2010 (9) TMI 1252 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 3,40,501 out of Rs. 5,74,087 by the Assessing Officer.
2. Method of accounting followed by the assessee.
3. Addition of Rs. 1,80,000 u/s 40(a)(ia) of the Act.
4. Disallowance of Rs. 81,970 and Rs. 1,11,410.

Summary:

Issue 1: Addition of Rs. 3,40,501 out of Rs. 5,74,087 by the Assessing Officer
The assessee, a partnership firm engaged in chartered accountancy, filed its return of income declaring Rs. 89,558. The Assessing Officer (AO) scrutinized the accounts and found that the assessee was following a hybrid system of accounting, which is not permissible u/s 145(1) of the Act. The AO determined the taxable income as Rs. 10,42,985, including an addition of Rs. 5,74,087. This amount included Rs. 4,13,586 related to M/s. Das Gupta Management Services (P) Ltd. and advances against traveling expenses. The CIT(A) upheld the addition of Rs. 3,40,501 but excluded Rs. 2,55,586 as it was an opening balance.

Issue 2: Method of accounting followed by the assessee
The assessee contended that it followed the mercantile system of accounting, consistently accepted in previous assessments. The CIT(A) rejected this claim based on the audit report note. The Tribunal found that the assessee had no outstanding bills and had realized all professional bills within the year, indicating a mercantile system. The Tribunal concluded that the assessee followed the mercantile system, and the AO's inference of a hybrid system was based on surmises and conjecture.

Issue 3: Addition of Rs. 1,80,000 u/s 40(a)(ia) of the Act
The AO disallowed Rs. 1,80,000 paid to M/s. Dass Gupta Management Services (P) Ltd. for non-deduction of TDS. The CIT(A) upheld this disallowance. The Tribunal found that the AO's findings were contradictory, as the amount was included in the Rs. 4,13,586 addition. The Tribunal noted that the amount paid for job work was less than Rs. 50,000, exempting it from TDS u/s 194C. The Tribunal allowed the appeal and deleted the disallowance.

Issue 4: Disallowance of Rs. 81,970 and Rs. 1,11,410
The AO disallowed these expenses as they remained unpaid, assuming the assessee followed the cash method of accounting. The Tribunal, having established that the assessee followed the mercantile system, allowed these expenses as there was no dispute about their nature and admissibility.

Conclusion:
The Tribunal allowed the appeal, deleted the disallowances, and confirmed that the assessee followed the mercantile system of accounting. The decision was pronounced on 24.09.2010.