2013 (11) TMI 1053 - HC - Income Tax

Change in accounting system Loss incurred - Held that - The change in method of accounting was bona fide and with the compliance of the Accounting Standard AS 9 Under new system the income is required to be accounted for or offered for taxation in the year in which it is accrued to the assessee - This method of account is more accurate, scientific and as per the various statutory requirements - The change cannot be rejected on the ground that it has resulted into claiming more expenditure during the year under consideration. Rejection of books - The assessing officer has not pin-pointed out any defects in the books of accounts of the Appellant - The assessing officer has not established that profit cannot be deduced because of method of accounting adopted by the appellant - The new accounting system followed by the assessee is permissible under the law - When the assessee changed the accounting system and started following the new accounting system which is permissible under the law It is not justified to reject the change in the method of accounting just because it resulted in loss Decided against Revenue.

Issues Involved:
1. Change in accounting policy by the assessee.
2. Addition of Rs.45,78,354/- to the total income by the assessing officer.
3. Rejection of books of accounts by the assessing officer.
4. Decisions of CIT(A) and ITAT regarding the addition and rejection of books of accounts.

Detailed Analysis:

1. Change in Accounting Policy by the Assessee:
The assessee company changed its accounting policy during the assessment year (AY) 2006-07 from an earlier system where advances received from sponsors and expenditures on projects were accounted for in the profit and loss account irrespective of project completion. The new system accounted for advances and expenditures only for completed projects in the profit and loss account, while those related to incomplete projects were carried forward to the balance sheet. The change was argued to be in compliance with Accounting Standard (AS) 9 - Revenue Recognition and Section 5 of the Income Tax Act. The CIT(A) found this change to be bona fide and more accurate, scientific, and compliant with statutory requirements.

2. Addition of Rs.45,78,354/- to the Total Income by the Assessing Officer:
The assessing officer added Rs.45,78,354/- to the total income of the assessee, arguing that the new accounting system resulted in a reduction of profit by this amount. The CIT(A) disagreed, stating that the change in accounting policy had an impact of only Rs.8,29,296/- on the profit, not Rs.45,78,354/-. The CIT(A) concluded that the expenditure of Rs.45,78,354/- was incurred during the year under consideration and was allowable under both the old and new accounting methods.

3. Rejection of Books of Accounts by the Assessing Officer:
The assessing officer rejected the books of accounts under Section 145(3) of the Income Tax Act, alleging that the new accounting system distorted the profit. However, the CIT(A) found no specific defects in the books of accounts and held that the rejection was incorrect. The CIT(A) emphasized that the method of accounting adopted by the assessee did not prevent the deduction of profit and was permissible under the law.

4. Decisions of CIT(A) and ITAT Regarding the Addition and Rejection of Books of Accounts:
The CIT(A) allowed the appeal by the assessee, deleting the addition of Rs.45,78,354/- and rejecting the assessing officer's decision to reject the books of accounts. The ITAT upheld the CIT(A)'s decision, confirming that the new accounting system was permissible and the change was bona fide. The High Court agreed with the findings of the CIT(A) and ITAT, noting that the new accounting system was allowed under the law and the assessing officer's rejection and addition were unjustified.

Conclusion:
The High Court dismissed the revenue's appeal, affirming that no substantial question of law arose. The change in accounting policy by the assessee was legitimate, and the addition of Rs.45,78,354/- by the assessing officer was unwarranted. The rejection of the books of accounts was also found to be incorrect, thus supporting the decisions of the CIT(A) and ITAT.

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