DCIT )-3(3), MUMBAI V. STUP CONSULTANTS P. LTD, MUMBAI

ITA 6063/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55222 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 30-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 17-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B JAYA KUMAR
• Assessee Lawyers: MAHESH C MATHUR
• Keywords: Rejection of books of accounts; Depreciation; Rule of consistency; Services rendered outside India; TDS
• Section: 115JB; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) THE DCIT, CIR.3(3), ROOM NO.609, 6 TH FLOOR, AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (APPELLANT) VS. M/S. STUP CONSULTANTS PVT. LTD., 1004-05, RAHEJA CHAMBERS, 213, FREE PRESS JOURNAL MARG, NARIMAN POINT, MUMBAI 400 021. PAN:AABCS 1945E (RESPONDENT) APPELLANT BY : SHRI B.JAYAKUMAR RESPONDENT BY : SHRI MAHESH C. MATHUR ORDER PER N.V.VASUDEVAN, J.M, ITA NO.5617/MUM/09 IS AN APPEAL BY THE REVENUE AG AINST THE ORDER DATED 26.6.2009 OF CIT(A)-XXXII, MUMBAI, RELATING T O AY 04-05. ITA NO.6062 & 6063/MUM/09 ARE ALSO APPEALS BY THE REVEN UE AGAINST TWO ORDERS BOTH DATED 4.8.09 OF CIT(A)-XXXII, MUMBAI, R ELATING TO AY 05-06 & 06-07 RESPECTIVELY. 2. THE ONLY COMMON ISSUE IN ALL THESE THREE APPEALS BY THE REVENUE IS AS TO WHETHER THE CIT(A) WAS RIGHT IN HOLDING THAT THE ASSESSEE CANNOT BE TAXED ON THE BASIS OF MERCANTILE SYSTEM OF ACCOUNTING AS AGAINST THE CASH SYSTEM FOLLOWED BY THE ASSESSEE. THE GROUNDS OF APPEAL IN ALL THESE THREE APPEALS ARE IDENTICAL AND IT READS AS FOLLOWS: ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) 2 THE LD. CIT(A) HAS ERRED IN LAW AND THE FACTS OF T HE CASE IN HOLDING THAT THE APPELLANT WHO FOLLOWS CASH SYSTEM OF ACCOU NTING CANNOT BE TAXED ON THE BASIS OF MERCANTILE SYSTEM OF ACCOUNTI NG. WHILE DOING SO THAT LD. CIT(A) HAS IGNORED THE FACT THAT THERE CAN T BE TWO DIFFERENT SYSTEMS OF ACCOUNTING FOR DETERMINING INCOME U/S. 1 43(3) AND U/S. 115JB OF THE I.T. ACT, 1961. 3. THE FACTS AND CIRCUMSTANCES GIVING RAISE TO THES E APPEALS BY THE REVENUE ARISE AS DISCUSSED IN THE ORDER OF ASSESSME NT FOR AY 04-05 ARE AS FOLLOWS: THE ASSESSEE IS A PRIVATE LIMITED COMPANY. IT REND ERS PROFESSIONAL SERVICES/CONSULTANCY SERVICES IN THE FIELD OF CIVIL /STRUCTURAL ENGINEERING AND ARCHITECTURE BY PROVIDING DESIGN, SUPERVISION AND P ROJECT MANAGEMENT. ITS INCOME IS IN THE FORM OF FEES FOR SERVICES RENDERED . FOR AY 04-05, THE ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INC OME AT RS.4,76,57,440/-. THE ABOVE TOTAL INCOME IS THE GROSS PROFIT AS PER P ROFIT AND LOSS ACCOUNT WHICH IS MAINTAINED ON THE CASH SYSTEM OF ACCOUNTIN G BY THE ASSESSEE. THE TAX PAYABLE AS PER THE TOTAL INCOME DECLARED IN THE RETURN OF INCOME BY THE ASSESSEE WAS RS.1,66,80,104. THE ASSESSEE IN COMPL IANCE WITH ITS OBLIGATIONS UNDER SEC.209(3) OF THE COMPANIES ACT, 1956 HAD MAINTAINED BOOKS OF ACCOUNTS IN ACCORDANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING. AS PER THE BOOKS MAINTAINED IN ACCORDANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING, THE PROFIT AS PER PROFIT AND LOSS ACCOU NT WAS RS.7,48,91,325/-. ACCORDING TO THE PROVISIONS OF SEC.115JB OF THE AC T, THE PROFIT AS PER PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH THE PR OVISIONS OF THE COMPANIES ACT, 1956 WOULD BE THE STARTING POINT OF COMPUTATION OF BOOK PROFIT U/S.115JB OF THE ACT, TO WHICH CERTAIN ADDI TIONS AND DEDUCTIONS HAVE TO BE MADE TO ARRIVE AT BOOK PROFITS. AS PER THE PROVISIONS OF SEC.115JB OF THE INCOME TAX ACT, 1961 (THE ACT), IF THE TAX PAYA BLE AS PER THE NORMAL PROVISIONS OF THE ACT IS LESS THAN 7.5% OF THE BOOK PROFITS THEN THE BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF TH E ASSESSEE AND TAX PAYABLE ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) 3 BY THE ASSESSEE ON SUCH TOTAL INCOME SHALL BE THE A MOUNT OF INCOME TAX AT 7.5% OF BOOK PROFITS. THE PERCENTAGE OF 7.5% HAS U NDERGONE CHANGES IN DIFFERENT ASSESSMENT YEARS BUT THIS WILL NOT BE OF ANY MATERIAL CONSEQUENCE IN THE PRESENT CASE. 7.5% OF BOOK PROFITS IN THE CA SE OF THE ASSESSEE FOR AY 04-05, WAS RS.56,16,849. SINCE THE TAX PAYABLE ON 7 .5% OF THE BOOK PROFITS WAS LESS THAN THE TAX PAYABLE ON TOTAL INCOME OF RS .4,76,57,440/- COMPUTED BY THE ASSESSEE AS PER PROFIT AND LOSS ACCOUNT MAIN TAINED BY IT ON THE CASH SYSTEM OF ACCOUNTING, THE ASSESSEE DECLARED TOTAL I NCOME AT RS.4,76,57,440/-. SEC.115JB (2) OF THE ACT PROVIDE S THAT EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PURPOSES OF THIS SE CTION, PREPARE ITS PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO TH E COMPANIES ACT, 1956. WHILE PREPARING THE ANNUAL ACCOUNTS INCLUDING PROFI T AND LOSS ACCOUNT, (I) THE ACCOUNTING POLICIES ; (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT ; (III) THE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, SHALL BE THE SAME AS HAVE BEEN ADOPTED FOR THE PURP OSE OF PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT AND LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE P ROVISIONS OF SECTION 210 OF THE COMPANIES ACT, 1956 (1 OF 1956). THUS THE A SSESSEE HAS TO COMPLY WITH THE PROVISIONS OF THE COMPANIES ACT, 1956 WHIL E PREPARING ITS PROFIT AND LOSS ACCOUNT. SEC.209 OF THE COMPANIES ACT, 1956 P ROVIDES THAT EVERY COMPANY SHALL KEEP AT ITS REGISTERED