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TMI Blog2005 (1) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 145 of the IT Act, the assessee at the time of filing the return of income for asst. yr. 1989-90, declared net profit as per the P L a/c and thereafter at p. 2 of the computation of income, claimed deduction on account of export incentives receivable amounting to Rs. 61,26,788, interest receivable on exports Rs. 83,55,606 and interest receivable from IDBI at Rs. 64,000. This computation statement was filed along with the return of income. The audited balance sheet of the company also had the report of auditors regarding these transactions at the appropriate place. The AO rejected the claim of the assessee and he added back all the three amounts to the taxable income of the assessee on the ground that since the assessee was maintaining the books of account on mercantile basis, therefore, the income by way of export incentives, interest on exports and interest receivable from IDBI were to be taxed according to the accrual basis and not on receipt basis as claimed by the assessee. 3. In appeal, this action of the AO was upheld except for a relief of Rs. 12,22,476 allowed by the CIT(A) out of interest receivable on export. Thereafter, the AO after giving an opportunity to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artmental Representative for the Revenue, perusing the records and carefully going through the orders of the tax authorities below. 6. Now, we shall deal with the reasoning of the CIT(A) in deleting the impugned penalty amount one by one. 7. In the first reasoning according to the CIT(A), while framing the assessment under s. 143(3), the AO should have invoked the Expln. 1 to s. 271(1)(c) of the IT Act and the same cannot be invoked by the AO while levying the penalty. 8. In the case of K.P. Madhusudhanan vs. CIT (2001) 169 CTR (SC) 489 : (2001) 251 ITR 99 (SC), their Lordships held that the Explanation to s. 271(1)(c) is a part of s. 271. When the AO or the AAC issues a notice under s. 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By virtue of the notice under s. 271, the assessee is put to notice that if he does not prove, in the circumstances stated in the Explanation that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and consequently be liable to pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty under s. 271(1)(c) was not validly levied because the AO has not recorded satisfaction during the course of assessment proceedings regarding concealment of income which constitutes the basis and foundation of the provision of levy of penalty. 13. In the case of D.M. Manasvi vs. CIT 1972 CTR (SC) 437 : (1972) 86 ITR 557 (SC), their Lordships have observed as under: "What is contemplated by s. 271(1) is that the ITO should have been satisfied in the course of assessment proceedings regarding matters mentioned in the clauses of that sub-section. It is not essential that the notice to the person proceeded against should have also been issued during the course of the assessment proceedings. Satisfaction, in the very nature of things, precedes the issue of notice and it would not be correct to equate the satisfaction of the ITO with the actual issue of notice." 14. From the decision, it is evident that the ITO has to record the satisfaction regarding the concealment of income which constitutes the basis and foundation of the proceeding for levy of penalty during the course of assessment proceedings. On going through the order of the AO, we find that at the end of the order he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sold on credit, a receipt entry is posted as of the date of sale, although no cash is received immediately in payment of such goods, and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is made at the time. From these observations it is apparent that once a person follows a mercantile system, he has to adopt a system as a whole, which means that if a person adopts a mercantile system, he has to maintain the records on accrual basis and not on actual receipt basis. It means that once the assessee has shifted from mix system of accounting to mercantile system of accounting, he has to maintain his record on accrual basis and not partly on accrual basis and partly on receipt basis. 17. In our opinion, in view of the above clear-cut principle of two accounting systems, the assessee's switching over to the mercantile system of accounting in the year under consideration but declaring the net profit in the P L a/c in respect of export incentive, interest on exports and interest payable from IDBI on receipt basis cannot be called bona fide merely because in the earlier years when the assessee was maintaining mix system of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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