M/s. Arora & Choudhary Associates, New Delhi V. ITO, New Delhi

ITA 530/DEL/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82024 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 30-10-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 29-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GAURAV PUOEJA
• Assessee Lawyers: S KRISHNAN
• Section: 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI A.T. VARKEY : JUDICIAL MEMBER ITA NO. 530/DEL/2013 ASSTT. YR: 2007-08 ARORA & CHOUDHARY ASSOCIATES VS. INCOME-TAX OFFIC ER, 8/28, WEA, ABDUL AZIZ ROAD, WARD 37(1), NEW DELH I. KAROL BAGH, NEW DELHI. PAN: AAAFA 4250 G ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI S. KRISHNAN ADV. & SHRI V. RAJA KUMAR ADV. RESPONDENT BY : SHRI GAURAV PUOEJA DR DATE OF HEARING : 30-10-2014 DATE OF ORDER : _______-11-2014. O R D E R PER S.V. MEHROTRA, A.M:- THIS APPEAL, PREFERRED BY THE ASSESSEE, IS DIRECT ED AGAINST THE ORDER OF CIT(APPEALS)-XXVIII, NEW DELHI DATED 03-12-2012 IN APPEAL NO. 111/2011-12 FOR A.Y. 2007-08. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM, CARRYING ON PROFESSION OF CHARTERED ACCOUNTANCY. IT HAD FILED ITS RETURN OF INCOME, DECLARING INCOME OF RS. 2,41,213/-. IN THI S CASE, THE ORIGINAL ASSESSMENT WAS COMPLETED U/S 144 OF THE INCOME-TAX ACT AT A TOTAL INCOME OF RS. 7,66,100/- BY MAKING AN ADDITION OF RS. 5,24,88 7/- INCLUDING EXPENSES PAYABLE OF RS. 2,46,040/-; BY REJECTING THE MERCANT ILE SYSTEM OF ACCOUNTING, AS CLAIMED TO HAVE BEEN EMPLOYED BY THE ASSESSEE BE CAUSE THE AUDITOR OF THE 2 ITA 530/DEL/2013 ARORA & CHOUDHARY ASSOCIATES ASSESSEE HAD REPORTED THAT THE FIRM WAS FOLLOWING C ASH SYSTEM OF ACCOUNTING AND THERE WAS NO CHANGE IN THE METHOD OF ACCOUNTING VIS A VIS METHOD EMPLOYED IN THE IMMEDIATELY PRECEDING YEAR. THE LD. CIT(A) HAD UPHELD THE ADDITION OF RS. 2,46,040/- BEING EXPENSES PAYABLE B Y ASSESSEE AND HAD DELETED THE REST OF THE ADDITIONS. THE ASSESSEE PRE FERRED APPEAL BEFORE THE TRIBUNAL AND THE TRIBUNAL VIDE ITS ORDER DATED 27-1 0-2010 IN ITA NO. 2096/DEL/2010, SET ASIDE THE ISSUE OF SYSTEM OF ACC OUNTING FOLLOWED BY THE ASSESSEE TO THE FILE OF AO, DIRECTING THE AO AS UND ER: FOR EXAMINING THE BOOKS OF ACCOUNTS, HEAR THE ASSE SSEE AND DECIDE WHETHER IT HAS BEEN FOLLOWING CASH OR MERCAN TILE SYSTEM OF ACCOUNTING. THEREFORE HE MAY DECIDE THE ISSUE RE GARDING DEDUCTIBILITY OF EXPENSES PAYABLE IN THE LIGHT OF H IS FINDING ON THE SYSTEM OF ACCOUNTING. 2.1. THE AO, AFTER EXAMINING THE ASSESSEES BOOKS C ONCLUDED THAT ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING AND NOT MER CANTILE SYSTEM. HE ACCORDINGLY, MADE ADDITION OF RS. 2,46,040/- BEING AMOUNT SHOWN AS EXPENSES PAYABLE. 2.2. BEFORE LD. CIT(A) THE ASSESSEE HAD SUBMITTED T HAT IT HAD REGULARLY BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. HOW EVER, LD. CIT(A), REFERRING TO THE FINDINGS OF AO, POINTED OUT THAT T HE CONTENTION OF THE ASSESSEE WAS CONTRARY. 