2024 (9) TMI 1097 - AT - Income Tax

Applicability of mercantile system or cash system of accounting - HELD THAT - We consider it appropriate to restore the issue on merits to the file of AO to consider the mercantile system of accounting as applicable in case of assessee and after taking response of assessee on the issue, pass order afresh. Additions sustained by the CIT(A) on account of purchase of iron purchased - As again once it is established that assessee was following mercantile system of accounting, then irrespective of fact that stock was received in the next financial year, while payment was made before 31.03.2010, the disallowance cannot be sustained. Accordingly, we sustain ground nos. 2 5 partly in favour of the assessee.

Issues:
1. Disallowance of various expenses by Assessing Officer.
2. Appeal against the order of Commissioner of Income Tax (Appeals).
3. Disallowance of mobilization advances and purchases by CIT(A).
4. Rejection of books of account by CIT(A) under section 145(3).
5. Disallowance of purchase of iron by CIT(A).
6. Appeal raised by the assessee against the orders passed by Assessing Officer and CIT(A).

Analysis:

1. The Appellate Tribunal considered the appeal against the order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2011-12. The Assessing Officer had made disallowances on various grounds, including creditors on cash basis, expenses payable, mobilization advances, accounting charges, donation, and purchases of TMT Bar. The CIT(A) sustained some disallowances while deleting others, leading to the Revenue's appeal being dismissed.

2. The Tribunal noted that the Revenue's appeal challenging the CIT(A)'s order was dismissed on merit, while the assessee's appeal was initially dismissed for non-appearance but later recalled. The learned AR argued that the assessee maintained accounts on a mercantile basis, citing a previous order. The Tribunal reproduced a portion of the earlier order highlighting the acceptance of the mercantile basis for recording expenses and revenue.

3. The assessee raised grounds challenging the orders passed by the Assessing Officer and CIT(A), particularly regarding mobilization advances and purchases. The CIT(A) invoked section 145(3) to reject the assessee's books of account, leading to a dispute over the method of accounting followed.

4. In the case of mobilization advances from Hooghly Holdings, the CIT(A) held that the amount was taxable in the relevant assessment year as it was actually received and considered revenue receipts received in advance. The CIT(A) rejected the assessee's plea based on the terms and conditions of the contract.

5. Regarding the disallowance of purchases of iron, the CIT(A) upheld the disallowance as the iron purchased was not in physical possession for consumption by the closing date. Despite the appellant's arguments on the method of accounting, the addition was sustained as undisclosed closing stock.

6. The Tribunal, considering the mercantile system of accounting accepted by the assessee, directed the issue of mobilization expenses to be reconsidered by the Assessing Officer. It was emphasized that the final adjustment of mobilization expenses was dependent on the settlement of bills after adjustments. The Tribunal also addressed the disallowance of iron purchases, stating that once the mercantile system was accepted, the disallowance could not be sustained solely based on the timing of stock receipt.

7. Consequently, the appeal of the assessee was partly allowed, with directions to the Assessing Officer to reconsider the issues in light of the mercantile system of accounting accepted for the assessee.

This detailed analysis of the legal judgment highlights the issues raised, the arguments presented, and the Tribunal's decision on each matter, ensuring a comprehensive understanding of the case.

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