPECTS, WE ARE OF THE OPINIO N THAT WE HAVE ACCEPTED THE CONTENTION OF THE ASSESSEE THAT IT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTANCY, THEREFORE, EVEN IF CERTAIN AMOUNT NOT ACTUALLY PAID THIS YEAR BUT SHOWN AS PAYABLE ASSESSEE IS ENTITLED FOR DEDUCTION OF THAT AMOUNT, SINCE THE 15 SERVICES HAVE ALREADY BEEN AVAILED FROM M/S. M/S. D ASS GUPTA MANAGEMENT SERVICES (P) LTD., IN THIS ACCOUNTING YEAR. 14. IN THE NEXT GROUND OF APPEAL, THE GRIEVANCE OF ASSESSEE IS THAT ASSESSING OFFICER HAS ERRED IN MAKING ADDITION OF R S.1,80,000 WITH THE HELP OF SECTION 40(A)(IA) OF THE ACT. 15. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. WE HAVE ALREADY DISCUSSED TH E FACTS IN DETAIL WHILE CONSIDERING GROUND NO.1 OF THE ASSESSEE. THIS DISAL LOWANCE WAS MADE BY THE ASSESSING OFFICER ON THE GROUND THAT ASSESSEE FAILE D TO DEDUCT THE TDS WHILE MAKING PAYMENT OF RS.1,80,000 TO M/S. DASS GUPTA MA NAGEMENT SERVICES (P) LTD. WE FIND THAT ASSESSING OFFICER HAS RECORDE D CONTRADICTORY FINDING. ON THE ONE HAND, HE INCLUDED THIS AMOUNT IN THE SUM OF RS.4,13,586 DISCUSSED IN GROUND NO.1 ON THE GROUND THAT ASSESSE E HAS NOT PAID THIS AMOUNT AND IT IS FOLLOWING CASH SYSTEM OF ACCOUNTAN CY, THEREFORE, ITS DEDUCTION CANNOT BE ALLOWED. ON THE OTHER HAND, HE DISALLOWED THIS AMOUNT ON THE GROUND THAT WHILE MAKING THE PAYMENT ASSESSE E FAILED TO DEDUCT THE TDS. ON GOING THROUGH THE RECORD, WE FIND THAT ASSE SSEE HAD CLAIMED THE DEDUCTION OF THIS AMOUNT ON THE GROUND THAT IT WAS TO PAY TYPING CHARGES AND STATIONERY CHARGES TO M/S. DASS GUPTA MANAGEMENT SE RVICES (P) LTD. AND 16 ASSOCIATES. FOR TYPING CHARGES, A SUM OF RS.4,000 W AS BEING PAID PER MONTH WHEREAS REST OF THE AMOUNT WAS PAID TOWARDS STATION ERY CHARGES. THE AMOUNT PAID TOWARDS JOB WORK CHARGES IS LESS THAN RS.50,00 0 DURING THE WHOLE YEAR AND, THEREFORE, ASSESSEE WAS NOT LIABLE TO DEDUCT T DS UNDER SECTION 194C OF THE ACT. LEARNED CIT(APPEALS) HAS REJECTED THE CLAI M OF ASSESSEE FOR THREE REASONS, NAMELY, THERE IS NO WRITTEN AGREEMENT, THE BILL OF M/S. DASS GUPTA MANAGEMENT SERVICES (P) LTD. WAS NOT PRODUCED AND I T IS UNRELIABLE THAT FOR THE JOB WORK OF RS.48,000 AN ASSESSEE WOULD USE STA TIONERY OF RS.1,32,000. ON DUE CONSIDERATION OF THE RECORD, WE FIND THAT AS SESSEE HAS SUBMITTED THE DETAILS IN RESPECT OF THE INVOICE AND OTHER BILLS. NO DOUBT, THERE IS NO WRITTEN CONTRACT BUT IT IS TRUE THAT M/S. DASS GUPTA MANAGE MENT SERVICES (P) LTD. HAS BEEN SUPPLYING PRINTED MATERIAL WHICH WAS USED IN THE AUDITING SERVICES. THE ASSESSEE HAS FILED THEIR COPIES OF ACCOUNT AND CONFIRMATION. ASSESSING OFFICER HAS ONLY POINTED OUT PERIPHERAL DEFECT. FOR THE JOB WORK OF LESS THAN RS.50,000.ASSESSEE WAS NOT SUPPOSED TO DEDUCT TDS. ASSESSING OFFICER IS NOT JUSTIFIED TO MAKE THE DISALLOWANCE OF THIS AMOU NT. WE ALLOW THIS GROUND OF APPEAL AND DELETE THE DISALLOWANCE. 16. GROUND NOS. 4 AND 5 ARE INTER CONNECTED TO EACH OTHER. IN THESE GROUNDS, THE GRIEVANCE OF ASSESSEE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN 17 CONFIRMING THE DISALLOWANCE OF RS.81,970 AND RS.1,1 1410. THE DETAILS OF THESE AMOUNTS HAVE BEEN NOTED BY THE LEARNED CIT(AP PEALS) WHILE TAKING COGNIZANCE OF THE ASSESSEES WRITTEN SUBMISSIONS IN PARAGRAPH NO.4.1 OF HIS ORDER. THE ASSESSEE CLAIMED THE DEDUCTION OF THESE AMOUNTS ON THE GROUND THAT THESE WERE EXPENSES RELATABLE TO THE BUSINESS OF THE ASSESSEE. ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF ASSESSEE ON THE GROUND THAT THESE EXPENSES REMAINED UNPAID. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION TH AT AS FAR AS DETAILS OF EXPENSES SHOWN AS PAYABLE BY THE ASSESSEE ARE CONCE RNED, ASSESSING OFFICER DID NOT FIND ANY DEFECT. HE DISALLOWED THE EXPENSES ON THE GROUND THAT ASSESSEES INCOME HAS TO BE COMPUTED ON CASH METHOD OF ACCOUNTANCY. IN THE EARLIER PART OF THE ORDER, WE HAVE HELD THAT AS SESSEE, IN FACT, IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTANCY AND, THEREFORE, TH E EXPENSES ARE TO BE ALLOWED. IN OTHER WORDS, THERE IS NO DISPUTE ABOUT THE NATURE OF EXPENSES AND THEIR ADMISSIBILITY. THE AREA OF DISPUTE IS THE MET HOD OF ACCOUNTANCY ONLY. UNDER THE CASH SYSTEM OF ACCOUNTANCY, EXPENSES CANN OT BE ALLOWED UNLESS THEY ARE ACTUALLY PAID DURING THE ACCOUNTING YEAR W HEREAS UNDER MERCANTILE SYSTEM OF ACCOUNTANCY IF ASSESSEE MADE A PROVISION AND AVAIL THE SERVICES THEN EXPENSES RELATABLE TO THOSE SERVICES IS TO BE ALLOWED. IN VIEW OF OUR 18 FINDING ON GROUND NO.1, WE ALLOW THESE GROUNDS OF A PPEAL AND DELETE THE DISALLOWANCE. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. DECISION PRONOUNCED IN THE OPEN COURT ON 24 .0 9.2010 ( G.E. VEERABHADRAPPA) ( RAJPAL YA DAV ) VICE-PRESIDENT JUDICIAL MEMBER DATED: 24/09/2010 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR