2007 (5) TMI 229 - HC - Income Tax

Discrepancy between the bills raised and the payments received AO made additions as undisclosed receipts by not accepting the assessee s explanation that it was maintaining a running account in respect of its clients - held that in view of the mercantile system followed by the Assessee there would always be some outstanding bills since the Assessee was maintaining its accounts on a mercantile system and kept a running account with its clients additions are not justified

Summary

Issues:
1. Discrepancy in bills raised and payments received under mercantile system of accounting.
2. Addition of undisclosed receipts by the Assessing Officer.
3. Commissioner of Income Tax (Appeals) and Tribunal's decision on the discrepancy.
4. Application of mercantile system and running account with clients.

Analysis:
The case involved a dispute regarding a discrepancy in bills raised and payments received by the Assessee under a mercantile system of accounting. The Assessee explained the difference by maintaining a running account with its clients, leading to the Assessing Officer adding an amount as undisclosed receipts. However, the Commissioner of Income Tax (Appeals) reviewed the accounts and accepted the Assessee's explanation, emphasizing that outstanding bills were yet to be paid by customers, and excess receipts represented payments towards such balances. This decision was upheld by the Tribunal, noting such discrepancies were common in accounts.

The High Court, comprising MADAN B. LOKUR and V. B. GUPTA JJ., affirmed the decisions of the Commissioner and the Tribunal. They found no error in the view taken, especially considering the Assessee's adherence to a mercantile system of accounting and the practice of maintaining a running account with clients. Consequently, the Court concluded that no substantial question of law arose and dismissed the appeal.

In conclusion, the judgment resolved the issues surrounding the discrepancy in billing and payments, the addition of undisclosed receipts by the Assessing Officer, and the application of the mercantile system of accounting by the Assessee. The decision highlighted the importance of considering the nature of accounting methods followed by the taxpayer and the practice of maintaining running accounts in determining the legitimacy of discrepancies in financial records.