M/S. GL LITMUS EVENTS PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

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 GL Litmus Events Pvt. Ltd. vs ACIT confirming the order of the Assessing Officer rejecting the Cash Method of Accounting followed by the Appellant and in concluding the assessment as per Accrual/ Mercantile Method of Accounting.

3. That the CIT (A) erred on facts and in law in confirming the order of the Assessing Officer making an addition of Rs. 5,72,17,800/- to the total income of the Appellant.

4. That the CIT (A) erred on facts and in law in confirming the observation of the Assessing Officer that no real business activity was carried out by the Appellant during financial year 2011- 2012.

5. That the CIT (A) erred on facts in confirming the order of the Assessing Officer incorrectly computing the total income of the Appellant at Rs. 5,59,09,910/- as against the correct computation of Rs. 13,75,238/-.

6. That the CIT (A) has erred on facts and in law in confirming the order of Assessing Officer charging interest under section 234A and section 234B of the Act.

7. That the CIT (A) has erred on facts and in law in confirming the order of Assessing Officer initiating penalty proceedings under section 271(1)(c) of the Act.”

3.0 The Ld. Authorised Representative (AR)

GL Litmus Events Pvt. Ltd. vs ACIT submitted that the first and second grounds of appeal are against the order of the learned CIT (A) in rejecting the cash method of accounting followed by the Assessee and completing the assessment as per accrual/mercantile method of accounting. It was submitted that the AO, while referring to the assessment order in A.Y. 2011-12 has stated that in the said year the assessee company had been regularly maintaining the books of account on accrual basis. The AO has further stated that the same was evident from the financial statements filed by the company under the Companies Act, 1956 and the books of accounts seized during the course of search. It was also stated by the AO that even for the Income Tax purposes the company has followed the accrual basis of the accounting initially as is evident from Form 3CEB filed by the company. The Ld. AR further submitted that the Assessing Officer relied upon the Order dated 09/01/2013 for A.Y.2011-12 wherein it was held that the assessee was maintaining accounts on accrual basis but for purposes of reduction of tax, they had switched to the cash system of accounting. He submitted that further, the Order of the Ld. DRP dated 26/12/2014 GL Litmus Events Pvt. Ltd. vs ACIT for the A.Y. 2011-12 were relied upon wherein the cash system of accounting followed by the Assessee in its first year of business operation (being A.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 GL Litmus Events Pvt. Ltd. vs ACIT 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, has 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. It was stated by the Ld. AR that in rejecting the cash system of accounting, the Ld. CIT (A) relied upon the Order of the Ld. DRP for the earlier year, being the A.Y. 2011-12. 3.2 The learned AR submitted that the A.O. and the Ld. CIT (A), both, have relied completely and solely on the Orders of the Assessee for the earlier assessment year 2011-12. It was submitted that no independent discussion whatsoever relating to the said rejection of cash system of accounting has been made specific to this year under appeal. In connection to the above, he submitted that the assessee’s appeal for the said earlier assessment year A.Y.2011-12 was decided vide the Order of the ITAT, “I-1” bench Delhi, vide dated 01/07/2019. The Ld. AR submitted that in the said appeal before the ITAT, Delhi, the issue of the rejection of the Cash GL Litmus Events Pvt. Ltd. vs ACIT method of accounting was the first and prime issue taken up vide Ground No. 1 of the Appeal filed which read as under: “1. That the Assessing Officer erred on facts and in law in rejecting the Cash Method of Accounting followed by the Assessee and in concluding the assessment as per Accrual/ Mercantile Method of Accounting.”

