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TMI Blog2020 (3) TMI 940X X X X Extracts X X X X X X X X Extracts X X X X ..... he accrual system of accounting - The business of any company cannot be said to be defunct until and unless the company has been wound up or has surrendered the Certificate of Incorporation in accordance with law. The status of the assessee company as per the MCA website is, undisputedly, active till date. Therefore, the company cannot be considered as a defunct company. Since, the assessee company is active, it has to incur some expenditure to maintain its daily operations and accounts such as salary to staff, audit fees, legal and professional fees, rent, repairs and maintenance, bank charges, professional tax, interest on loan taken in earlier years, depreciation, etc. Such expenditure cannot be disallowed only on the ground that there was no business activity during the year especially in the case of companies. It is also seen that the AO has nowhere examined the expenses claimed by the assessee in the accrual system of accounting. He has not cared to discuss and examine any of the expenses claimed by the Assessee on accrual basis but has simply disallowed the said expenses and added back to the income of the assessee without carrying out the necessary enquiry and verificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y (DDA) which were all executed in the A.Y.2011-12, the activities of the Assessee were not carried forward from one accounting year to the next. The A.O., thus, held that the accounts should be in the nature of venture account and the correct profitability could be arrived at by following the accrual method of accounting only. 2.2 Aggrieved by the order of the AO, the Assessee filed an appeal before the Ld. CIT (A). The Ld. CIT (A), vide his Order dated 27/02/2017, upheld the action of the A.O., of rejecting the cash system of accounting followed by the Assessee and confirmed the Total Income as computed by the A.O. The Ld. CIT (A) also relied upon the Order of the Ld. DRP for the earlier assessment year, being the A.Y. 2011-12. 2.3 Against this order, the Assessee is in appeal before us raising the following grounds of appeal:- 1. That the CIT (A) erred on facts and in law in summarily confirming the order of the Assessing Officer without giving any cogent reasons for the same. 2. That the CIT (A) erred on facts and in law in confirming the order of the Assessing Officer rejecting the Cash Method of Accounting followed by the Appellant and in concluding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Y.2011-12) was rejected. It was submitted that the Assessing officer, while quoting the section 209 of the Companies Act, 1956, has stated that books even for purposes of Income Tax Act were supposed to be maintained on accrual basis. It was submitted that lastly it was stated by the Assessing officer that the Assessee Company, being allegedly formed with the specific and exclusive purpose of executing the overlays contract/s for CWG, 2010 and the DDA which were all executed in the A.Y.2011-12, the activities of the Assessee were not carried forward from one accounting year to the next. The Ld. AR submitted that the A.O. has, thus, held that the accounts should be in the nature of venture account and that the correct profitability could be arrived at by following the accrual method of accounting only. It was submitted that based on the above Order dated 17/03/2015, while rejecting the cash system of accounting followed by the Assessee, the AO passed the Assessment Order dated 27/03/2015 wherein the cash system of accounting followed by the Assessee was rejected. 3.1 The Ld. AR further stated that on appeal before the Ld.CIT (A), the Ld. CIT (A), vide his Order dated 27/02/2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts books of accounts on accrual basis to comply with the provisions of section 209 of The Companies Act 1956. According to the provisions of section 145 of the income tax act, to compute the income chargeable under the head profits and gains of business or profession or income from other sources, assessee can either follow cash or Mercantile system of accounting, which is regularly employed by him. This is subject to the provisions of subsection (2) of section 145 of the income tax act. Further, provisions of section 145 (3) also provides that where the assessing officer is not satisfied about the correctness or completeness of accounts of the assessee or where the method of accounting provided in subsection (1) has not been regularly followed by the assessee, has not been computed in accordance with this standards notified under subsection (2), the assessing officer has to make an assessment in the manner provided under section 144 of the income tax act. On plain reading of the above section, it is clear that section 145 provides for computation of income u/s 28-29 based on the books of account and method of accounting regularly followed by the assessee. However, the assessing off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. (4) The concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within their recognized limits. (5) Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (6) Under section 145 of the Act, in a case where accounts are correct and complete but the method employed is such that in the opinion of the Income-tax Officer, the income cannot be properly deduced there from, the computation shall be made in such manner and on such basis as the Income-tax Officer may determine. Therefore accordingly, principle emerges that the method of accounting adopted by the taxpayer consistently in regularly cannot be discarded by the revenue on the view that he should have adopted a different method of keeping accounts but the concept of real income is certainly applicable in judging whether there has been an income or not and such principle must be applied with care and within their recognized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nreported decision of a division bench of this court in Manickavasagam ltd V Commissioner of Income Tax ( case referred no 21 of 1954). 