1998 (2) TMI 160 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 14,81,827 upheld by CIT(Appeals).
2. Assessing Officer's compliance with CIT(Appeals) directions.
3. Adoption of cash and mercantile system of accounting for different transactions.
4. Validity of the CIT(Appeals) order.

Detailed Analysis:

1. Addition of Rs. 14,81,827 Upheld by CIT(Appeals):
The primary issue revolves around the addition of Rs. 14,81,827 made by the Assessing Officer (AO) and upheld by the CIT(Appeals). The assessee, a company deriving income from underwriting commission, followed a hybrid system of accounting-receiving commission on a receipt basis while claiming deductions on a mercantile basis. The AO found this method inconsistent and added Rs. 14,81,827 to the taxable income, arguing that the hybrid system did not reflect a true and fair picture of profits. The CIT(Appeals) upheld this addition, stating that the assessee could not adopt two different methods of accounting for the same item.

2. Assessing Officer's Compliance with CIT(Appeals) Directions:
The CIT(Appeals) had set aside the initial assessment and directed the AO to re-examine the case, specifically to verify the privity of contract between the sub-brokers and Ansals. The AO, upon re-assessment, maintained the addition of Rs. 14,81,827, arguing that the hybrid system led to tax avoidance. The assessee contended that the AO exceeded his jurisdiction by not adhering strictly to the CIT(Appeals) directions. However, the Tribunal found that the AO did not exceed his jurisdiction as the CIT(Appeals) had indeed asked for a re-examination of the facts, which the AO carried out.

3. Adoption of Cash and Mercantile System of Accounting for Different Transactions:
The assessee argued that the hybrid system was employed for different items, not the same item, and that this method had been consistently followed and accepted in the past. The Tribunal acknowledged that the hybrid system is a recognized method of accounting and cited various judicial precedents supporting the use of different accounting methods for different transactions. The Tribunal found that the assessee had separate contracts with different parties, and the terms varied, justifying the use of different accounting methods. The Tribunal noted that the AO failed to provide evidence that the hybrid system resulted in an untrue representation of profits.

4. Validity of the CIT(Appeals) Order:
The Tribunal examined whether the CIT(Appeals) order was valid and whether the AO complied with it. The Tribunal noted that the CIT(Appeals) had directed the AO to verify specific facts, which the AO did. The Tribunal found that the AO did not exceed his jurisdiction and that the CIT(Appeals) order was valid. The Tribunal also noted that the CIT(Appeals) had not restricted the AO's powers but had asked for a re-examination of the facts.

Conclusion:
The Tribunal concluded that the assessee's hybrid system of accounting was valid, as it was consistently followed and recognized by accounting and commercial practices. The Tribunal found no evidence that this method resulted in an untrue representation of profits. The Tribunal also found that the AO did not exceed his jurisdiction and complied with the CIT(Appeals) directions. Consequently, the Tribunal allowed the assessee's appeal, setting aside the addition of Rs. 14,81,827.