3. LD. COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 37 OF THE PB WHEREIN THE FINDINGS OF THE TRIBUNAL IN FIRST ROUND OF PROCEEDI NGS ARE CONTAINED AND POINTED OUT THAT AO WAS REQUIRED TO EXAMINE THE BOO KS OF ACCOUNT TO ASCERTAIN THE METHOD OF RECOGNIZING THE INCOME AND EXPENDITURE. HE SUBMITTED THAT ASSESSEE WAS FOLLOWING MERCANTILE SY STEM OF ACCOUNTING AND, 3 ITA 530/DEL/2013 ARORA & CHOUDHARY ASSOCIATES THEREFORE, RIGHTLY CLAIMED THE EXPENSES ON ACCRUAL BASIS. DURING THE COURSE OF HEARING, LD. COUNSEL ALSO FILED SYNOPSIS, AS REP RODUCED BELOW: 1. THIS APPEAL BY THE ASSESSEE BUTTRESSES A SOLITAR Y GRIEVANCE, PERTAINING TO THE METHOD OF ACCOUNTING A DOPTED BY IT. SHORN OF EMBELLISHMENT, THE RELEVANT FACTS ARE AS UNDER: A. DURING ASSESSMENT PROCEEDINGS, THE AO FOUND [PB 49) THAT THE ASSESSEE HAD CLAIMED 'EXPENSES PAYABLE' AT ~ 2A6,040. DETAILS OF SUCH EXPENSES WERE REQUISITIONE D. THE ASSESSEE RESPONDED WITH LETTER DATED 26.11.09, PROVIDING THE SAID DETAILS, AND STATING INTER-ALIA, THAT: I. RECEIPTS HAD BEEN RECORDED ON MERCANTILE BASIS ONLY, AND REFERENCE WAS GIVEN ALSO TO P&L ALC., WHE REIN PROVISIONS FOR INTEREST ON BANK FDR'S WERE MADE ON MERCANTILE BASIS; II. IT SO HAPPENED THAT ALL BILLINGS FOR THE SUBJEC T YEAR HAD BEEN COLLECTED, AND THEREFORE, THERE WERE NO OUTSTANDING BILLINGS; III. TABULATION OF PROFESSIONAL RECEIPTS AND TDS DEDUCTIONS SHOWED THAT ALL RECEIPTS PERTAINED TO TH E SUBJECT YEAR ONLY, AND THAT IS WHY, NO OUTSTANDING BILLINGS EXISTED. B. THE AO RELIED UPON THE DISCLOSURE IN THE TAX AUD IT REPORT, AND HELD THAT THE ASSESSEE WAS FOLLOWING CASH SYSTE M OF ACCOUNTING. THE EXPENSES PAYABLE WERE DISALLOWED IN THE ORDER PASSED THE VERY SAME DAY, I.E.26.11.09. C. THE ITAT IN SECOND APPEAL SET [PB 37) ASIDE THE ISSUE TO THE AO, DIRECTING HIM TO VERIFY THE FACTS FROM AN E XAMINATION OF THE BOOKS OF ACCOUNT, HOLDING THAT THEY WERE THE ON LY WAY TO ASCERTAIN THE METHOD OF ACCOUNTING. D. THEREAFTER, THE AO REQUISITIONED BOOKS OF ACCOUN T, WHICH WERE DULY FILED BEFORE HIM, AND PROFESSIONAL BILLS HAD BEEN RAISED ONLY 2-3 DAYS BEFORE RECEIPT OF FEES, AND EN TRIES IN BOOKS 4 ITA 530/DEL/2013 ARORA & CHOUDHARY ASSOCIATES OF ACCOUNT WERE MADE ONLY ON THE DAY OF RECEIPT OF THE FEES. HE TABULATED SOME INSTANCES THEREOF, AND HELD THAT THE ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING. E. THE CLT(A) HAS IN THE IMPUGNED ORDER, CONFIRMED THIS FINDING MECHANICALLY, SIMPLY SAYING THAT THE ASSESS EE'S CONTENTION IS CONTRADICTORY TO THE FINDING OF THE A O. 2. A BARE PERUSAL OF THE FINDING OF THE CLT(A) IN T HE IMPUGNED ORDER WILL DEMONSTRATE THAT THE SAID FINDI NG IS MECHANICAL, BORDERING ON THE LACONIC. THE FACT THAT THE SAY OF THE ASSESSEE IS CONTRARY TO THE FINDING OF THE AO, IS THE REASON AN APPEAL WAS FILED BEFORE HER. SHE WAS REQUIRED TO EXAMINE THE RIVAL CONTENTIONS, ON THE BASIS OF THE BOOKS OF ACCOUNT AND SUBMISSIONS TENDERED. IT WAS NO REASON FOR DISMISSA L OF AN APPEAL, THAT TOO IN THE SECOND ROUND. 