Loading judgment…
Facts
The Revenue appealed an order from the CIT(A) concerning assessment year 2005-06. The assessee, a Trust, had claimed income as exempt under Section 11. The AO changed the accounting method from mercantile to cash after a Special Auditor pointed out flaws, while the CIT(A) directed the AO to use the mercantile system.
Held
The Tribunal upheld the mercantile system of accounting for the assessee, stating that the AO's reasons for changing the method were not strong and that minor lapses in accounting should not hinder determining true income. Consequently, additions made based on the cash system were not sustainable.
Key Issues
Whether the Tribunal was justified in directing the AO to compute the total income on a mercantile system of accounting when the AO had changed to a cash system due to alleged flaws identified by a special auditor.
Sections Cited
11, 142(2A), 143(3), 143(2), 145(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DIVISION BENCH, ‘A’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI KRINWANT SAHAY
The Revenue is in appeal before the Tribunal against the order of ld. Commissioner of Income Tax (Appeals) [in short ‘the CIT (A)’] dated 26.08.2009 passed for assessment year 2005-06.
The Revenue has taken 8 grounds of appeal, out of which Ground Nos. 7 and 8 are general grounds which do not call for recording of any specific finding.
ITA No.1027/CHD/2009 A.Y.2005-06 2
In the first ground of appeal, grievance of the Revenue is that ld. CIT (Appeals) has erred in directing the AO to compute total income of the assessee on mercantile system of accounting in place of cash system of accounting adopted by the AO. The assessee is a Trust. It has filed its return of income on 30.10.2005 declaring total income of Rs.40,54,586/-. The assessee Trust had claimed alleged income as exempt u/s 11 of the Income Tax Act. The case of the assessee was selected for scrutiny assessment and notice u/s 143(2) was issued and served upon the assessee. The ld. AO found that accounts of the assessee are complicated, therefore, they are required to be audited by a Special Auditor u/s 142(2A). He sought approval from the ld. Commissioner of Income Tax-3, Ludhiana who has concurred his request and ultimately accounts of the assessee have been audited by the Special Auditor. According to the AO, the auditor has pointed out certain flaws in the books of accounts and therefore, AO has changed the method of accounting from mercantile to cash system. He computed the income of the assessee as per cash system.
ITA No.1027/CHD/2009 A.Y.2005-06 3
On appeal, ld. CIT (Appeals) has observed that consistently assessments of the assessee have been framed u/s 143(3) by adopting mercantile system of accounting, therefore, there should not be any change in the method of accounting in this year. The ld. Sr.DR except putting reliance upon the order of AO and submitting that since accounts were complicated, Special Auditor has pointed out certain infirmities about non-maintenance of specific books, the income of the assessee is required to be determined on cash system of accounting. On the other hand, ld. counsel for the assessee relied upon order of CIT (Appeals).
We have duly considered the rival contentions and gone through the record. Section 145 sub-section (2) contemplates method of accounting required to be followed by an assessee consistently over a period of time. The assessee has followed mercantile system of accounting. This system has been accepted by the AO in assessment year 2003-04 and 2004-05 in a scrutiny assessment passed u/s 143(3). There are no strong reasons assigned by the AO as to why this method of accounting is required to be changed. The reasons given by A.Y.2005-06 4 the special Auditor as well as of the AO are that assessee has been following single entry system of accounting. There is absence of certain general ledger, but we are of the view that these are minor lapses which do not create hinderance to the AO to deduce the true income of the assessee under mercantile system of accounting. Therefore, we are of the view that ld. CIT (Appeals) has rightly directed the AO to determine the income of the assessee on the basis of mercantile system of accounting. Accordingly, first ground of appeal of the Revenue is rejected.
6. In Ground No. 2, grievance of the Revenue is that ld. CIT (Appeals) has erred in deleting the addition of Rs.2,66,805/-. The facts regarding this ground is discussed by the CIT (Appeals) on page 12 paragraph No. 8.1.10.
6.1 The brief facts are that a sum of Rs.2,66,805/- was received from Kundan Lal Trust on 19.10.1983. It was treated as income of the appellant for the relevant period. Thereafter, a dispute arose and under the order of the Consumer Dispute Redressal Forum, Ludhiana, this amount was refunded on 30.09.2004. The assessee has claimed the deduction. The AO A.Y.2005-06 5 has disallowed this claim only on the basis of method of accounting required to be adopted for assessing the income of the assessee in this assessment year. In other words, he disallowed on the ground that since income of the assessee is to be determined on cash system, therefore, deduction is not admissible. On the other hand, ld. CIT (Appeals) has deleted the addition. Since it was an amount refunded by the assessee under the order of the Consumer Dispute Redressal Commission, it was earlier recognized as income, therefore, ld. CIT (Appeals) has rightly deleted the addition. We do not find any error in the order of the CIT (Appeals).
Ground Nos. 3 and 4
In these grounds of appeal
, grievance of the Revenue is that ld. CIT (Appeals) has erred in deleting the addition of Rs.63,28,402/- and Rs.80,09,095/-. The facts regarding both the issues are being discussed by the ld. CIT (Appeals) on page 17 paragraph No.8 of the impugned order. The discussion made by the CIT (Appeals) read as under :
8. Grounds of appeal
Nos. 7 &
8. A.Y.2005-06 6 8.1 Submissions of the Ld. Counsel for the appellant in respect of Ground of appeal No.7 & 8 read as under: - GROUND NO.
7. The Ld. A:0. has added Rs.6328402/- on account of expenses payable on 31.03.2004 but actually paid during the year under appeal. Since the assessment has been made by following cash system of accounting, this amount is allowable in assessment year 2005-06 on actual payment basis. GROUND NO.
8. The Ld. A.O. has made an addition of Rs. 8090095/- out of Rs. 18321095/- paid under the head "Enhancement Compensation". The actual of payment of Rs. 18321095/- is not disputed. This entire payment is allowable in assessment year 2005-06 on actual payment basis, which has been adopted by the Ld. A.O. for making the assessment. The Ld. A.O. cannot be allowed to blow hot & cold in the same breath. Addition of Rs. 8090095/- has been made by the Ld. A.O. quite contrary to the method of accounting (i.e. cash method) adopted by him for making the assessment. Addition of Rs. 8090095/-, therefore, deserves to be deleted.
9. As is quite clear from the submissions of the Ld. Counsels in respect of these grounds which have been reproduced above both these grounds are alternative grounds of appeal only. These alternative grounds are to be considered if appellant's contention with regard to assessing its income on mercantile system of accounting is not accepted. However as the ground in respect of this issue has already been decided in favour of the appellant and it has been held that the income of the appellant is to be computed on the basis of mercantile system of accounting, these grounds would become infructuous. These are taken to have been dismissed accordingly.”
8. Since both the items are depending upon the method of accounting required to be followed, we have upheld the method of accounting required to be applied on the income of the assessee as mercantile system, these additions would not be sustainable. The ld. CIT (Appeals) has rightly recorded the above finding and we do not find any error in the order of the CIT (Appeals). Both these grounds are rejected.
A.Y.2005-06 7 Ground Nos. 5 and 6
In these grounds of appeal
, grievance of the Revenue is that ld. CIT (Appeals) has deleted the addition of Rs.79,790/- and Rs.1,50,300/- which were added by the AO by disallowing the expenses out of development work and development of parks. The ld. CIT (Appeals) has considered this issue on page 17 paragraph No.
9. A perusal of the details would reveal that AO has added a sum of Rs.13,69,660/- by making disallowance of expenditure. This addition was made on the recommendation of the Special Auditor, but ld. CIT (Appeals) has observed that income of the assessee has been computed by the AO by taking a net figure i.e. net income and if net figure is being taken, then it should not be amplified by further disallowances. The sum of Rs.13,69,660/- is being included by the Special Auditor while working out the alleged net figure of income at Rs.5.80 Cr. Thus, a double addition was made by the AO. Accordingly, ld. CIT (Appeals) has deleted the addition.
10. With the assistance of ld. Representative, we have gone through paragraph No.11 of the CIT (Appeals)’s order and we A.Y.2005-06 8 find that CIT (Appeals) has rightly deleted the addition on the ground that if these two additions are being sustained, then it would be a double addition. Therefore, we do not find any error in the order of the CIT (Appeals). These two grounds are rejected.
In the result, the appeal of the Revenue is dismissed. Order pronounced on 24.06.2025.