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TMI Blog2016 (5) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... o follow mercantile method of accounting in respect of income - Held that:- The law has given freedom to the assessee to regularly employ either cash basis of accounting or mercantile basis of accounting to compute correct income chargeable to tax and the plain, simple and natural language and words used in section 145 of the Act does not, in our humble opinion, cast any bar on the assessee to follow regularly either cash basis or mercantile basis of accounting by the assessee having more than one source of income within the head of income from "Profits and gains of business or profession" or "income from other sources" as in the instant case the assessee has two stream and sources of income under the head of income from "Profits and gains of business or profession", viz., his professional income and also income from production of films because by following either of the two methods of accounting regularly, there is not likely to be distortion in computation of correct income as per the provisions of the Act and it will be only timing difference which we have seen above due to following the above methods of accounting and no prejudice will be caused to the Revenue. The said income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Assessing Officer and file the necessary evidences before the Assessing Officer to support its claim and assertions for verification and authentication by the Assessing Officer. Needless to say that proper and adequate opportunity as per law shall be given by the Assessing Officer to the assessee in accordance with the principles of natural justice. Addition of cash deposit under section 68 - additional evidences before the Commissioner of Income-tax (Appeals) which are not admitted - Held that:- With lot of hard work, difficulty and moral support from the family, the assessee has come so far in his profession of choreography. Due to lack of financial support, the assessee could not even complete his basic education and as such he is not well versed with the terms of accountancy, tax and other laws and regulations. The assessee has once again hit as he had incurred huge losses in the film business. The assessee's accountant also left the job without even handing over the charge of the books of account. The assessee was not having the proper information about the books of account and the assessee was travelling while assessment proceedings were going on which was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in restricting the claim of interest to ₹ 1,50,000. 3. On the facts and circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) erred in conforming the action of the learned Assessing Officer in holding that for professional income appellant is liable to follow mercantile method of accounting and accordingly adding a sum of ₹ 22,57,000 in respect of income which has already been considered as income in subsequent assessment year. 4. On the facts and circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) erred in confirming the action of the learned Assessing Officer to the extent of ₹ 10,00,000 as unexplained cash-credit under section 68 of the Income- tax Act. 5. On the facts and circumstances of the case and in law the learned Commissioner of Income-tax (Appeals) erred in conforming the action of the learned Assessing Officer in adding a sum of ₹ 14,19,000 as cash deposit under section 68 of the Income-tax Act. 6. That the orders of the learned Commissioner of Income-tax (Appeals) and the learned Assessing Officer are bad in law and on facts. 3. The brief facts of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,03,545 5. Flat at Millat Nagar 1203 23,63,490 Personal office 6. Plot at MHADA Sheriq Hall 23,70,548 Ganesh Acharya Dance Academy 5. The Assessing Officer observed that the assessee has claimed four out of the six house properties to be used for his business purposes while the assessee is not claiming depreciation with respect to these four properties stated to be used for business purposes and since no evidence were submitted by the assessee to substantiate its claim of usage of above properties for the purpose of business, the Assessing Officer after giving benefit of one house property for residential purpose and one for the purpose of business, computed the income under the head Income from house property based on 10 per cent. of the book value as under : Sl. No. Description of property Book value (Rs.) 1. Flat at Malad 5,42,902 2. Flat at Millat Nagar 1103 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also using a part of the abovesaid property for running as Ganesh Acharya Dance Academy. The assessee submitted that the assessee is owner of the plot only and not the owner of the building, hence the provisions of section 22 of the Act are not attracted with respect to this property. 8. Similarly, the assessee submitted that the flat at Malad was used as godown during the previous year but erroneously the usage was not indicated before the Assessing Officer and hence it being used for business purpose, it cannot be brought to tax under the head Income from house property . The assessee further submitted that the flat Nos. 1103 and 1203 at Millat Nagar are being used by the assessee as choreography and film production businesses separately as they cannot be used in conjunction with each other due to requirements of business necessities. The assessee also submitted that MHADA premises were actually sold during the year and the sale consideration of ₹ 15 lakhs was shown as advance against MHADA properties in the balance-sheet. This property was being used for film production which was later transferred to Millat Nagar premises and no income can be assessed in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the building on the plot was not owned by the assessee. The Commissioner of Income-tax (Appeals) also held that even if the said plot was given to the aforesaid partnership firm, no rent is received from the partnership firm by the assessee and no copy of utilisation of plot by the firm has been filed by the assessee. The Commissioner of Income-tax (Appeals) relied upon the decision in the case of D. M. Vakil v. CIT [1946] 14 ITR 298 (Bom), Indian City Properties Ltd. v. CIT [1965] 55 ITR 262 (Cal), East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC) wherein it is held that the owner of property is liable to be charged to house property income. Thus, the Commissioner of Income-tax (Appeals) upheld the orders of the Assessing Officer. 14. The Commissioner of Income-tax (Appeals) after considering the submission of the assessee, restricted the disallowance to 8 per cent. of market value of the property after referring to the provisions of section 7(1) of the Wealth-tax Act, 1957 read with Schedule III, from which the assessee will be granted deduction of municipal taxes and the standard deduction at 30 per cent. as provided under the Act. 15. Simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce is placed by the counsel for the assessee. The Full Bench was called upon to decide as to how to determine 'fair rent' of the property and, then, to find out as to whether the actual rent received is less or more than the 'fair rent' so that higher of the two is taken as annual letting value under section 23(1)(b) of the Income-tax Act. 44. The factual and admitted position before the Delhi High Court Full Bench was in addition to the contractual rent, substantial amount by way of interest-free deposit is given, the security deposit is many time more than the annual rent received by the assessee. Nonetheless, the annual letting value arrived at by the Municipal Corporation was less than the contractual rent received by the assessees. The Assessing Officer while arriving at the 'fair rent' had added notional interest on the security deposit to the actual rent received to arrive at the annual letting value. None of the cases before the Full Bench involved applicability of the Delhi Rent Control Act. Therefore, the question of fixing standard rent in terms of this Act did not arise. However, it was admitted that if the property is covered by Delhi Rent Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the provision of section 23(1) and is, therefore, unauthorised. Though what has been urged on behalf of the Revenue is not to be brushed aside as irrational, yet the contention is not acceptable as the law itself comes short of tackling such fact-situation. This view of the Calcutta High Court has been accepted by a Divi sion Bench of this court as well in the case of CIT v. Asian Hotels Ltd. [2008] 215 CTR (Delhi) 84; [2010] 323 ITR 490 (Delhi) holding that the notional interest on refundable security, if deposited, was neither taxable as profit or gain from business or profession under section 28(iv) of the Act or income from house property under section 23(1)(a) of the Act. Rationale given in this behalf was as under (page 493) : A plain reading of the provisions indicates that the question of any notional interest on an interest-free deposit being added to the income of an assessee on the basis that it may have been earned by the assessee if placed as a fixed deposit, does not arise. Section 28(iv) is concerned with business income and is distinct and different from income from house property. It talks of the value of any benefit on perquisite, 'whether convertibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest-free security can be taken as determinative factor to arrive at a fair rent . The provisions of section 23(1)(a) do not mandate this. The Division Bench in CIT v. Asian Hotels Ltd. [2010] 323 ITR 490 (Delhi), thus, rightly observed that in a taxing statute it would be unsafe for the court to go beyond the letter of the law and try to read into the provision more than what is already provided for. We may also record that even the Bombay High Court in the case of CIT v. J. K. Investors (Bombay) Ltd. [2001] 248 ITR 723 (Bom) categorically rejected the formula of addition of notional interest while determining the fair rent . . . . It is, thus, manifest that various courts have held a consistent view that notional interest cannot form part of actual rent. Hence, there is no justification to take a different view that what has been stated in CIT v. Asian Hotels Ltd. [2010] 323 ITR 490 (Delhi). The next question would be as to whether the annual letting value fixed by the municipal authorities under the Delhi Municipal Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are incurred in excess of such statutory limit, no deduction for such excess is allowed. The deductions for municipal taxes and repairs are not allowed to the extent they are borne by the tenant. However, even such actual reimbursements for municipal taxes, insurance, repairs or maintenance of common facilities are not considered as part of the rent and added to the annual value. Accordingly, there can be no scope or justification whatsoever for making any addition for any notional interest for determining the annual value. Whatever benefit or advantage which is derived from the deposits-whether by way of saving of interest or of earning interest or making profits by investing such deposit-the same would be reflected in computing the income of the assessee under other heads. In our view there is no scope for making any addition on account of so-called notional interest on the deposit made by the tenant, since there is no provision to this effect in section 22 or section 23 of the Income-tax Act, 1961. In fact, this is the view taken even by the Supreme Court in the case of Mrs. Sheila Kaushish v. CIT [1981] 131 ITR 435 (SC) on account of similarity of the provisions under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t we agree with the contention of the learned counsel of the assessee. However, we make it clear that rateable value is not binding on the Assessing Officer. If the Assessing Officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/evidence placed on record. This view is fortified by the decision of the Patna High Court in the case of Kashi Prasad Kataruka v. CIT [1975] 101 ITR 810 (Patna). The above discussion leads to the following conclusions : (i) Annual letting value would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances. (ii) An inflated or deflated rent based on extraneous consider ation may take it out of the bounds of reasonableness. (iii) Actual rent received, in normal circumstances, would be a reliable evidence unless the rent is inflated/deflated by reason of extraneous consideration. (iv) Such annual letting value, however, cannot exceed the standard rent as per the Rent Control Legislation applicable to the property. (v) If standard rent has not been fixed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. In such cases as well, the conceded position is that the annual letting value will have to be determined on the same basis as noted above. In the event and as urged before us, the security deposit collected and refundable interest-free and the monthly compensation shows a total mismatch or does not reflect the prevailing rate or the attempt is to deflate or inflate the rent by such methods, then, as held by the Delhi High Court, the Assessing Officer is not prevented from carrying out the necessary investigation and enquiry. He must have cogent and satisfactory material in his possession and which will indicate that the parties have concealed the real position. He must not make a guess work or act on conjectures and surmises. There must be definite and positive material to indicate that the parties have sup pressed the prevailing rate. Then, the enquiries that the Assessing Officer can make, would be for ascertaining the going rate. He can make a comparative study and make a analysis. In that regard, trans actions of identical or similar nature can be ascertained by obtaining the requisite details. However, there also the Assessing Officer must safeguard against adopting the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50. We have broadly agreed with the view taken by the Full Bench of the Delhi High Court. Hence, the issue of determination of the 'fair rental value' in respect of properties not covered by or covered by the Rent Control Act is to be undertaken in terms of the law laid down in the Full Bench decision of the Delhi High Court. 51. We quite see the force in the arguments of Ms. Vissanjee that ordinarily the licence fee agreed between the willing licensor or a willing licensee uninfluenced by any extraneous circumstances would afford reliable evidence of what the landlord might reasonably be expect to get from a hypothetical tenant. She has in making this sub mission, answered the issue and summed up the conclusion as well. Then, it is but natural and logical that in the event, the transaction is influenced by any extraneous circumstances or vitiated by fraud, or the like that the Assessing Officer can adopt a fair rent based on the opinion obtained from reliable sources. There as well, we do not see as to how we can uphold the submissions of Mr. Chhotaray that the notional rent on the security deposit can be taken into account and consideration for the determination. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Act. Until, then, he may not be justified in applying any other formula or method and deter mine the 'fair rent' by abiding with the same. If he desires to undertake the determination himself, he will have to go by the Maharashtra Rent Control Act, 1999. Merely because the rent has not been fixed under that Act does not mean that any other determination and contrary thereto can be made by the Assessing Officer. Once again having respectfully concurred with the judgment of the Full Bench of the Delhi High Court, we need not say anything more on this issue. 53. Thus, apart from the three aspects namely of a municipal valuation, of obtaining interest-free security deposit and the properties being covered by the Maharashtra Rent Control Act but no standard rent thereunder is fixed, our attention has not been invited to any other case. Suffice it to hold that in those cases and to which our attention is not invited the principles laid down in the decisions of the hon'ble Supreme Court and referred to by the Full Bench of the Delhi High Court would govern the enquiry. 54. As a result of the above discussion, we are of the opinion that wherever the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses. 21. Ground No. 3 relates to the addition of ₹ 22,57,000 made by the Assessing Officer on the ground that in case of professional income, the assessee is liable to follow mercantile method of accounting in respect of income which has already been considered as income in the subsequent assessment year based on cash basis of accounting consistently followed by the assessee. During the assessment proceedings under section 143(3) read with section 143(2) of the Act, the Assessing Officer observed that the assessee is following cash system of accounting for individual transactions and mercantile system of accounting for transactions in his proprietorship concern M/s. Pushpa Krishna Creations. As per section 145 of the Act, method of accounting should be either cash or mercantile to be followed by the assessee and since the assessee is following mercantile system of accounting in view of the compulsory requirements of rules 9A and 9B of the Income-tax Rules, 1962, it was show caused to the assessee by the Assessing Officer that why mercantile system of accounting should not be followed by the assessee with respect to his other individual