OFFICE PROPER BOOKS OF ACCOUNT WITH RESPECT TO CERTAIN MATTERS REFERRED TO IN SUB-SECTI ON (1) THEREOF. SEC.209(3) OF THE COMPANIES ACT, 1956, MANDATES THAT FOR THE PUR POSES OF SUB-SECTIONS (1) AND (2), PROPER BOOKS OF ACCOUNT SHALL NOT BE D EEMED TO BE KEPT WITH RESPECT TO THE MATTERS SPECIFIED THEREIN,-- (A) IF THERE ARE NOT KEPT SUCH BOOKS AS ARE NECESSA RY TO GIVE A TRUE AND FAIR VIEW OF THE STATE OF THE AFFAIRS OF THE COMPAN Y OR BRANCH OFFICE, AS THE CASE MAY BE, AND TO EXPLAIN ITS TRANSACTIONS ; AND ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) 4 (B) IF SUCH BOOKS ARE NOT KEPT ON ACCRUAL BASIS AND ACCORDING TO THE DOUBLE ENTRY SYSTEM OF ACCOUNTING. THUS IT IS MANDATORY FOR COMPANIES TO MAINTAIN BOOK S OF ACCOUNTS IN ACCORDANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING IN COMPLIANCE WITH THE PROVISIONS OF THE COMPANIES ACT, 1956. 4. THE AO CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE ASSESSEE MAINTAINS TWO SETS OF BOOKS OF ACCOUNTS, O NE UNDER THE CASH SYSTEM OF ACCOUNTING AND THE OTHER UNDER THE MERCAN TILE SYSTEM OF ACCOUNTING. THE ASSESSEE EXPLAINED BEFORE THE AO T HAT IT WAS ORIGINALLY FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. IN THE YEAR ENDED 31.3.1983, RELEVANT TO AY 83-84, THE ASSESSEE OPTED TO CHANGE ITS METHOD OF ACCOUNTING FROM MERCANTILE SYSTEM OF ACCOUNTING TO CASH SYSTEM OF ACCOUNTING. THE ASSESSEE ADDRESSED A LETTER DT.15.12.1982 TO THE AO IN WHICH THE ASSESSEE HAS POINTED OUT THAT IT WISHES TO CHANGE ITS METHOD OF ACCOUNTING FROM MERCANTILE SYSTEM OF ACCOUNTING TO CASH SYSTEM OF A CCOUNTING W.E.F 1-4- 1983. ATTENTION OF THE AO WAS ALSO DRAWN TO THE CO PY OF THE ASSESSMENT ORDER FOR AY 84-85, IN WHICH THE AO HAS ACCEPTED TH E CHANGED METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE, IN THE FIRST P AGE OF THE ASSESSMENT ORDER, THE METHOD OF ACCOUNTING FOLLOWED HAS BEEN D ESCRIBED AS CASH. THE ASSESSEE POINTED OUT THAT EVER SINCE AY 83-84, THE ASSESSEE HAS BEEN MAINTAINING ITS BOOKS OF ACCOUNTS ON CASH SYSTEM OF ACCOUNTING AND FILING RETURNS OF INCOME ON THE BASIS OF SUCH BOOKS OF ACC OUNTS. THE ASSESSEE POINTED OUT THAT THE INCOME TAX DEPARTMENT HAS ACCE PTED SUCH A CHANGE IN THE SYSTEM OF ACCOUNTING AND THAT ITS ASSESSMENTS A RE BEING COMPLETED ON THE BASIS OF CASH SYSTEM OF ACCOUNTING EVER SINCE THE AY 83-84. 5. THE ASSESSEE POINTED OUT THE REASONS FOR THE CHA NGED SYSTEM OF ACCOUNTING AS FOLLOWS: ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) 5 1. THE ASSESSEE RENDERS PROFESSIONAL SERVICES/CONSULTA NCY SERVICES IN THE FIELD OF CIVIL/STRUCTURAL ENGINEERING AND ARCHITECT URE BY PROVIDING DESIGN, SUPERVISION AND PROJECT MANAGEMENT. THE INCOME IS IN THE FORM OF FEES FOR SERVICES RENDERED AND THE ASSESSEE DOES NOT IND ULGE IN ANY TRADING. 