2010 (9) TMI 1280 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 27,76,039/- being rental income for 1/4th cycle not credited in Profit & Loss Account.
2. The correctness of the accounting method followed by the assessee.
3. Applicability of the matching principle in accounting.
4. Consistency in the method of accounting from year to year.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 27,76,039/-:
The department appealed against the deletion of Rs. 27,76,039/- rental income for 1/4th cycle not credited in the Profit & Loss Account. The AO observed that the assessee debited expenses related to loading and fuel for the period January 2005 to March 2005 without crediting the corresponding income. The AO added back the rental income proportionate to the expenses incurred during this period, arguing that the assessee should have recognized this income on a mercantile basis. The CIT(A) deleted this addition, emphasizing that the assessee consistently followed the completed contract method, recognizing revenue at the point of upliftment of potatoes.

2. Correctness of the Accounting Method:
The AO contended that the assessee's claim of following the mercantile system was incorrect because expenses were debited without recognizing matching income. The AO argued that the business of cold storage involves multiple acts, including loading, storage, and upliftment, and thus should follow the proportionate completion contract method. The CIT(A) upheld the assessee's method, noting that it had been consistently accepted by the department in previous years, and any change would require adjustments across multiple years.

3. Applicability of the Matching Principle:
The AO applied the matching principle, stating that expenses and income should be shown simultaneously to give a correct picture of taxable profits. The AO rejected the assessee's completed contract method, arguing that the cold storage business does not involve a single act but multiple stages. The CIT(A) countered that applying the matching principle in isolation without adjusting prior and subsequent years' accounts would distort the income measurement. The CIT(A) emphasized the rule of consistency and found the AO's addition uncalled for.

4. Consistency in the Method of Accounting:
The CIT(A) highlighted that the assessee's accounting method had been accepted in earlier and subsequent years, and changing it based on the AO's interpretation would disrupt the consistency. The CIT(A) noted that the department had dropped similar proceedings in previous years and that the principle of consistency should prevail. The Tribunal agreed, stressing that each assessment year is separate and independent, and the true and correct taxable income must be shown for each year.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, emphasizing the importance of consistency in the accounting method. The Tribunal directed that the income for the period January to March 2005 should be accounted for on an accrual basis for the assessment year 2005-06, with the assessee entitled to set off the income relating to the previous period. The appeal was partly allowed, aligning with the principles of mercantile accounting and consistency.