transactions. The Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer and there was no intention of the assessee of showing incorrect income. The assessee submitted that the choice of following the method of accounting lies with the assessee and not with the Revenue in accordance with the provisions of section 145 of the Act. The assessee submitted that as per rule 9A of the Rules which govern the amortisation of cost of production of the film business, the assessee can only follow the mercantile system of accounting. The assessee submitted that if the Assessing Officer wanted to follow the mercantile system of accounting for his other professional income, the Assessing Officer cannot do it on piecemeal basis and the Assessing Officer should compute the income afresh by recasting the total income and expenditure. The assessee relied upon the case of Asst. CIT v. Nana G. Patekar [2009] 27 SOT 8 (Mum) wherein it was held that rejection of books of account under section 145 while accepting the books as correct and complete was invalid. The assessee submitted that this professional income of ₹ 22.57 lakhs has already been offered to tax and due taxes have been paid to the Revenue in the assessment year 2008-09 and the same income ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier years. Learned counsel submitted that it produced films under the banner of his proprietary concern Pushpa Krishna Creation and for the film production business the assessee followed prescribed rules 9A and 9B of the Income-tax Rules, 1962 and for this business of film production the mercantile method of accounting is adopted. Thus, in nut-shell, the income from profession of choreography was accounted for on cash basis consistently and regularly for several years which was accepted by the Revenue and for the film production business, rules 9A and 9B was mandatory and was followed by the assessee whereby mercantile method of accounting was followed. Learned counsel submitted that the Assessing Officer has directed the assessee to follow accrual basis of accounting for choreography business also because as per the Assessing Officer, the assessee by following both cash and mercantile basis of accounting for different sources of income is following hybrid system of accounting which is not permitted by law as per the amended provisions of section 145 of the Act. The assessee relied upon the judgment in the case of Abdulgafar A. Nadiadwala v. Asst. CIT [2004] 267 ITR 488 (Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Income-tax (Appeals) has observed that the choreographer, film producer has to follow rules 9A and 9B of the Income-tax Rules, 1962 which in our humble opinion is not correct as the rule 6F of the Income-tax Rules, 1962 provides that film artist include dance director and are professionals vide Explanation (c) to sub-rule (2) to rule 6F of the Income-tax Rules, 1962 while rules 9A and 9B of the Income-tax Rules, 1962 deals with film production and distribution rights of feature film, thus the finding of the Commissioner of Income-tax (Appeals) that choreographer, i.e., dance directors have to compulsorily follow rules 9A and 9B of the Income-tax Rules, 1962 is humbly rejected. The whole controversy revolves around the action of the Assessing Officer whereby the Assessing Officer held that the assessee cannot follow cash basis of accounting for income arising from his profession and at the same time follow mercantile system of accounting for film production business, which in the opinion of the Assessing Officer is not permissible in view of the amendment in section 145 of the Act by the Finance Act, 1995 as it leads to following hybrid system of accounting because the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and due taxes paid to the Revenue. 28. The contention of the Assessing Officer is that the assessee in the instant case by following cash system of accounting for income from profession and by following mercantile system of accounting for film production business, has in fact followed hybrid system of accounting which is not permitted by section 145 of the Act after amendment by the Finance Act, 1995 which in our considered view is again devoid of merits. It is important to refer to amended section 145 of the Act which was amended by the Finance Act, 1995 as applicable to the relevant assessment year which reads as under : 145. Method of accounting.-(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. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in the case of CIT v. V. T. C. Leasing and Finance Ltd. [2010] 323 ITR 514 (Raj) ; [2008] 215 CTR 51 (Raj) has held as under (page 516) : 5. So far as the first question is concerned, of course, it has come that the assessee was maintaining books of account by both manners, viz., by receipt basis, and on mercantile basis as well, inasmuch as, with respect to accrual of lease income, mercantile system was adopted. However, for lease and hire income, the receipt basis was adopted. True it also is that by virtue of section 145, as amended, the income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' is, subject to provisions of sub-section (2), to be computed in accordance with either cash or mercantile system of accounting, regularly employed by the assessee. Earlier the provision was that such income was to be computed in accordance with the method of accounting regularly employed by the assessee. In the present case, the learned Tribunal has found that this is undisputed and settled principle of fiscal law, that only the real income is to be taxed, and that the same income cannot be taxed twice. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting, mercantile method of accounting and hybrid or mixed method of accounting to proceed further : 1. Cash method of accounting (cash basis of accounting) : Under this method, all incomes are considered to be earned only when they are actually received in cash. Similarly, expenses are deemed to be incurred only when they are actually paid in cash. 2. Accrual basis of accounting (mercantile basis of accounting) : Under this method, all incomes are recorded or credited to the period in which they are earned irrespective of the fact that whether the same has actually been received or not. Similarly, expenses are charged to the period in which they relate irrespective of the fact that they have actually been paid or not. Thus, as could be seen the major difference between the cash method of accounting and accrual basis of accounting is the timing difference in the recognition of expenses and income. 3. Hybrid or mixed method of accounting : Under this method, both cash basis and accrual basis are followed. Incomes are recorded on cash basis whereas expenses are taken on accrual basis. The net income is ascertained by matching expenses on accrual basis with inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atural language and words used in section 145 of the Act does not, in our humble opinion, cast any bar on the assessee to follow regularly either cash basis or mercantile basis of accounting by the assessee having more than one source of income within the head of income from Profits and gains of business or profession or income from other sources as in the instant case the assessee has two stream and sources of income under the head of income from Profits and gains of business or profession , viz., his professional income and also income from production of films because by following either of the two methods of accounting regularly, there is not likely to be distortion in computation of correct income as per the provisions of the Act and it will be only timing difference which we have seen above due to following the above methods of accounting and no prejudice will be caused to the Revenue. The said income of ₹ 22,57,000 from the profession is also stated to have been offered to tax by the assessee in the year of receipt, i.e., immediately succeeding the financial year 2007-08 by following consistently and regularly cash basis of accounting for his source of income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the Commissioner of Income-tax (Appeals) that with respect to the two properties, i.e., accommodation Nos. C-18 and C-20, the assessee's mother and sister are registered owners but it was essentially the assessee's funds utilised for purchase of all the three properties. It was also submitted by the assessee that in the block assessment order passed in the case of the assessee, the funds utilised for purchase of aforesaid properties were assessed as undisclosed income of the assessee. It is the assessee only in whose income the capital gain/loss arising from transfer of the aforesaid properties should be included. The assessee submitted that these accomodations were purchased in September 1994 in above three names and the purchase of the same has been duly dealt with in the order of the Assessing Officer passing the block assessment order in the case of the assessee. Accordingly the assessee submitted that the Assessing Officer be directed to assess capital gains in the hands of the assessee and delete the addition made under section 68 of the Act. The Commissioner of Income-tax (Appeals) after considering the facts, gave relief to the assessee with respect to the accom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en brought to tax as undisclosed income in the hands of the assessee vide block assessment order dated July 31, 2001 and orders of the settlement commission framed against the assessee with tax dues paid to the Revenue. It is stated by the assessee that these accommodations have been sold (C-18 and C-20) with respect to which addition of ₹ 10 lakhs have been made. In our considered opinion, once the income is stated to be assessed in the hands of the assessee and the said accommodations C-18 and C-20 have been stated to be acquired out of the undisclosed income and treated as own property by the assessee, which has been brought to tax in the hands of the assessee and taxes due paid to the Revenue, then the capital gains arising on sale of these accommodations C-18 and C-20 owned by the assessee and held by the assessee in the name of close family members being sister and mother shall be chargeable to tax in the hands of the assessee although the accommodations are technically held in the name of close family members, i.e., mother and sister of the assessee and hence we order deletion of addition of ₹ 10 lakhs being advance on sale of these accommodations as made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 28 lakhs from the bank. Thus, there was inflow of cash of ₹ 53.81 lakhs out of which the cash of ₹ 14.91 lakhs was not required for business purpose which was deposited in the bank. The assessee also filed the copy of cash book and bank statement of all the concerned entities. The Commissioner of Income-tax (Appeals), however, rejected the contentions of the assessee and held that sufficient opportunity was given by the Assessing Officer during the assessment proceedings and even in remand report proceedings and the assessee is now not entitled to submit the additional evidences which was not admitted by the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the cash book, etc., were not produced before the Assessing Officer and the assessee has not reconciled as to how the amount reflected in cash book and how it is accounted for in the various concerns as these so called cash books were not produced before the Assessing Officer. 40. Aggrieved by the orders of the Commissioner of Income-tax (Appeals), the assessee is in further appeal before the Tribunal. 41. Learned counsel for the assessee submitted that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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