2016 (8) TMI 361 - AT - Income Tax

Disallowance of the provisions directly debited in the balance sheet - method of accounting adopted - CIT(A) allowed the claim - Held that - It is notable that the ld. CIT(A) after considering the recognized system of accounting followed consistently by the assessee and accepted by department in previous years and keeping in view the rule of consistency as envisaged by Hon ble Apex Court in the case of CIT vs. Realest Builder & Services Ltd., (2008 (5) TMI 6 - SUPREME COURT ), has rightly observed that the Assessing Officer cannot reject the method adopted by assessee and also cannot apply a different method of accounting in a subsequent year unless he is able to demonstrate that there is under-estimation of profits by giving facts and figures in that regard. In the instant case no such facts and figures have been assigned by the Assessing Officer to discard the findings reached by the ld. CIT(A). Moreover, the treatment of the assessee with regard to accounting of income and expenses from the business of Fleet Management Services is in accordance with the accepted accounting method as laid down in AS-9 issued by the Institute of Chartered Accountants of India. The ld. DR could not rebut the contention of the assessee that the buffer account created is in the nature of amount received on account of services to be rendered over the period of lease in respect of the leased cars and any income or loss in this regard arises only at the time of determination, i.e., at the end of the tenure of the contract, and till such time the assessee holds the amount with an obligation to render the services during the tenure of the contract. In presence of these facts, we do not find any good reason to interfere with the order of the ld. CIT(A). - Decided in favour of assessee.

Summary

Issues:
1. Addition of provision directly debited in the balance sheet.
2. Rejection of the method of accounting by the Assessing Officer.

Analysis:
1. The case involved an appeal by the Revenue against the order of ld. CIT(A)-VII for the assessment year 2007-08, challenging the deletion of an addition of ?3,00,88,607 made by the AO by disallowing provisions directly debited in the balance sheet. The AO contended that the provision created by the assessee was not routed through the profit and loss account, leading to the addition. However, the ld. CIT(A) deleted the addition after considering the assessee's method of accounting and various legal precedents. The CIT(A) observed that the assessee followed the completed service contract method consistently, which was accepted in previous assessments. The method allocated incomes and expenses over the contract period, and the AO's attempt to assess income differently was not justified. The CIT(A) referred to legal positions supporting the assessee's method and concluded that the addition was not sustainable, directing its deletion.

2. The Assessing Officer rejected the assessee's accounting method, arguing that the income should be assessed on an accrual basis during the year. However, the Tribunal upheld the CIT(A)'s decision, emphasizing the importance of consistency in accounting methods unless there is evidence of underestimation of profits. The Tribunal noted that the assessee's method was in line with AS-9 and previous acceptance by the department. The Tribunal highlighted the lack of evidence provided by the AO to justify discarding the assessee's method. The Tribunal also noted that the buffer account created by the assessee was in line with services to be rendered over the lease period, and any income or loss was determined at the end of the contract period. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the addition of provisions directly debited in the balance sheet, emphasizing the importance of consistency in accounting methods and the lack of evidence to support the rejection of the assessee's method. The Tribunal found no merit in the Revenue's appeal and dismissed it accordingly.