3. SUBSTANTIVELY, THE MISGIVINGS OF THE REVENUE AUT HORITIES ARE BASED ON AN INCOMPLETE APPRECIATION OF THE METH OD OF ACCOUNTING. SINCE IN THE SUBJECT YEAR, ALL BILLS HAV E BEEN DULY COLLECTED, REGARDLESS OF THE METHOD OF ACCOUNTING, INCOME WAS TO BE RECOGNISED. AS LONG AS INCOME IS BILLED, RECE IVED, AND ACCOUNTED FOR IN A GIVEN YEAR, THE SYSTEM IS MERCAN TILE. THIS WOULD GET TESTED ONLY IF THE AD IS ABLE TO POINT OU T AN INSTANCE WHERE SERVICES STAND BILLED, BUT PAYMENTS HAVE NOT BEEN RECEIVED, AND FOR THIS REASON, INCOME IS NOT RECOGN ISED. NO SUCH INSTANCE HAS BEEN POINTED OUT, SINCE NO SUCH INSTAN CE EXISTS. THE FACT IS, INCOME HAS BEEN RECOGNISED ON ACCRUAL BASIS, AND HENCE, THE METHOD OF ACCOUNTING IS CLEARLY MERCANTI LE. THIS HAS BEEN CLEARLY POINTED OUT TO THE CIT(A), AS MAY BE D ISCERNED FROM PAGE 3 OF THE PAPER BOOK, AND SUCH CONTENTION HAS NOT BEEN DEALT WITH AT ALL. 4. THE AMOUNT INVOLVED IS NOT A LARGE ONE, AND IN S UCH CASES, THE REVENUE AUTHORITIES TEND TO COUNT ON THE ASSESSEE TO OPTIMISE ITS EFFORTS, AND FOREGO SMALL ADDITIONS. I N THE SUBJECT CASE THOUGH, THE ASSESSEE IS A CA FIRM, AND HAS MAI NTAINED CORRECT AND COMPLETE ACCOUNTS, NO DEFECT OR OMISSIO N IN WHICH HAS BEEN IDENTIFIED BY THE AD OR THE CIT(A). IN SEC OND ROUND, 5 ITA 530/DEL/2013 ARORA & CHOUDHARY ASSOCIATES THE CIT(A) HAS NOT EVEN FOLLOWED THE ITAT'S DIRECTI ON TO ASCERTAIN FACTS FROM THE BOOKS OF ACCOUNT, AND HAS MECHANICALLY CONFIRMED THE AD'S VERSION WITHOUT EVE N ADDRESSING HERSELF TO SUBMISSIONS IN THIS REGARD. 5. THE EXPENSES IN ANY CASE HAVE BEEN ACCEPTED AS GENUINE. IN THAT EVENT, THE LEAST EITHER AUTHORITY COULD HAVE DONE WAS TO DIRECT ALLOWANCE THEREOF IN THE YEAR OF PAYMENT. THIS TOO, THEY HAVE OMITTED TO DO. 6. IT IS THE SHORT SUBMISSION AND PRAYED ON THE ASS ESSEE'S BEHALF, THAT AS STATED AT PARA 3 ABOVE, THE ISSUE P ROCEEDS FROM A MISAPPREHENSION ON THE PART OF THE REVENUE AUTHOR ITIES. SIMPLY BECAUSE ALL BILLINGS STAND COLLECTED IN THE SAME YEAR, THAT DOES NOT MAKE THE ACCOUNTING AS 'CASH BASIS'. TO ESTABLISH THAT, THE AD SHOULD HAVE FOUND AN INSTANCE WHERE AM OUNTS BILLED WERE PENDING ON 31.03.2007, AND THAT SUCH AM OUNT HAD NOT BEEN RECOGNISED AS INCOME. NO SUCH TRANSACTION HAS BEEN IDENTIFIED. 7. IN THAT EVENT, THE EXPENSES PAYABLE [PS 57-64] A RE ALLOWABLE IN FULL. SO IT IS PRAYED. 4. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES. IN COURSE OF SET ASIDE PROCEEDINGS, AO HAD EXAMINED THE FOLLOWI NG DOCUMENTS: 1. COPY OF LEDGER ACCOUNT OF PROFESSIONAL RECEIPTS FOR FY 2006-07 RELEVANT TO AY 2007-08. 2. COPY OF BILLS RAISED FOR PROFESSIONAL RECEIPTS FOR FY 2006-07 RELEVANT TO AY 2007-08. 3. COPY OF CASH BOOK FOR THE PERIOD 01-04-2006 TO 31-0 3-2007. 