2013 (8) TMI 178 - AT - Income Tax

Jurisdiction power u/s 263 by CIT(A) - receipt method of accounting in respect of the refund of VAT - refund pertaining to AYs. 2005-06 & 2006-07 received during the relevant year was credited in its accounts and duly returned as income for the current year - as per CIT the assessee following mercantile method of accounting, the refund of VAT, which for the current year was omitted to be accounted for by the assessee for the current year thus, there was an escapement of income to that extent - Held that - As it is impermissible for the assessee to follow cash method of accounting in respect of the sales tax/VAT refund due to it, it admittedly following mercantile method of accounting. As such, in terms of s. 5 r/w s. 145, income becomes chargeable to tax when the assessee acquires the right to receive such income. In fact, apart from the auditor s report, to which reference has been made by the CIT, the notes to the assessee s accounts itself state that the sales-tax (VAT) paid on purchases are included in the cost of the purchases, is, though refundable from the Sales Tax Department, not taken as income as the same is subject to acceptance by the Sales Tax Authority. The assessee has throughout completely failed to exhibit the uncertainty that it claims to have prevailed, and which weighed with it in deferring the recognition of the said income, i.e., in its accounts. The assessee is rather, it is apparent, following the same, i.e., the said procedure, as a matter of course, regularly accounting for the VAT refund only upon receipt, and which, as explained, cannot hold in view of section 145 proscribing (w.e.f. A.Y. 1997-98) a mixed method of accounting in preference to a pure, i.e., either cash or mercantile, method of accounting; As decided in CIT vs. Punjab Bone Mills 2001 (7) TMI 114 - SUPREME Court that income by way of cash incentive accrued to the assessee at the time of filing of the claim in its respect (with the concerned authority). Thus as noted that the assessee has not stated any factual reason/s with regard to the uncertainty that is stated to exist with regard to the claim for VAT refund. In fact, where the difference in income followed a consistent though incorrect method of valuation of closing stock, so that its effect neutralized in the succeeding year, the argument was found not valid. The direction by the CIT, therefore, for including the amount of VAT refund accrued to it is to be upheld. On the second aspect, the fact that the assessee has been before the AO able to exhibit that no difference to its returned income arises when reckoned in terms of section 145A, would not in any manner undermine the jurisdiction or the validity of the revisionary order on that score. The CIT could have examined the said issue himself, and it is quite within his competence to direct the AO to examine the assessee s case, as stands done by him. In fact, all his order shows is that the issue had not been verified at the time of the assessment proceedings and, accordingly, directs the AO to pass a fresh order upon due verification and in accordance with the law. As such, on the merits of both the objections, it is find the revisionary order as sustainable in law. Against assessee.

Summary

Issues:
1. Assessment based on accounting method - Receipt method vs. Mercantile method
2. Compliance with section 145A of the Income Tax Act

Analysis:

Issue 1: Assessment based on accounting method - Receipt method vs. Mercantile method
The appeal was against the Commissioner of Income Tax-24's order under section 263 of the Income Tax Act concerning the assessment for the assessment year 2008-09. The Assessee argued for following the receipt method of accounting for VAT refunds, while the Commissioner contended that the Assessee should have followed the mercantile method. The Assessee consistently deferred recognizing VAT refunds until receipt, which the Commissioner deemed as an escapement of income. The Auditor's report highlighted this practice. The argument focused on the non-application of mind by the assessing authority and the failure to consider section 145A's prescription. The Tribunal clarified that the Assessee, following the mercantile method, should recognize income when the right to receive it accrues. The Tribunal upheld the Commissioner's direction to include the VAT refund amount in the assessment.

Issue 2: Compliance with section 145A of the Income Tax Act
The second objection revolved around the Assessee not adhering to section 145A, which mandates an inclusive method of accounting. The Assessee's argument that no difference in income arose under section 145A was deemed insufficient to undermine the revisionary order. The Tribunal found the revisionary order sustainable, emphasizing the assessing authority's non-application of mind. The Assessee's challenge regarding the validity of the revisionary proceedings, based on the authority initiating the proposal, was dismissed. The Tribunal concluded that the show cause notice issued by the Commissioner demonstrated a clear application of mind. The decision upheld the revisionary order, dismissing the Assessee's appeal.

In conclusion, the Tribunal dismissed the Assessee's appeal, upholding the Commissioner's order under section 263 of the Income Tax Act regarding the assessment for the assessment year 2008-09.