2. SINCE THE ASSESSEES NATURE OF INCOME IS FROM RENDE RING PROFESSIONAL SERVICES AKIN TO DOCTORS, LAWYERS ETC., THE CASH SY STEM OF ACCOUNTING WAS FELT TO BE MORE APPROPRIATE. 3. BILLS RAISED ON PARTIES ARE SUBJECT TO SETTLEMENT A ND IN MANY CASES, THEY ARE REVISED. THUS THERE WAS UNCERTAINTY OF THE COR RECT INCOME FIGURES. 4. THE REALIZATION OF PAYMENT ALSO TAKES TIME, NORMALL Y FROM 4 TO 6 MONTHS AND GENERALLY THE ULTIMATE PAYMENT IS LESSER THAN T HE AMOUNT DUE AS PER THE BILL. 5. THE ASSESSEE FELT THAT IT WAS NOT PRUDENT TO PAY TA X ON DUE BASIS AS IT AMOUNTS TO PAYING TAX OUT OF POCKET, WHEN REALIZATI ON IS LATER AND NOT CERTAIN. THE ASSESSEE FELT THAT SINCE THE SERVICES RENDERED BY IT ARE AKIN TO SERVICES OF A SOLICITOR OR ACCOUNTANT IT WAS PRO PER TO FOLLOW CASH SYSTEM OF ACCOUNTING. 5. THE ASSESSEE FURTHER POINTED OUT THAT SECTION 14 5 OF THE ACT ALLOWS AN ASSESSEE TO EMPLOY CASH SYSTEM OR MERCANTILE SYSTEM IN RESPECT OF INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION OR INCOME FROM OTHER SOURCES. THE CHOICE OF METHO D OF ACCOUNTING IS LEFT TO THE ASSESSEE AND IT IS NOT A CHOICE OF THE JURISDIC TIONAL ASSESSING OFFICER. THE ASSESSEE IS EVEN ALLOWED TO CHANGE ITS METHOD O F ACCOUNTING IF IT FEELS THAT THE OTHER METHOD IS MORE APPROPRIATE AND BENEF ICIAL FOR ITS BUSINESS OR PROFESSION. SECTION 44AA OF THE INCOME TAX ACT PRO VIDES FOR MAINTENANCE OF ACCOUNTS BY PERSONS CARRYING ON PROFESSION OF ENGIN EERING OR ARCHITECTURE, LEGAL, MEDICAL, ACCOUNTANCY, TECHNICAL CONSULTANCY OR INTERIOR DECORATION. THE BOOKS OF ACCOUNT REQUIRED TO BE MAINTAINED BY S UCH PERSONS ALSO ARE PRESCRIBED IN RULE 6F IN INCOME TAX RULES, 1961. S ECTION 44AB OF THE INCOME TAX ACT PRESCRIBES AUDIT OF SUCH ACCOUNTS FO R TAX PURPOSES. THE ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) 6 ASSESSEE THUS SUBMITTED THAT THE ACT TAKES CARE ABO UT BOOKS OF ACCOUNT REQUIREMENT UNDER THE ACT, METHOD OF ACCOUNTING TO BE FOLLOWED AND AUDIT TO BE CARRIED OUT AND REPORT OBTAINED FROM A CHARTE RED ACCOUNTANT. UNDER THE COMPANIES ACT ALSO, THERE ARE SUCH PROVISIONS F OR THE PURPOSE OF THE REQUIREMENTS OF THE SAID ACT. SECTION 209 OF THE C OMPANIES ACT PRESCRIBES BOOKS OF ACCOUNT REQUIRED TO BE KEPT. THEY ARE ALS O REQUIRED TO BE PREPARED AS PRESCRIBED IN SCHEDULE VI. 6. IT WAS FURTHER SUBMITTED THAT UNDER THE ACT DOES NOT PROVIDE THAT THE RETURN OF INCOME SHOULD BE BASED ON AUDITED ACCOUNT S UNDER THE COMPANIES ACT, AND FURTHER THAT THE INCOME WILL BE COMPUTED AS PER THE PROFIT