26. Further, in 149 ITR 738 and at page number 79 in CIT vs. Sikka honourable Delhi High Court also held so. In view of this, we do not have any hesitation in holding that the assessee is maintaining its books of accounts on cash method of accounting and the same method of accounting is regularly employed by the assessee during this year as well as in subsequent years. Therefore it can be said that assessee is following this method of accounting regularly hence it is regularly employed by the assessee. 27. It is also apparent that assessee is a company and therefore the provisions of the Companies act apply to it. Thus, to comply with the provisions of section 209 of the companies act 1956, where it is provided that the assessee company must maintain its books of accounts to be presented before the shareholders as well as before the Ministry of corporate affairs, it should comply the accrual method of accounting. Such mandate of the company law is definitely required to be complied by the assessee and therefore it maintains its books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the books of the assessee should therefore be in the nature of venture account only and the correct profitability can be arrived at by following the accrual method of accounting only. Therefore, the books of accounts maintained by the assessee on Cash basis were rejected. The claim of the assessee is that assessee is engaged in the business of performing the contract for services, and is in the 1st year of its operations with the limited vision of completing the said venture, therefore the cash method of accounting employed by the assessee was the most suitable and easiest method wherein income was recorded only when it is received and expenses were recorded only when it is paid. On careful perusal of the provisions of section 145 (1) of the act, we do not find any distinction with the nature of the business for method of accounting to be employed regularly. Further, the assessee stated that as assessee is in a contract business there are always possibility of disputes and negotiation giving rise to the element of uncertainty in acknowledgement of and receipt of the invoices, that is subject to certain deductions or adjustment is always, it would be futile to record an income, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee on Cash basis and stated that the profit of the assessee cannot be deduced from it for the reason that: i. total value of the bills found and seized during the course of search comes to only INR 275505611/ as against the total of the above parties as per the books of accounts on 16/10/2010 comes to INR 3 87738567/ . Therefore, according to the learned assessing officer there is a discrepancy of approximately INR 11 crore for which no bills are available. To substantiate this learned AO has tabulated on page number 6 9 of the draft assessment order, details of 92 parties where there is a difference in the bills found during the course of search as well as bills recorded in the books of accounts. In fact the assessee has recorded the total bills of INR 38,77,38,567/ whereas the bills found during the course of search are only INR 27,55,05,611/ . The contention of the assessee raised before the learned dispute resolution panel was that that the search party found other bills but seized only those bills, which were of the amount of above INR 100,000. Therefore, it is not of fact that no bills were found for a sum of INR 11 crores. The AR further stated that as per the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. In fact the rejection should be based on cogent reason as held by the honourable Supreme Court in CIT vs. British paints 188 ITR 44 (SC). ii. The another issue for which the method of accounting adopted by the assessee is rejected is for the reason that from the residence of a director in the assessee company are rough handwritten note and a print out of an email dated 16/6/2010 which was sent by Mr. Oliver of GL events France , whereas there is a working of a sum of INR 35.85 crore as is expenses on account of organizing committee and Delhi development authority. Such email is placed at para number 5.2 of the direction. The copy of the email is produced at page number 6 of the order of the learned dispute resolution panel. At page number 7 of the direction, another document that is seized from the residential premises of Mr. Binu Nanu is also placed. According to the learned dispute resolution panel those documents speaks a lot about the money paid/payable for obtaining the contracts. The learned dispute resolution panel in para number 5.4 has noted that that it is evident from the above two documents that for taking contract for CWG from organizing committee in Delhi Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed dispute resolution panel to have enquired into the bills debited by the assessee and to show that these are the bogus bills. Not all these exercise has been carried out by the learned assessing officer or the learned dispute resolution panel. Over and above, assessee was directed by the learned dispute resolution panel to produce the copies of the bills before the learned assessing officer, the learned assessing officer has straight way rejected these bills stating that assessee is engaged in the practice of receiving bogus bills. Without finding any of the bills recorded in the books of accounts of the assessee as bogus, the whole argument of the learned dispute resolution panel and the learned assessing officer, with respect to method of accounting employed by the assessee cannot be sustained. The correct methodology should have been to find out the bogus bills by the assessee, if any, and then to disallow those expenses under section 69C of the income tax act. The addition u/s 69C of the income tax act can be made irrespective of any of the accounting method followed by the assessee. Therefore, for this reason the books of accounts and method of accounting employed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Vs British Paints India Ltd (1991) 188 ITR 44 (SC). The learned dispute resolution panel in para number 5.11 stated that the honourable Supreme Court in case of the above decision has held that it is only the right but the duty of the learned assessing officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced there from are not. It is further held that that it is incorrect to say that the assessing officer is bound to accept the system of accounting regularly employed by the assessee, the correct method which had not been questioned in the past as there is no estoppels in this mattes and the AO is not bound by the method followed in the earlier years. On careful analysis of the decision of the honourable Supreme Court at page number 0049 it is held as under:- the question to be determined by the assessing officer in exercise of his power under this provision is whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the officer and the income has been computed in accordance with the method of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employed by the assessee can be discarded, only if the proper profits, real income, there from cannot be deduced. Therefore, if an assessing officer desires to reject the method of accounting regularly employed by the assessee, he must give a cogent reason, which clearly shows that profits of the business cannot be correctly deduced from the method of accounting employed by the assessee. In the present case, the learned assessing officer has not shown any reason for which if an assessee follows cash basis of accounting, the profits cannot be deduced correctly. Even otherwise, the real income of the assessee is required to be taxed. In the present case assessee itself has shown that though it has raised the bills but some of the bills have not been received till now because of protracted litigation which itself proves that even in the mercantile system of accounting such income has not accrued. Nothing more could have been shown as an income then what is received by the assessee. It is not the case of the revenue that assessee has not shown income what has been received by it. It is also not the case of the revenue that expenditure claimed by the assessee has not been paid. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, which is followed by the assessee consistently and also for the impugned assessment year, cannot be rejected and the income of the assessee should not be computed on mercantile method of accounting. Accordingly, ground number 2 of the appeal of the assessee is allowed. 6.0 Coming to ground nos. 3, 4 and 5, the Ld. AR submitted that the A.O in the Assessment Order, while relying on the Assessment order and the Ld. DRP s order for the earlier assessment year A.Y. 2011-12, rejected the cash system of accounting of the Assessee and directed the assessee to follow the accrual system of accounting. The A.O. computed the income on accrual basis of accounting. The A.O. noted that the accrual accounts were furnished by the Assessee but in the absence of Return of Income on accrual basis treated the Return of Income filed by the Assessee on the cash system of accounting to be the Income on accrual basis. The Ld. AR further submitted that the A.O. held that no real business activity had been done by the Assessee in the said year under appeal and he disallowed and added back to the total income of the Assessee, the expenses of ₹ 5,72,17,800/- as had been claimed by the Assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the A.O. It was stated that the Ld. CIT (A) further held that the fact that the assessee maintained two sets of accounts, first on cash basis and second on accrual basis, pointed out that the intention of the assessee was not bona fide. It was stated by the Ld. AR that in agreement with the A.O., the Ld. CIT (A) held that no real business activity was carried out by the Assessee in the A.Y. 2012- 13 and, thus, the disallowance of the claim of expenses of ₹ 5,72,17,800/- was correctly done by the A.O. 6.4 The Ld. Authorised representative submitted that it would be of utmost importance here to analyse the manner in which the A.O. has computed the income of the Assessee Company after rejecting the books of the Assessee. The Ld. AR stated that it is seen from the computation (reproduced at pg 33 of this order above) that the A.O., while rejecting the Cash system of accounting has in fact adopted the Income as declared by the Assessee on the basis of the Cash system to the tune of (₹ 13,07,888/). It was submitted that the A.O., on absolutely no basis, has stated that The return of income furnished by the assessee following the cash basis of accounting, is treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AR submitted that a reading of provision of section 142 of the Act would show that the AO, u/s 142(1), may serve notice on the assessee to produce such accounts and documents required by him and also to furnish such information in writing as required by him for the purpose of making an assessment. Thereafter, u/s 142(2) of the Act, the AO is required to make such enquiry as he considers necessary to obtain full information in respect of income or loss of assessee. It was submitted that the AO shall, u/s 142(3) of the Act, give opportunity of being heard to the assessee in respect of material gathered on the basis of inquiry u/s 142(2). It was submitted that however, in this case, the AO has utterly failed to comply with the provision of section 142 of the Act. 6.7 It was further submitted by the Ld. AR that the Audited Financial statements prepared on cash basis and accrual basis, both, were furnished by the assessee before the AO. Hence, it was the responsibility of the AO to examine and inquire as to whether the expenses claimed were genuine and for the purpose of business. It was submitted that the nature and type of expenses could easily be identified/verified from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to ₹ 156.70 crores with the Organising Committee (OC), CWG, bills amounting to ₹ 70.18 crores were accepted by the OC, CWG and payments were also received to the same extent. Bills amounting to balance of ₹ 86.52 crores were not accepted by the OC, CWG and the payments were also not received. The Ld. AR submitted that due to this reason the assessee was also facing financial crisis and the amounts of many creditors are still payable especially to the associated enterprises. This was also the reason that no party was ready to do business with the assessee company. Hence, the AO s allegation that no business activity was done by the assessee company is completely false and it was only because of the aforesaid reason that the assessee was not getting any contract/s and there was a lull in the business. The Ld. AR submitted that it was only because no revenue was generated during the year, it cannot be presumed that no business activity was performed during the year. It was submitted that further, the business of the company cannot be said to be defunct until and unless the company has been wound up or surrendered its certificate of incorporation in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis was to be treated as Return as per the accrual basis. Thus, the A.O. held the Income (net) as per the cash system of ₹ 13,07,888/- (as per Return) to be the Income as per the accrual system of accounting and then the A.O., alleging that the assessee had in its Return (filed on cash basis) claimed an expenditure of ₹ 5,72,17,800/- (which was actually the expenditure claimed in the Accrual Profit Loss Account) disallowed the same. Thus, the A.O. has made an addition of the said ₹ 5,72,17,800/- to the Income of the Assessee. The Ld AR submitted that the return of income filed on cash basis cannot be treated as return filed on accrual basis as these two methods are distinct from each other. Had the both the methods been the same, the assessees would not have been provided with an option to select any one of the two methods. It was submitted that under cash system of accounting, transactions are only recorded when actually paid or received. The cash method postpones tax liability to the year of actual receipt of income. Hence, the assessee has claimed those income/s and expenditure/s for which the amount is received and paid in current year for the amount alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses were justified. It is our considered opinion that the finding given by the AO that no business was carried out during the year is not based on any cogent reason. The business of any company cannot be said to be defunct until and unless the company has been wound up or has surrendered the Certificate of Incorporation in accordance with law. The status of the assessee company as per the MCA website is, undisputedly, active till date. Therefore, the company cannot be considered as a defunct company. Since, the assessee company is active, it has to incur some expenditure to maintain its daily operations and accounts such as salary to staff, audit fees, legal and professional fees, rent, repairs and maintenance, bank charges, professional tax, interest on loan taken in earlier years, depreciation, etc. Such expenditure cannot be disallowed only on the ground that there was no business activity during the year especially in the case of companies. It is also seen that the AO has nowhere examined the expenses claimed by the assessee in the accrual system of accounting. He has not cared to discuss and examine any of the expenses claimed by the Assessee on accrual basis but has simply d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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