3.3 The Ld. Authorised representative submitted that the ITAT, vide its order dated 01/07/2019 accepted in full, the contention of the Assessee, and held that “the cash method of accounting, which is followed by the assessee for the impugned assessment year as well as subsequently, cannot be rejected and the income of the assessee should not be computed on mercantile method of accounting”. 3.4 It was submitted that this issue has been dealt in full vide Para 18 to 36 of the aforementioned Order. The Ld. AR read out the relevant part of the Order of the ITAT as under: “23. We have carefully considered the rival contention and perused the orders of the lower authorities. The only dispute with respect to the above ground of appeal is whether the assessee has maintained its books of 8. GL Litmus Events Pvt. Ltd. vs ACIT accounts on cash basis of accounting from which the correct profit can be deduced or not. It is also not in dispute that the assessee has followed the cash basis of accounting for the purpose of income tax return and maintained its 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 officer, if he is not satisfied with the correctness or completeness of the books, he may reject 9 GL Litmus Events Pvt. Ltd. vs ACIT them and estimate the income to the best of his judgment in accordance with the provisions of section 144 of the income tax act. It is also if it is the option of the assessee to follow cash method of accounting or mercantile method of accounting and income tax authority had no option or jurisdiction to either direct assessee to maintain its accounts in a particular manner or adopt different method. Therefore, assessee has an option or liberty to adopt any recognized method of accounting for its business and the income should be computed in accordance with such regularly maintained accounting system. However, it has a rider that where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided under section 145 (1) has not been regularly followed by the assessee, then the assessing officer may make an assessment in the manner provided under section 144 of the income tax act. We will deal with the each of the proposition with respect to the above issue raised by both the parties.

GL Litmus Events Pvt. Ltd. vs ACIT 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 limits.

It is further held that the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation and if the method of accounting employed by the assessee, real income of the assessee cannot be properly deduced there from, the income tax officer may determine the income as per his wisdom.

Further, the honourable Supreme Court in case of CIT vs. Macmillan & Co (1958) 33 ITR 182 has held that the choice of the method of accounting lies with the assessee. The only precondition is that assessee must show that he has followed the method regularly for his own purposes.

“Apparently the tribunal accepted the contention of the assessee, that though the accounts related to the 1st accounting period of its activities, it was a system of accounting “regularly employed” within the meaning of section 13 of the act, though there was no such express finding. In any event, considering it was the same system of accounting that the assessee adopted in the subsequent accounting period is also, the test of “regularly employed” must be held to have been satisfied in this case. That was the principle laid down in an unreported decision of a division GL Litmus Events Pvt. Ltd. vs ACIT bench of this court in Manickavasagam ltd V Commissioner of Income Tax ( case referred no 21 of 1954).”

Thus it is apparent that the cash system followed by the assessee cannot be discarded merely for the reason that assessee is also maintaining its books of account on accrual basis to comply with the provisions of section 209 of the Companies Act, 1956.

Therefore we reject this argument of the learned AO that assessee should have maintained its books of accounts on accrual basis. Even looking at the facts of the case of the assessee wherein it is shown that for a substantial period of time the revenue is locked in litigation and has still not been received. In such cases, the income would have been taxed without any liability for payment by the recipient of those services. Therefore, in such circumstances, we do not find any fault with the cash method of accounting followed by the assessee.

GL Litmus Events Pvt. Ltd. vs ACIT 31. The next reason given by the learned AO for not accepting the books of accounts maintained by the assessee 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 direction of the learned DRP the assessee did produce before the assessing Officer the original remaining bills for verification which were rejected by the learned assessing officer stating that the above bills cannot be relied upon as the assessee company was involved in the practice of receiving bogus bills. In fact, on careful analysis of the finding of the learned assessing officer, it is apparent that GL Litmus Events Pvt. Ltd. vs ACIT assessee did produce before the learned assessing officer as per the direction of the learned dispute resolution panels the balance bills. However, the learned assessing officer without examination of the same, rejected stating that the assessee is engaged in the practice of receiving bogus bills and therefore such bills were not accepted. In fact, before making such an allegation the learned assessing officer should have examined those bills and made the detailed enquiry with respect to the genuineness of those bills. Without making any enquiry about those bills and rejecting them on the conjectures and surmises and then to state that the method of accounting employed by the assessee is not proper is not sustainable in the eye of the law. In fact, assessee produced in the form of paper book the details of such bills and stated that they are all accounted for in the books of accounts maintained by the assessee and are available for the verification of the learned assessing officer, which was directed by the learned dispute resolution panel and therefore for the reason that assessee has not produced the balance bill of INR 11 crore cannot justify the rejection of the method of accounting regularly employed by the assessee. It is further the case that it is not for the assessee to suggest that what document should be seized by the search party and what document should not be seized. It is solely the discretion of the search team to decide that. Further, all those vendors parties were also paid by account payee cheques. Thus merely for the reason that assessee produced those bills but assessing officer rejected them for the sole reason that assessee is in practice of receiving bogus bills, without proving that, the learned assessing officer is not authorised to reject the method of accounting regularly employed by the assessee. Therefore, it is not proper to state that for this reason, 20 GL Litmus Events Pvt. Ltd. vs ACIT the profits of the assessee cannot be derived for taxation purposes correctly. 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 Development Authority the assessee has paid the sum of INR 27 Crore for contract value of INR 16 5,00,00,000, 120 crores from organizing committee and INR 45,00,00,000 from Delhi development authority, 15% of the contract value to organizing committee and 4.5% of the contract value to Delhi development authority. Therefore, the learned dispute resolution panel was also of the view that above sum has been shown in the books of accounts as these expenditure should have been incurred which is an offence in 21 GL Litmus Events Pvt. Ltd. vs ACIT private and by law and thus are not allowable under section 37 of the income tax act. Therefore, it was found that the money actually paid by the assessee for obtaining the above-mentioned contract for the organizing committee in Delhi development authority is not less than INR 35.85 crores. It was further noted that since this amount has been paid before getting the contract money released from the organizing committee in Delhi development authority and therefore the source of the expenditure which is an offence and prohibited by law and thus are not allowable u/s 37 remained unexplained, same has been shown to recoup from the contract value through the bogus billing. Thus, according to the learned Dispute Resolution Panel the assessee is not even following the true cash system while accounting its income and that is why the sum of INR 35.85 crore paid by the assessee to the organizing committee and the Delhi Development Authority as mentioned above does not get reflected in the books of accounts. Therefore, the learned assessing officer relying on these findings of the learned dispute resolution panel stated that the method of accounting followed by the assessee that is cash method of accounting is not acceptable and assessee should follow accrual method of accounting. iii. On careful consideration of the argument of the learned AO, we do not find any substance that for this reason the method of accounting employed by the assessee can be challenged or this could be the reason because of which the profits of the assessee or the real income earned by the assessee cannot be deduced.

In fact, the learned dispute resolution panel despite having the copies of the email and was having a belief GL Litmus Events Pvt. Ltd. vs ACIT that assessee has paid INR 35.85 crores as an illegal gratification by booking the bogus bills, therefore, it was mandatory for the learned assessing officer, learned 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 assessee cannot be rejected. iv. The next reason that has been given by the learned assessing officer is that that there is a negative cash balance in the books of accounts of the assessee of INR 1,22,696/–. During the course of search, daily cashbook of the assessee company was found. Based on this it was found that on 09/04/2010 – INR 15,000/–, on 18/05/2010 – 2767/– and on 08/10/2010 – INR 1 04929/– are the negative cash 23 GL Litmus Events Pvt. Ltd. vs ACIT balances. Therefore, this was also given as one of the reason for rejecting the method of accounting employed by the assessee. No doubt cashbook can never have any negative cash balance. Before the learned assessing officer, the assessee explained the reasons for having such negative cash balances. However, rejecting the explanation of the assessee, the addition has been made by the learned assessing officer and which are separately contested by the assessee as per ground number 10 of this appeal. But now we are here to say that whether such negative cash balance in the cash book of the assessee can be used to reject the method of accounting employed by the assessee or not, here we are not supposed to decide whether the addition is required to be sustained or not. According to us if there is a negative cash balance in the books of accounts of the assessee, same is required to added under section 69C of the income tax act, irrespective of the method of accounting employed by the assessee, because the assessee has incurred any expenditure, source of which is not known to the assessee. Such kind of addition is required to be made irrespective of the method of accounting employed by the assessee. Therefore, for this reason it cannot be stated that the profits of the assessee cannot be correctly deduced because there is a negative cash balance in the books of the assessee. In view of this, we do not find this reason to sustain the rejection of the method of accounting employed by the assessee on this ground.

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 regularly GL Litmus Events Pvt. Ltd. vs ACIT employed by the assessee. What is to be determined by the officer in exercise of his power is a question of fact, i.e. , whether or not income chargeable under the act can properly be deduced from the books of accounts, and he must decide the question with reference to the relevant material and in accordance with the correct principles.

GL Litmus Events Pvt. Ltd. vs ACIT 35. Further at page number 53 the honourable Supreme Court further held that:- “it is not only the right but the duty of the assessing officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say, as contended on behalf of the assessee, that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and officer is not bound by the method followed in the earlier years.”

3.5 Based upon the above order of the ITAT and relying on it in totality, the Ld. Authorised Representative submitted that, in the well admitted, accepted and decided upon facts of the case of the Assessee wherein the cash system of accounting was the method regularly and consistently followed by it and wherein the said cash system was the method of accounting by which the profits could be correctly and fairly deduced and wherein the A.O. could not point out any irregularity in the said cash system GL Litmus Events Pvt. Ltd. vs ACIT so followed ,the said cash system of accounting followed by the Assessee in the year under consideration be accepted as such and the Income as returned on the basis of the said accounts be accepted as the income of the Assessee. 4.0 Countering the arguments of the learned authorised representative, the learned Senior Departmental Representative (Sr. DR) extensively referred to the order of the assessing officer and the Ld. Commissioner of Income Tax (Appeals) and stated that he relies on the order of the Assessing officer and the Ld. CIT (A).

5.0 We have carefully considered the rival contentions and perused the orders of the lower authorities. The only dispute with respect to the above grounds of appeal is whether correct profit/s of the assessee can be deduced or not from the books of account which the assessee has maintained on cash basis of accounting. It is seen this ground of appeal has been discussed in detail in the case of the assessee for the A.Y 2011-12, by a co-ordinate Bench of the ITAT in dated 01/07/2019. It has been held in GL Litmus Events Pvt. Ltd. vs ACIT this order:- “We are of the view that the cash method of accounting, which is followed by the assessee for the impugned assessment year as well as subsequently, cannot be rejected and the income of the assessee should not be computed on mercantile method of accounting. Accordingly, ground number 1 of the appeal of the assessee is allowed.”

5.1 In view of the above, cash method of accounting, 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.

GL Litmus Events Pvt. Ltd. vs ACIT 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 Rs.5,72,17,800/- as had been claimed by the Assessee in the accrual basis of accounting. The Ld. AR drew our attention to the details of the said expenses amounting to Rs.5,72,17,800/- as was claimed on accrual basis from the following chart:

Particulars Amount (in Rs.) 1 Cost of 15,68,141 materials consumed 2 Operating 7,52,252 expenses 3 Employee 7,86,189 benefits expenses 4 Financial cost 12,09,956 GL Litmus Events Pvt. Ltd. vs ACIT 5 Depreciation 2,93,209 and amortization expenses 6 Other 5,26,08,053 expenses Total Rs.5,72,17,800/- 6.1 The Ld. AR read out the relevant portion of the assessment order in this regard which is reproduced here in under for a ready reference: “The return of income furnished by the assessee following the cash basis of accounting, is treated as accrual basis. No real business activity has been done by the assessee company during the year under consideration. However, the expenses of Rs.5,72,17,800/- has been claimed by the assessee. In view of the facts of the case, expense claimed by the assessee amounting to Rs.5,72,17,800/- is being disallowed and is added back to the total income of the assessee for the year under consideration.”

6.2 The Ld. AR submitted that thus, based on the above, the A.O. computed the assessed Total Income of the Assessee as under:

GL Litmus Events Pvt. Ltd. vs ACIT Particulars Amount (in Rs.) Loss declared in the (13,07,888/-) Return (On cash basis) Add: Disallowance of 5,72,17,800/- the expenses as claimed by the Assessee (on accrual basis) Assessed Total Income 5,59,09,912/- 6.3 The Ld. AR stated that the Ld. CIT(A), relying on the order of the Ld. DRP for the earlier assessment year A.Y. 2011-12, wherein the Ld. DRP had rejected the cash system of accounting of the Assessee and had directed the assessee to follow the accrual system of accounting, upheld the order 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 Rs.5,72,17,800/- was correctly done by the A.O. 6.4 The Ld. Authorised representative submitted GL Litmus Events Pvt. Ltd. vs ACIT 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 (Rs. 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 treated as accrual basis.” The Ld. AR further submitted that it can be seen that the A.O. has then picked up the expenses as debited in the Accrual books and disallowed the expenses as claimed in the said accrual accounts on the premise that no real business activity was done and, therefore, no expenses were justified. It was submitted that the AO has in fact added the said expenses to the Returned Income (on cash basis). He further submitted that it is pertinent to note here that the A.O., while assessing the Total Income at Rs.5,59,09,910/-, grossly failed to note GL Litmus Events Pvt. Ltd. vs ACIT that when the accrual system of accounting was followed by the AO, the loss as per P/L on accrual basis was amounting to Rs. 5,58,42,563/-. Thus, the adding of Rs.5,72,17,800/- on account of disallowance of expenses made by the AO, can at the most lead to a total income of Rs. 13,75,238/- only. 6.5 The Ld. Authorised representative further stated that the AO has nowhere examined the expenses claimed by the assessee in the accrual system of accounting. He submitted that no discussion, enquiries, etc. were made by the A.O in regard to any of the expenses as claimed by the Assessee on accrual basis. It was submitted that in fact all throughout the assessment proceedings there was no query on the method of accounting followed/not followed by the Assessee and it was only vide the Show cause notice dated 11/03/2015 that it was indicated that the cash system followed was to be rejected and accrual method was to be followed. It was further submitted that, thereafter, without any prior discussion or enquiry as to the correctness of the accrual expenses, the said expenses were disallowed and added back to the income vide the Assessment Order dated GL Litmus Events Pvt. Ltd. vs ACIT 27/03/2015. It was submitted that the AO did not examine the nature, purpose and amount of the expenses claimed by the assessee either in the accrual system of accounting or even in the cash system of accounting. The Ld. AR reiterated that the A.O., simply, without any enquiry or pointing out of defect, if any, picked up the accrual accounts and disallowed the entire expenses claimed on accrual basis. 6.6 It was further submitted by the Ld. Authorised representative that as per the provision of section 142 of the Act, the AO is required to make a proper inquiry before reaching a conclusion. After referring to the language of section 142, the 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 GL Litmus Events Pvt. Ltd. vs ACIT 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 financial statements. It was further submitted that even if it is to be presumed that the expenses were examined and some material was gathered by the AO, the AO was required to provide opportunity of being heard to the assessee company u/s 142(3) of the Act but the AO neither asked for any information in relation to the expenses claimed by the assessee nor issue any show cause notice requiring the assessee to explain as to why the same should not be GL Litmus Events Pvt. Ltd. vs ACIT added. Thus, it was submitted by the Ld. AR that the action of the A.O. in disallowing the accrual expenses without any enquiry whatsoever was beyond the provisions of law and, thus, unjustified, and uncalled for. 6.8 The Ld. AR further pointed out that the genuineness of the expenditure has not been doubted by the AO and the only reason given by the AO for disallowance of the expenses was that “no real business activity was done by the assessee company and income has been shown by the assessee under the head “other income” amounting to Rs.13,75,228/-.” It was submitted that the assessee company is a private limited company which is registered in accordance with the Companies Act, 1956 and once the company is formed, it comes into existence and it has to maintain the establishment for complying with the statutory obligation. It was submitted that the company was operating and had revenue from business during the Financial Year (FY) 2010-11. The Ld. AR stated that the assessee, during the F.Y. 2010-11, had entered into the overlays contract with the Organizing Committee, CWG, 2010 and Delhi Development Authority and the work GL Litmus Events Pvt. Ltd. vs ACIT related to the dismantling and cleaning of the sites continued till the 1st Quarter of the F.Y. 2011-12. However, the assessee company did not generate any revenue during the F.Y. 2011-12 and the AO presumed that no real business activity was done by the assessee company. It was submitted that during the F.Y. 2010-11, a Search u/s 132 of the Income Tax Act, 1961 on the Assessee Group on 19/10/2010 was conducted. The FIR was filed in the name of the Consortium dated 05/01/2011 and the CBI also conducted search on 06/01/2011. This search and seizure process had high impact on the business performance of the assessee company. Due to this, the assessee company was not getting any contract/s or business from any other concerns or organizations. Further, out of the total contract amounting to Rs. 156.70 crores with the Organising Committee (OC), CWG, bills amounting to Rs.70.18 crores were accepted by the OC, CWG and payments were also received to the same extent. Bills amounting to balance of Rs.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 GL Litmus Events Pvt. Ltd. vs ACIT 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 with law. The Ld. AR submitted that the status of the assessee company as per the website of Ministry of Corporate Affairs (MCA) is also active till date. Therefore, the company is neither considered as defunct company nor has its name been struck off by the MCA. Hence, there was only lull in the business of the company. It was reiterated that since, the assessee company is active, it has to incur GL Litmus Events Pvt. Ltd. vs ACIT 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 and such expenditure cannot be disallowed only on the ground that there was no business activity during the year especially in the case of companies. In order the support the above contention, reliance was placed on the following judicial precedents:

(i) The Hon’ble Calcutta High Court in the case of Commissioner of Income-tax v. Ganga Properties Ltd. [1993] 199 ITR 94 (Calcutta). (ii) The decision of the Delhi Bench of the Tribunal in the case of ACIT Vs. M/s. JNG Builders Pvt. Ltd. I.T.A. No. 3873/Del/2011. (iii) The decision of Delhi Bench of the Tribunal in the case of Income Tax Officer vs. Mokul Finance (P) Ltd. (2008) 110 TTJ (Delhi) 445. (iv) The Delhi Bench of the Tribunal in the case of G.R. Commercial Pvt. Ltd. vs. Income Tax Officer, Ward 12(2) (28.07.2015 - ITAT Delhi): and 1134/Del/2013. (v) The Bombay Bench of the Tribunal in the case of 41 GL Litmus Events Pvt. Ltd. vs ACIT Assistant Commissioner of Income Tax-7(2)(2) vs. New Era Mercantile Private Ltd. [I.T.A. No. 3033/Mum/2017 and CO. No. 40/Mum/2019 (Arising out of ITA No. 3033/Mum/2017)].

6.9 The Ld. AR submitted that applying the ratio of aforesaid decisions, it is apparent that the expenditure incurred by the assessee company being a corporate entity are to be considered as incurred for the purpose of business even if there is no income from business during the year. 6.10 The next contention of the Ld. AR was that the AO, in his Assessment Order, has made the addition instead of making disallowances. It was submitted that the A.O. has held that since the cash system of accounting was rejected and since the Assessee had failed to furnish fresh Return on accrual system of accounting, he held that the Return of income filed by the assessee as per cash 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 Rs.13,07,888/- (as per Return) to be the Income as per the accrual system of accounting and then the A.O., alleging GL Litmus Events Pvt. Ltd. vs ACIT that the assessee had in its Return (filed on cash basis) claimed an expenditure of Rs.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 Rs.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 accounting, cash system of 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 already accrued in earlier years as well as in current year. However, under mercantile system of accounting, transactions are recorded as and when they accrue or when they become due. It is obvious that the assessee has GL Litmus Events Pvt. Ltd. vs ACIT recorded the income and expenditure paid in the current year for expenditure already accrued in earlier years in its income tax return. Hence, the income/loss shown in the return of income also includes the amount which were accrued in earlier years but received in current years. Therefore, the return of income filed in cash basis cannot be treated as return filed on accrual basis. It was further submitted that even if return is considered as filed on accrual basis, adjustment can be made only to the extent of expenditures as are claimed in the return of income and not for what has not been claimed. 6.11 It was further submitted by the Ld. AR that the AO has alleged that the expenditure of Rs.5,72,17,800/- had been claimed by the assessee which is not correct. As is evident from the schedule of profit and loss in the return of income enclosed at pages 5-7 of the Paper Book as well as the Profit and Loss Statement enclosed at page 31 of Paper Book, the assessee has claimed in the Return the expenditure amounting to only Rs.1,31,56,621/-.(following the cash basis). It was prayed that this addition deserved to be deleted.

GL Litmus Events Pvt. Ltd. vs ACIT 7.0 Countering the arguments of the learned authorised representative, the learned departmental representative extensively referred to the orders of the assessing officer and the Ld. Commissioner of Income Tax (Appeals) and stated that he relies on the order of the Assessing officer and the Ld. CIT (A). 8.0 We have carefully considered the rival contentions and perused the orders of the lower authorities. The cash basis of accounting followed by the assessee has been upheld in the Para 5 above. Further, it is seen that the AO, while rejecting the Cash system of accounting, adopted the Income as declared by the Assessee on the basis of the Cash system by stating that “The return of income furnished by the assessee following the cash basis of accounting, is treated as accrual basis.” The AO, thereafter, went on to pick up the expenses as debited in the Accrual books and disallowed the expenses as claimed in the said accrual accounts on the premise that no real business activity was done and, therefore, no expenses were justified. It is our considered opinion that the finding given by the AO that no business was carried GL Litmus Events Pvt. Ltd. vs ACIT 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 disallowed the said expenses and added back to the income of the assessee without carrying out the