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TMI Blog2010 (5) TMI 577X X X X Extracts X X X X X X X X Extracts X X X X ..... addition of Rs. 11,15,482. 3. Because the CIT(A) has erred on facts and in law in ignoring the method of accounting regularly employed by the appellant and accepted by the department year after year without any reason and has wrongly upheld the applicability of the provision under section 145(3) thereby erred in holding that the profit and gains of business or profession cannot be correctly or completely deduced from the system of accounting regularly followed by the appellant. 4. Because the CIT(A) has erred on facts and in law in holding that the accounting standards as notified as per section 145(2) have not been regularly followed by the appellant without appreciating that there is no specific accounting standard notified for the purpose of appellants business and as such the provisions of section 145(2) are not applicable. 5. Because on a proper consideration of the facts and circumstances the authorities below have failed to appreciate that the income in the instant case accrues to the appellant not at the time of loading of potatoes in the cold storage but at the time of unloading/exit of potatoes, and as such no income can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted total expenses of Rs. 38,03,604 during the previous year relevant to the year under consideration and if the expenses of loading, Repairs and Maintenance, Wages and fuel were excluded then the total expenses debited in this year came to Rs. 10,13,223 and the proportionate expenses for three months i.e., January to March 2006 came to Rs. 2,52,805. He, therefore, was of the view that the assessee had debited other expenses of Rs. 2,52.805, loading Rs. 1,77,948, Repairs and Maintenance Rs. 2,33,175, Wages Rs. 54,000 and fuel Rs. 5,11,804 totalling to Rs. 12,29,732 in its profit & loss account during the year under consideration for the period January 2006 to March 2006 whereas the matching income in respect to these expenses had not been credited in the profit & loss account. The Assessing Officer, therefore, required the assessee to explain as to why the revenue on the loading of potatoes was not charged at the time of loading on mercantile basis. 3.1 In response to the above query raised by the Assessing Officer, the assessee, vide letter filed on 21-11-2008 submitted that the assessee was running a cold storage and revenue was recognized, at the point of time of upliftment/exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... potato loaded during January to March, 2006 had been booked on cash basis, which was a contradictory fact to the system of accounting mentioned in the Audit Report as mercantile. He was of the view that in assessee's case it was a statutorily necessity to maintain its books of account on mercantile basis. Therefore, the claim of expenses for earning a particular income could be allowed on mercantile basis, if the matching income arising out of those expenses was also accounted for on the mercantile basis. The Assessing Officer also quoted the Accounting Standard AS-9 prescribed by Institute of Chartered Accountants of India which had been made mandatory by the Company Law for all the company cases. The said accounting standard recognizes revenue on proportionate completion method. According to the said method, the revenue is recognized proportionately with the degree of completion of services under a contract. Based on the accounting standard AS-9, the Assessing Officer was of the view that since the expenses for the period January to March, 2006 were exclusively for loading of 49,577 bags which had been loaded from January, 2006. The proportionate revenue on account of keeping all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to the learned CIT(A), the method of accounting followed by the assessee was not in consonance with the standards as prescribed by ICAI (which was mandatory) and that the profits of the assessee as shown were distorted, therefore, it was important to recast the profit & loss account of the assessee to remove this distortion. The reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR 12 . The learned CIT(A) accordingly confirmed the action taken by the Assessing Officer. Now the assessee is in appeal. 5. The learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee runs a cold storage which is a cyclic industry which starts with the storing of potatoes and ends with the return of stored potatoes, rent is due only when the potatoes stored are delivered to the owner without any damage and if the potatoes are damaged the owner is eligible for compensation. It was further stated that the rent was never received in advance and it is a case just like that of dry cleaning or stitching of clothes. When a person gives his clothes for dry-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otified Accounting Standard-I and Accounting Standard II - and as the assessee, who is following mercantile system of accounting, as per Accounting Standard-I, disclose all significant accounting policies adopted in preparation and presentation of financial statements and nothing else and since Project Completion Method even in the case of mercantile system of accounting, was a recognized method, the assessee was justified in following the same and had consequently disclosed all the required financial statements which were in accordance with Accounting Standard AS-9. It was contended that another condition in sub-section (2) of section 145 of the Act is stipulated that the assessee while following the cash system of accounting or mercantile system of accounting was to maintain the accounts as per accounting standard notified by the Central Government and since the Accounting Standard or revised Accounting Standard AS-9 had not been notified by the Central Government, the assessee was not bound to follow the same particularly when Accounting Standard AS-9 is applicable only to contractors and since the assessee being not a contractor, rather a builder, these Accounting Standards wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account for its income adopted by the assessee has apparently not been challenged in the past. The learned DR contended that the Assessing Officer discovered during the course of assessment proceedings that the rent receipt shown by the assessee was from lifting of 40,829 bags which was upto December, 2005 and thereafter potatoes started getting loaded from January to March, 2006 and in the said period the loading of potatoes as admitted by the assessee itself in course of the financial