2014 (12) TMI 1056 - AT - Income Tax

Method of accounting to be adopted by assessee Rejection of mercantile system of accounting - Held that - The findings of the CIT(A) is mechanical, bordering on the laconic - the fact that the say of the assessee is contrary to the finding of the AO, is the reason an appeal was filed before her - She was required to examine the rival contentions, on the basis of the books of account and submissions tendered - It was no reason for dismissal of an appeal, that too in the second round as long as income is billed, received, and accounted for in a given year, the system is mercantile - This would get tested only if the AD is able to point out an instance where services stand billed, but payments have not been received, and for this reason, income is not recognized - No such instance has been pointed out, since no such instance exists - income has been recognised on accrual basis, and the method of accounting is clearly mercantile -expenses in any case have been accepted as genuine. Assessee rightly contended that if bills raised are realized in that very financial year, then it cannot be a basis to come to the conclusion that assessee was not following mercantile system of accounting, unless it is demonstrated that services were rendered in one financial year and bill for the same realized in subsequent assessment year- interest income of ₹ 12,127.91 was accounted for on accrual basis thus, the claim of assessee is accepted Decided in favour of assesee.

Summary

Issues:
1. Determination of the method of accounting followed by the assessee.
2. Allowability of expenses payable claimed by the assessee.
3. Assessment of income based on the accounting method.

Analysis:
1. The primary issue in this case was to ascertain the method of accounting employed by the assessee, a partnership firm engaged in the profession of Chartered Accountancy. The original assessment under section 144 of the Income-tax Act resulted in the addition of expenses payable, challenging the claimed mercantile system of accounting. The CIT(A) upheld part of the addition but deleted the rest. The Tribunal directed the Assessing Officer (AO) to determine the accounting system followed by the assessee. The AO concluded that the firm was using the cash system of accounting, leading to the addition of expenses payable.

2. The assessee contended that it consistently followed the mercantile system of accounting, emphasizing that all billings for the relevant year had been collected, indicating income recognition. The AO's reliance on the tax audit report to assert the cash system was challenged. The Tribunal highlighted instances where billings and revenue recognition were closely linked, supporting the mercantile system argument. The AO's failure to prove delayed billing and revenue recognition discrepancies further strengthened the assessee's position.

3. The Tribunal, after reviewing the documents and observations made by the AO, found merit in the assessee's argument regarding income recognition and the mercantile system. The Tribunal emphasized that the mere realization of billings in the same financial year did not negate the mercantile system, especially when no instances of delayed billing were identified. Notably, the interest income was accounted for on an accrual basis, reinforcing the mercantile system claim. Consequently, the Tribunal allowed the assessee's appeal, emphasizing the proper recognition of income and the erroneous addition of expenses payable.

In conclusion, the judgment revolved around establishing the method of accounting, evaluating the allowability of expenses, and determining income based on the chosen accounting system. The Tribunal's decision favored the assessee's consistent application of the mercantile system, emphasizing proper income recognition and rejecting the addition of expenses payable under the cash system premise.