AND LOSS ACCOUNT PREPARED UNDER THE COMPANIE S ACT. NOR THERE IS ANY PROVISION OR SECTION IN THE ACT WHICH PROVIDES THAT COMPANIES CAN NOT HAVE CASH SYSTEM OF ACCOUNTING, AS ALLOWED IN SECTI ON 145 OF THE SAID ACT. THE ASSESSEE SUBMITTED THAT WHEN COMPANIES FOLLOW M ERCANTILE METHOD OF ACCOUNTING, THE PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUNT ARE NEVER TREATED AS CORRECT FOR PAYING INCOME TAX., THOUGH ACCOUNTS ARE PREPARED UNDER MERCANTILE METHOD OF ACCOUNTING. 7. IT WAS SUBMITTED THAT UNDER THE COMPANIES ACT,19 56, COMPANIES ARE ALLOWED TO HAVE THEIR ANNUAL ACCOUNTS ON A DATE OTH ER THAN 31 ST MARCH, BUT FOR INCOME TAX PURPOSES, SUCH COMPANIES HAVE TO PRE PARE ANOTHER SET OF ACCOUNTS FOR THE PERIOD OF 12 MONTHS ENDING 31 ST MARCH, AS UNDER THE ACT, THE DEFINITION OF PREVIOUS YEAR IS THE PERIOD ENDIN G 31 ST MARCH. THUS TO HAVE TWO SETS OF ACCOUNTS, ONE FOR THE COMPANIES AC T AND ANOTHER FOR INCOME TAX PURPOSES IS NOT NEW TO THE INCOME TAX DE PARTMENT. ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) 7 8. THE AO HOWEVER DID NOT ACCEPT THE SUBMISSIONS MA DE ON BEHALF OF THE ASSESSEE. HE HELD THAT UNDER SECTION 209(3) OF THE COMPANIES ACT, 1956, EVERY COMPANY WAS OBLIGED TO MAINTAIN ITS BOOKS OF ACCOUNTS UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. ACCORDING TO THE AO, THE PROVISIONS OF SEC.209(3) OF THE COMPANIES ACT, 1956 OVERRIDES THE PROVISIONS OF SEC.145 OF THE ACT WHICH PROVIDES THAT THE INCOME CHARGEABL E UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' OR 'I NCOME FROM OTHER SOURCES' SHALL BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSE. ACCORDING TO THE AO, THE CHOICE IN THE MATTER OF SELECTION OF THE METHOD OF ACCOUNTING U/S.145 OF TH E ACT IS NOT AVAILABLE TO CORPORATE ASSESSEEES IN VIEW OF THE PROVISIONS OF S EC.209(3) OF THE COMPANIES ACT, 1956. THE AO PLACED RELIANCE ON THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF AMARPALI MERCANTILE (PRI VATE) LTD. VS. ACIT 45 ITD 386 (DEL). THE FACTS OF THE CASE WERE THAT THE ASSESSEE WHICH WAS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF FINANCIN G AND INVESTMENT WAS FOLLOWING CASH SYSTEM OF ACCOUNTING SINCE INCEPTION UPTO ASSESSMENT YEAR 1986-87. DURING THE FINANCIAL YEAR ENDED ON 31-3-19 89, SECTION 209 OF THE COMPANIES ACT WAS AMENDED BY THE COMPANIES (AMENDME NT) ACT, 1988, W.E.F 15-6-1988 WHEREBY IT WAS MADE MANDATORY FOR A LL COMPANIES TO MAINTAIN ACCOUNTS ON ACCRUAL BASIS I.E., MERCANTILE SYSTEM OF ACCOUNTING ONLY. IN COMPLIANCE WITH THIS AMENDMENT, THE ASSESS EE STARTED MAINTAINING ACCOUNTS ON MERCANTILE SYSTEM OF ACCOUNTING W.E.F. 1-4-1988. ACCORDINGLY THE ACCOUNTS