2014 (8) TMI 239 - AT - Income Tax

Revenue recognition - Method of accounting Mismatch between purchases and reflection in stock - Assessee neither followed neither mercantile system nor cash system of accounting Held that - As decided in assessee s own case, it has been held that the advances were required to be utilized for the purpose of executing contract and as per the terms of the contract, the advances were adjusted as per actual progress of the contract - CIT(A) has recorded that no advance is adjusted in full in the first bill for the work done as the entire contract was not complete and that if the contract is not completely fulfilled the assessee has to return the amount of advances the system of accounting of the assessee was followed by the assessee for the last 35 years i.e. from the year of its inception and all along has been accepted by the department - there is nothing wrong on the part of the assessee in not considering the amount representing work advances as income accruing or arising to it until a regular bill for work done is submitted and accepted by its clients - the order of the CIT(A) is correct in accepting the method of accounting followed regularly for the last 35 years there was no reason to interfere in the order of the CIT(A) Decided against Revenue.

Summary

Issues:
1. Whether the addition of Rs. 75,00,000 made by the Assessing Officer under section 145 of the Income Tax Act, 1961 should be deleted.
2. Whether the mismatch between purchases executed by the assessee and their reflection in stock justifies invoking section 145 of the IT Act.
3. Whether the order of the CIT(A) deleting the addition should be set aside and that of the Assessing Officer restored.

Analysis:

Issue 1:
The revenue appealed against the CIT(A)'s order deleting the addition of Rs. 75,00,000 made by the Assessing Officer under section 145 of the IT Act for the assessment year 2009-10. The Assessing Officer rejected the book results, claiming the assessee did not follow a recognized method of accounting. However, the CIT(A) deleted the addition, citing that the appellant's books were audited under section 44AB, certifying the use of the mercantile system of accounting. The CIT(A) found no defect in the accounts maintained by the assessee and emphasized that the Assessing Officer failed to appreciate the method of accounting regularly followed by the appellant. The Tribunal upheld the CIT(A)'s decision, stating that the Assessing Officer erred in invoking section 145(3) and making an ad hoc addition without proper verification.

Issue 2:
Regarding the mismatch between purchases executed by the assessee and their reflection in stock, the Assessing Officer raised concerns about the absence of a stock register. However, the CIT(A) emphasized that no provision in the Act or rules mandates the maintenance of a stock register for such businesses. The assessing officer's heavy reliance on the absence of closing stock in the books was countered by the appellant's audited financial statements showing work in progress. The Tribunal held that the Assessing Officer's grounds for invoking section 145(3) based on the absence of a stock register were unfounded.

Issue 3:
The Tribunal noted that in a previous order for the A.Y. 2005-06, it upheld the method of accounting followed by the assessee for the last 35 years. The Tribunal found no reason to interfere with the CIT(A)'s order, stating that the revenue could have challenged the order before the High Court if aggrieved. As there was no stay or reversal of the Tribunal's order by the High Court, the CIT(A) rightly followed the same, leading to the dismissal of the revenue's appeal.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the addition made by the Assessing Officer under section 145 of the Income Tax Act, 1961 for the assessment year 2009-10.