2022 (11) TMI 975 - AT - Income Tax

Understatement of income on account of sale of energy - difference in the sale of energy price - method of accounting of sales realization - amount realized during prior years - booking sale on accrual basis - sales of energy on realization basis - assessee submitted no understatement of the income as the assessee company has shown sales to this extent stands realized and the sales were in consistent with the method of accounting being followed by the appellant company - HELD THAT - Special Auditor as well as Ld. A.O have failed to appreciate that even the amount realized during prior years have been offered to tax as in the year under consideration. Relevant para 11(a) of Form 3CD of statement of particulars required to be furnished under section 44AB of the I.T Act reveal about the method of accountingwhere the Special Auditor specified the system of accounting to be cash basis for sale of energy as per para 2 of Annexure 'A' to form 6B of Special Report. As evident that the CIT(A) has confirmed the finding of the AO, ignoring the very fact that Revenue has taxed the sales of energy in preceding assessment years on sales realization on cash basis only - As an undisputed fact that the cash system of accounting has been followed is duly disclosed by Tax Auditors as well as by Special Auditor. Consistency in booking of sales on cash basis should have been accepted by department as there was no loss of revenue, by this method of realization of sales. From the para 3, of the assessment order for Assessment Year 2008-09, the AO has admitted on record that During the year under consideration the company has changed the system of accounting from cash to mercantile resulting in increase in revenue of Rs.36,86,66,000 . Department has accepted the version of Special Auditors that bills of electricity have been raised for an amount without application its mind to the standard principles of accounting system, change of method of accounting sue moto by assesse company, the resultant revenue gains on the principle of consistency on the disputed issue of booking of sales of energy/electricity. As per accounting method, in order to change a method of accounting an exercise is required to be done from the very inception of business activity of sale of energy that these were the dues; these were the realizations and this much was the short fall. Once this exercise has been done, the excess or shortfall to be accounted for, to follow the change in accounting method is ignored by the authorities below. As per settled principle of rule of consistency, by the Hon'ble Apex Court in a Historical Judgement in the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT the authorities below ought to have been accepted, the appellant company s sales of energy on realization basis right from inception to year under consideration on principal of consistency. Over and above, if action of Ld. A.O and the Ld. CIT(A) in adding on alleged account of booking sale on accrual basis is accepted, it would amount to double taxation as the appellant company has changed the method from cash to accrual in following year and has offered to tax additional revenue of Rs.36,86,66,000/- in addition to regular sales on accrual basis and further this exercise has to be done right from inception till the year under consideration subject to credit of the sum offered to tax in following year. Appeal of the assessee is allowed.

Issues Involved:
1. Confirmation of addition on account of difference in sale energy treating it as understatement of income.
2. Consistency in the method of accounting for sales of energy.
3. Change in the method of accounting from cash to mercantile.
4. Double taxation due to change in accounting method.

Issue-wise Detailed Analysis:

1. Confirmation of Addition on Account of Difference in Sale Energy Treating it as Understatement of Income:
The assessee challenged the action of the CIT(A) in confirming the addition of Rs. 56,20,70,000 on account of the difference in the sale energy, treating it as an understatement of income. The AO observed that the financial accounts submitted by the appellant were incorrect and false, leading to the rejection of these accounts. The AO noted that the assessee had shown a sale of energy amounting to Rs. 64,00,00000/- instead of the required Rs. 1202070000/- on an accrual basis, leading to an understatement of income.

2. Consistency in the Method of Accounting for Sales of Energy:
The assessee argued that the revenue should be recognized at the fair value of consideration received or receivable, and it is appropriate to recognize revenue when it is reasonably certain that ultimate collection will be made. The AO rejected this argument, stating that the ultimate collection of revenue was not uncertain at the time of making the sale of electricity to JKPDC. The assessee had not claimed any bad debts/provision for bad debt in its accounts, and the accounting policy defined by the assessee corporation stated that revenue is recognized on an accrual basis when energy is generated and supplied.

3. Change in the Method of Accounting from Cash to Mercantile:
The assessee contended that although it followed the accrual system of accounting, for the sale of energy, it followed the method of booking only realized sales. This method had been consistently followed since the company's inception. The AO and the Special Auditor failed to appreciate that even the amount realized in prior years had been offered to tax in the year under consideration. The assessee changed the method of accounting from cash to mercantile in the succeeding A.Y. 2008-09, resulting in an increase in revenue of Rs. 36,86,66,000/-.

4. Double Taxation Due to Change in Accounting Method:
The assessee argued that the addition of Rs. 56,20,70,000/- would result in double taxation, as the company had already offered to tax an additional revenue of Rs. 36,86,66,000/- due to the change in the accounting method in the following year. The authorities below ignored the exercise required to account for the excess or shortfall when changing the accounting method from the inception of the business activity.

Judgment:
The tribunal found that the CIT(A) had confirmed the addition without considering the fact that the revenue had taxed the sales of energy in preceding assessment years on a cash basis. The tribunal emphasized the principle of consistency, noting that the method of accounting followed by the assessee for sales realization had been consistent since the company's inception. The tribunal also highlighted that the department accepted the change in the accounting method in the following year, which resulted in additional revenue being taxed. The tribunal concluded that the addition of Rs. 56,20,70,000/- would amount to double taxation and set aside the impugned order, deleting the addition.

Conclusion:
The appeal of the assessee was allowed, and the addition of Rs. 56,20,70,000/- was deleted, emphasizing the importance of consistency in the accounting method and preventing double taxation. The judgment upheld the principle that changes in accounting methods should be carefully accounted for to avoid unjust taxation.

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