FOR THE PREVIOUS YEAR ENDED ON 31-3-19 89 WERE PREPARED ON THE BASIS OF MERCANTILE SYSTEM OF ACCOUNTING. HOWEV ER, AS FAR AS THE INCOME-TAX ACT WAS CONCERNED, THE ASSESSEE PREPARED ITS RETURN OF INCOME ON CASH SYSTEM OF ACCOUNTING, AS WAS HITHERTO BEING FOLLOWED BY THE COMPANY AND ACCEPTED IN PAST. THE ASSESSING OFFICER DID NOT ACCEPT THE INCOME RETURNED ON THE BASIS OF CASH SYSTEM OF ACCO UNTING AND MADE AN ADDITION OF RS. 2,68,870 BEING THE INTEREST AMOUNT ACCRUED BUT NOT ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) 8 RECEIVED, NOT TAKEN INTO ACCOUNT WHILE TAKING THE R ETURN OF INCOME ON CASH BASIS. HE WAS OF THE VIEW THAT AS PER THE PROVISION S OF SECTION 145(1) THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS, HAD TO BE COMPUTED IN ACCORDANCE WITH METHOD OF ACCOUNTING REGULARLY EMPL OYED BY THE ASSESSEE AND SINCE THE METHOD FOLLOWED BY THE COMPANY WAS ME RCANTILE, THE INCOME HAD TO BE COMPUTED ACCORDINGLY. THE ASSESSING OFFIC ER OBSERVED THAT THE ASSESSEE COULD NOT BE PERMITTED TO HAVE TWO SETS OF ACCOUNTS, ONE ON THE BASIS OF THE COMPANIES ACT AND ANOTHER FOR THE PURP OSE OF INCOME-TAX. THE COMMISSIONER (APPEALS) APPROVED THE REASONING OF TH E ASSESSING OFFICER BY CONFIRMING THE ADDITION. ON FURTHER APPEAL BY THE ASSESSEE, THE TRIBUNAL HELD FOR ALL PRACTICAL PURPOSES SUCH AS RECORDING OF TH E BUSINESS TRANSACTIONS, COMPLIANCE WITH REQUIREMENTS OF THE C OMPANIES ACT, PRESENTATION OF THE ACCOUNTS BEFORE THE SHARE-HOLDE RS ETC. AND ALSO FOR THE PURPOSE OF FILING RETURNS UNDER THE INCOME-TAX ACT, THE ASSESSEE FOLLOWED CASH SYSTEM OF ACCOUNTING WHICH WAS ADMITT EDLY ACCEPTED IN PAST. HOWEVER, FROM THE CURRENT YEAR THE ASSESSEE C HANGED OVER TO METHOD OF MERCANTILE SYSTEM OF ACCOUNTING FOR ALL P RACTICAL PURPOSES OTHER THAN MEETING ITS LIABILITY UNDER THE INCOME-T AX ACT. THIS IS NOT PERMISSIBLE AS THE SAME IS NOT IN ACCORDANCE WITH L AW WHILE INTERPRETING THE WORDS 'METHOD OF ACCOUNTING REGULA RLY EMPLOYED BY THE ASSESSEE' IT WAS HELD IN THE CASE OF SARANGPUR COTTON MFG. CO. LTD. THAT SECTION RELATED TO A METHOD OF ACCOUNTING REGU LARLY EMPLOYED BY THE ASSESSEE FOR HIS OWN PURPOSES, THAT IS TO SAY, FOR THE PURPOSES OF HIS BUSINESS AND DID NOT RELATE TO A METHOD OF MAKI NG UP THE STATUTORY RETURN FOR ASSESSMENT TO INCOME-TAX. SIMILAR PRINCI PLE WAS LAID DOWN IN THE CASE OF CIT V. SMT. SINGARI BAI [1945] 13 IT R 224 (ALL.) (FB) WHERE IT WAS HELD THAT THE ASSESSEE COULD NOT FOR T HE PURPOSE OF MORE CONVENIENTLY CARRYING ON HIS OWN BUSINESS ADOPT THE MERCANTILE BASIS AND THEN FOR THE PURPOSE OF INCOME-TAX ASSESSMENT A DOPT THE CASH SYSTEM OF ACCOUNTING. SEE PAGES 1159/60 