4. COPY OF LEDGER ACCOUNTS OF MAJOR EXPENSES FOR FY 20 06-07 RELEVANT TO AY 2007-08. 4.1. AFTER EXAMINING THESE DOCUMENTS, AS PER THE D IRECTIONS OF TRIBUNAL, THE AO HAS RECORDED A CATEGORICAL FINDING THAT ASSE SSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING, WHICH IS EVIDENT FROM THE FOL LOWING OBSERVATIONS: 6 ITA 530/DEL/2013 ARORA & CHOUDHARY ASSOCIATES ON EXAMINING THE LEDGER ACCOUNT OF PROFESSIONAL RE CEIPTS IT IS OBSERVED THAT THE ASSESSEE BOOKED THE PROFESSIONAL FEES IN ITS BOOKS OF ACCOUNTS ON THE DATE OF RECEIPT OF PROFESSIONAL FEE S WHILE THE BILL FOR THESE PROFESSIONAL FEES HAVE BEEN RAISED BY IT 2-3 DAYS BEFORE RECEIPT OF PROFESSIONAL FEES. HAD THE ASSESSEE FIRM BEEN FO LLOWING MERCANTILE SYSTEM OF ACCOUNTING IT WOULD HAVE BOOKED THE PROFE SSIONAL FEES ON THE DATE OF RAISING THE BILL AND NOT ON THE DATE OF RECEIPT OF THE SAME. FOR EXAMPLE DETAILS OF SOME OF THE BILLS RAISED FOR PROFESSIONAL FEES AND BOOKING THE SAME IN THE BOOKS OF ACCOUNTS ARE A S UNDER: S.NO. DATE ON WHICH BILL RAISED AMOUNT OF BILL DATE OF RECEIPT OF BILL AMOUNT DATE OF BOOKING OF PROFESSIONAL FEES IN THE BOOKS OF ACCOUNT 1. 01-04-2006 SURYA JEWELLERS RS. 10,000/- 03-04- 2006 03-04-2006 2. 05-07-2006 J&K BANK LTD. RS. 30,000/- 12-07- 2006 12-07-2006 3. 11-10-2006 SOLOMAN INDIA LTD. RS. 17,053 17-10- 2006 17-10-2006 4. 15-12-2006 CHOPRA MOTORS (P) LTD. RS. 21,200/- 23-012- 2006 23-012- 3006 5. 05-03-2007 BANSAL CONTRACTORS (I) LTD. RS. 25,000/- 14-03- 2007 14-03-2007 FROM THE ABOVE TABLE IT IS EVIDENT THAT THE ASSESSE E IS FOLLOWING CASH SYSTEM OF ACCOUNTING AND NOT MERCANTILE SYSTEM OF A CCOUNTING AS CLAIMED BY THE ASSESSEE DURING THE CURSE OF ORIGINA L ASSESSMENT PROCEEDINGS. IN VIEW OF THE ABOVE, EXPENSES PAYABLE SHOWN AT RS. 2,46,040/- IS TREATED AS INCOME OF THE ASSESSEEE AN D ADDED BACK TO THE INCOME OF ASSESSEE. 4.2. THE MAIN CONTENTION OF ASSESSEE IS THAT IF BIL LS RAISED ARE REALIZED IN THAT VERY FINANCIAL YEAR, THEN THE SAME CANNOT BE A BASIS TO COME TO THE 7 ITA 530/DEL/2013 ARORA & CHOUDHARY ASSOCIATES CONCLUSION THAT ASSESSEE WAS NOT FOLLOWING MERCANTI LE SYSTEM OF ACCOUNTING, UNLESS IT IS DEMONSTRATED THAT SERVICES WERE RENDER ED IN ONE FINANCIAL YEAR AND BILL FOR THE SAME REALIZED IN SUBSEQUENT ASSESS MENT YEAR. WE FIND FORCE IN THIS CONTENTION. THE AO HAS NOT DISPUTED ASSESSE ES CONTENTION. THERE IS NO FINDING BY AO THAT ANY PARTICULAR BILL IS RAISED AFTER RECEIPT OF AMOUNT. FURTHER, IT IS NOT DISPUTED THAT INTEREST INCOME OF RS. 12,127.91 WAS ACCOUNTED FOR ON ACCRUAL BASIS. THEREFORE, TAKING I NTO CONSIDERATION THE ENTIRE CONSPECTUS OF THE CASE, WE ARE OF THE OPINIO N THAT ASSESSEES CLAIM DESERVES TO BE ACCEPTED. 5. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON _____-11-2014. ( A.T. VARKEY ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: _____-11-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR