2014 (1) TMI 536 - AT - Income Tax

Deletion of Rs. 30 Lakhs - Method of Accounting Held that - The assessee is following cash system uniformly for all customers, and in respect of an item/s of income which is regularly charged and for which they are contractually bound - the figures itself suggest of the payments being received in the regular course of business it cannot or ought not to lead to a double tax - matter remitted back to the AO and the onus to prove its case with reference to uncertainty and its resolution would be on the assessee - the offer of income pertaining to a preceding year/s on cash basis, would not justify non accounting of income for the current year, or even for a preceding year, which though not received, yet stands accrued during the current year - This is as there could be no option for following a mixed system of accounting - the income not offered to tax on accrual basis, would not preclude it being brought to tax on receipt inasmuch as the same falls within the scope of income u/s. 5 of the Act. Disallowance of prior paid expenses Held that - The expenses being admitted as prior period expenditure in the assessee s accounts - Where an expenditure is disputed or indeterminate, liability would arise only in the year of resolution of the dispute Decided partly in favour of Revenue.

Summary

Issues:
1. Dispute over deletion of addition in the sum of Rs.30 lakhs by the Assessing Officer.
2. Disallowance of prior period expenses in the sum of Rs.1,83,433.

Analysis:

Issue 1: Dispute over deletion of addition in the sum of Rs.30 lakhs by the Assessing Officer

The appeal revolves around the Revenue challenging the deletion of Rs.30 lakhs addition by the Assessing Officer. The company, engaged in gas supply business, follows accrual method of accounting but recognizes revenue for certain items on a cash basis due to uncertainty in collection. The Revenue argues that the company must follow either cash or mercantile system exclusively as per section 145 of the Income Tax Act. The Tribunal agrees with the Revenue's stance that the company, being a company, is obligated to follow the accrual method. However, it acknowledges the validity of deferring revenue recognition due to uncertainty in collection but emphasizes that it does not justify adopting the cash method. The Tribunal suggests the company should provide details to differentiate between the income offered on a receipt basis and the estimated addition. It directs the Assessing Officer to reevaluate the matter based on the provided information, with the onus on the company to prove the uncertainty and its resolution. The Tribunal clarifies that offering income on a cash basis for preceding years does not exempt it from being taxed on a receipt basis for the current year. The Tribunal partially allows the Revenue's appeal for statistical purposes.

Issue 2: Disallowance of prior period expenses in the sum of Rs.1,83,433

The second issue pertains to the disallowance of prior period expenses amounting to Rs.1,83,433. The company claimed these expenses based on crystallization, but the Commissioner found that they were claimed without a clear determination of liability. The Tribunal concurs with the Commissioner that disputed or indeterminate expenses should only be recognized in the year of dispute resolution. Hence, it upholds the Commissioner's decision regarding the disallowance of prior period expenses. Consequently, the Tribunal confirms the disallowance of Rs.1,83,433 on this ground.

In conclusion, the Tribunal's judgment addresses the issues raised by the Revenue concerning the company's accounting methods and prior period expenses. It provides detailed reasoning for its decisions and directs further action to resolve the accounting discrepancies effectively.