OF KANGA AN D PALKHIWALA'S THE LAW AND PRACTICE OF INCOME-TAX, EIGHTH EDITION AND ALSO PAGES 4231/32 OF SAMPATH IYENGAR'S LAW OF INCOME-TAX, EIG HTH EDITION. IN OUR OPINION THE PRINCIPLE LAID DOWN IN THESE TWO CA SES STILL HOLD THE FIELD OF ASSESSMENTS. ACCORDING TO THE AO THE ABOVE DECISION OF THE TRIBU NAL IS AUTHORITY FOR THE PROPOSITION THAT A COMPANY HAS NO OPTION EVEN UNDER THE INCOME TAX ACT, ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) 9 1961 TO ADOPT ANY SYSTEM OF ACCOUNTING EXCEPT MERCA NTILE SYSTEM OF ACCOUNTING. THE AO ALSO RELIED ON THE FACT THAT IN THE ANNUAL REPORT OF THE ASSESSEE WHEREIN IT HAS BEEN MENTIONED THAT THE SYS TEM OF ACCOUNTING FOLLOWED IS MERCANTILE. 9. IN THE REPORT OF THE AUDITORS U/S.44AB OF THE AC T, THE SYSTEM OF ACCOUNTING FOLLOWED HAD BEEN MENTIONED AS CASH SYST EM OF ACCOUNTING. THE AO NOTICED THAT IN THE BALANCE SHEET PREPARED ACCOR DING TO THE CASH SYSTEM OF ACCOUNTING A SUM OF RS.67,24,540/- WAS APPEARING AS SUNDRY CREDITORS. IN CASH SYSTEM OF ACCOUNTING GENERALLY THERE WILL N OT BE SUNDRY CREDITORS BECAUSE UNDER THE CASH SYSTEM OF ACCOUNTING NO AMOU NT IS SHOWN AS OUTSTANDING OF THE BUSINESS, AS THE RECORD IS MAINT AINED ONLY OF ACTUAL RECEIPTS AND ACTUAL DISBURSEMENTS. THE AO THEREFOR E CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE SUNDRY CREDITO RS SHOULD NOT BE TREATED AS INCOME OF THE YEAR UNDER CONSIDERATION A S THE ASSESSEE CLAIMED THAT IT WAS FOLLOWING ONLY CASH SYSTEM OF ACCOUNTIN G FOR INCOME TAX PURPOSES. THE ASSESSEE GAVE DETAILS OF SUNDRY CRED ITORS, WHICH WERE AS FOLLOWS: STATEMENT OF SUNDRY CREDITORS AS AT THE END OF THE YEAR. A PARTICULARS OF AMOUNTS SHOWN UNDER SUNDER CREDITORS 2003-04 RS. REMARKS PURPOSE OF LIABILITY 1 SERVICE TAX 2,657,087 COLLECTED IN MARCH, 2004 & PAYABLE TO GOVT. 2. T.D.S FROM OTHERS 661,354 COLLECTED IN MARCH, 2004 & PAYABLE TO GOVT. 3. STAFF INCOME TAX 447,300 TDS FROM STAFF SALAR IES PAYABLE TO GOVT. 4 STUP EMP. CO-OP. HSG. SOC. 68,115 MARCH DEDU CTION TO BE PAID TO SOCIETY. 5. NEW INDIA CLAIM SETTLEMENT 166,187 RECEIVED F ROM NEW INDIA TO BE PAID TO STAFF. 6 FORESHORE CO-OP HSG. SOC. 25,310 TRANSFER C HARGES FOR PURCHASE OF FLAT. 7. ADVANCE RENT A/C. 7,100 RENT PAID IN ADVA NCE. 8. DEPOSIT RECEIVED FROM TEMPLE TOWER 500,000 AGAINST DOCUMENTS TO RECEIVE FOR CHENNAI OFFICE. 9 SBOI, DIVIDEND A/C. FOR F.Y 100 BANK CH ARGES ITA NO. 5617/MUM/2009(A.Y. 2004-05) ITA NO.6062/MUM/2009(A.Y. 2005-06) ITA NO.6063/MUM/2009(A.Y. 2006-07) 10 2002-03 10 SUSPENSE ACCOUNT 4,149 EXCESS CREDIT GIVEN IN OUR A/C. BY ICICI BANK LTD. 11. TRAVEL ADVANCE 55,417 PAUL AMARNATH 42,252 VARIOUS PARTIES 13,165 WITH BAL