2010 (9) TMI 58 - HC - Income Tax

Addition - Rules of consistency - The assessing officer noticed that the assessee was maintaining mercantile system of accounting and had claimed expenses amounting to Rs.14,55,720/- under the head prior period expenses pertaining to earlier years. The auditor, in column 22(b) of the Tax Audit Report, stated that prior period expenses amounting to Rs.14,55,720/- had been debited to the Profit & Loss Account. - As per AO, the nature of the expenses was such that they had occurred and crystallized during the earlier years. It was further held that as the same had been crystallized during the relevant year, the same could not be allowed in the later years. - Held that The assessee has been debiting the expenditure spill over to the subsequent years and the assessing officer had been allowing the same. The said accounting practice has been consistently followed by the assessee and accepted by the department. If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with the same, the doctrine of consistency would come into play. The said accounting system has been followed for a number of years and there is no proof that there has been any material change in the activities of the assessee as compared to the earlier years. Nothing has been brought on record to show that there has been distortion of profit or the books of account did not reflect the correct picture in the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system which was accepted by the department in respect of the previous years. - Decided in favor of assessee

Issues Involved:
1. Whether ITAT was correct in law in deleting the addition applying Rule of consistency holding that such a practice was adopted by the assessee and accepted by the Department in past.

Detailed Analysis:

Issue 1: Consistency in Accounting Practices:
The High Court examined whether the Income Tax Appellate Tribunal (ITAT) was correct in law in deleting the addition by applying the Rule of consistency, holding that such a practice was adopted by the assessee and accepted by the Department in past.

Facts:
The respondent-assessee, engaged in the manufacturing and sale of various products, was maintaining a mercantile system of accounting. During the assessment proceedings, the assessee claimed expenses amounting to Rs. 14,55,720/- under the head "prior period expenses" pertaining to earlier years. The Assessing Officer (AO) noticed these expenses and questioned their allowance in the current year. The assessee explained that these expenses crystallized during the current year due to delayed receipt of vouchers from various branches. However, the AO disallowed Rs. 13,46,299/- of these expenses, initiating proceedings under Section 271(1)(c) of the Income Tax Act for furnishing inaccurate particulars of income.

CIT(A) Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal of the assessee, noting that due to the widespread branches and the nature of business, certain expenses could not be accounted for in the same financial year. The CIT(A) emphasized that given the turnover and business practices, the expenses spilling over to subsequent years were justifiable and directed the deletion of the addition.

ITAT Decision:
The ITAT upheld the CIT(A)'s decision, emphasizing the principle of consistency. It noted that the assessee had consistently followed the practice of claiming prior period expenses in subsequent years due to delayed receipt of vouchers, and this practice had been accepted by the Department in the past.

High Court Analysis:
The High Court affirmed the ITAT's application of the Rule of consistency. It referred to several precedents, including:
- Director of Income Tax (Exemption) v. Apparel Exports Promotion Council (No.1): Highlighted that consistency should be maintained if there is no material change in the assessee's activities compared to earlier years.
- CIT v. Doom Dooma India Ltd.: Emphasized that the assessee could adopt any recognized method of accounting, provided it is consistently followed.
- CIT v. Bilahari Investment P. Ltd.: Stressed that if the Department had previously accepted a particular method of accounting, it could not later challenge it without proving that it distorted the profits.

The Court noted that the assessee had branch offices throughout the country, and the practice of debiting spill-over expenses to subsequent years had been consistently followed and accepted by the Department. There was no evidence of distortion of profits or any material change in the assessee's activities. Therefore, the doctrine of consistency applied, and the previous accounting system should not be deviated from without valid reasons.

Conclusion:
The High Court concluded that the ITAT was correct in law in deleting the addition by applying the Rule of consistency. The appeal was dismissed without any order as to costs, reinforcing the principle that consistent accounting practices, once accepted by the Department, should not be arbitrarily challenged.

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