year relevant to assessment year under consideration was 49,577 bags. However, the expenses debited in the profit and loss account included expenses incurred from April, 2005 to March, 2006 but the income which had been credited was only that accruing from uplifting of 40,829 bags i.e., bags lifted upto December, 2005 only. It was contended that the Assessing Officer identified the expenses amounting to Rs. 12,29,732 from January to March, 2006 which were debited in the profit & loss account but the corresponding income for the period January, 2006 to March, 2006 had not been credited in the profit & loss account and if the assessee recognized income on mercantile basis the income for that period i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortionate basis. In the case of the assessee company the income of cold storage rent is charged for one complete cycle irrespective of the period for which the potato was kept in the cold storage. Thus, as the rent is directly related to the complete cycle period or say season the income should be proportionately apportioned on the basis of the period of completed cycle." 6.1 The learned DR. emphasized that in order to calculate that if period of loading from January to March, is taken as 1/4 completion of proportionate service contract (with the justification that the year is broken into four parts: January to March, April to September (two parts) October to December) then the period of January to March is 1/4th period and Assessing Officer accordingly applied section 145(3) on the accounts of the assessee and the rental income of 49577 bags for 1/4th cycle accordingly was worked out at Rs. 11.15 lakhs out of total rental income of Rs. 44.16 lacs and against the said income the assessee had debited the expenditure of Rs. 12.29 lakhs, so it was evident that there was suppression of income by following the mixed system of accounting which was in inconsonance with the ruling of Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-1996 and the only requirement as per the Accounting Standard 1 relating to disclosure of accounting policies and Accounting Standard 2 relating to disclosure of prior period and extraordinary items and changes in accounting policies had duly been complied with by the assessee. It was contended that the Accounting Standard AS-9 is applicable on work contract in which some work is done with the help of labours, goods or machines etc., and is capable of being measured but in the case of cold storage business this method is irrelevant, because no work is being done on the potatoes except keeping it safe until its safe delivery to the farmers. Therefore, AS-9 has no applicability in the assessee's case. It was further stated that the income of all the bags which had been unloaded during the year had been accounted for, therefore, the figure of 8.748 bags considered by the Assessing Officer as excess bags loaded was only an imaginary difference and that the bags loaded during the year had been unloaded in the next financial year which have been accounted for accordingly. As regards to the expenses for the period January to March, 2006, it was stated that all the expenses had been booke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or deriving taxable profit of the company. Regarding this submission of learned D.R. that as per the provisions of section 145(1), the accrual income is required to be accounted for if accrual expenses/actual incurred expenses are accounted for, the learned counsel for the assessee submitted that the main crux of section 145(1) is that the system of accounting whatsoever had been applied that should be followed regularly and there should not have been any variation in this year to year. It was emphasized that the assessee followed the method of accounting consistently and there was no variation. However, the Assessing Officer only on the basis of imagination, preponed income of next financial year to this year and created a bubble profit for the assessee. It was emphasized that when it was not possible to rectify the orders of the previous year, how it was possible to book up the income of the next financial year and tax the same in the current financial year. It was stated that the Assessing Officer had not pointed out any defect or incompleteness in the books of account examined by him other than the presumptive way of treatment of rental income of the potatoes which had been cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed has been prescribed in section 145 of the Income-tax Act, 1961 and sub-section (1) of section 145 reads as under : "(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee." 8.1 From the above provisions, it is crystal clear that an assessee can either adopt a cash system of accounting or mercantile system of accounting and the said method of accounting is to be followed regularly. The cash system is that system in which the income earned is taken into account on receipt basis and similarly the expenditure incurred are considered on payment basis in the period falling in the previous year. However, in the mercantile system of accounting the income as well as expenditure are considered on accrual basis. In this type of accounting system, it is immaterial whether actual receipt of income is there or actual payment of expenses is there. Under the mercantile system entries are made in the account books on the dates when the monies fall due, and not on the dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deemed to have accrued or arisen being also liable to be charged for income-tax the assessability of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen. 8.3 The Hon'ble Supreme Court in the aforesaid case has held that Mercantile system brings into credit what is due, immediately it becomes due and before it is actually received, and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. 8.4 The claim of the assessee in the instant case is that mercantile system of accounting is followed, therefore, the income earned by the assessee which has accrued for the period starting from 1-4-2005 and ending on 31-3-2006 is to be considered and same is the position for the expenses. As regards to the incurring of expenditure is concerned there is no dispute that the assessee had entered and accounted for in the books of account all the expenditure incurred/accrued from 1-4-2005 to 31-3-2006, those expenses had been considered as genuine and no disallowance has been made. In the present case the only dispute relates to the earning of i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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