ITO, NEW DELHI vs. M/S. PARAGON XT, NEW DELHI

PER L. P. Sahu, A.M.

This is an appeal filed by the assessee against the order of Ld. CIT(Appeals)-XXVI, New Delhi vide order dated 29.10.2014 for the assessment year 2010-11 on the following grounds :

“On the facts and circumstances of the case and in law the Ld. CIT(A) erred in

assessee is partnership firm and engaged in the business of civil construction work during the impugned year. During the year under consideration, the assessee declared net profit at 0.38% as against 5.31% declared in the preceding year, thereby the profit declined by 4.93%. The AO noticed from the audit report that auditor has stated that the assessee is maintaining mercantile system of accounting whereas in the ITR –V the assessee stated that the cash system of accounting is employed during the year and in the reply dated 10.12.2012 the assessee also submitted that the assessee is maintaining his books of account on cash basis and bank interest is accounted for only on accrual basis. The assessee also submitted before the AO on 24.1.2013 that the it has adopted only cash system of accounting since its incorporation. Ld. AO noticed that the assessee has shown creditor of Rs. 92,14,742/- and expenditure payable Rs. 5,89,362/-. Accordingly assessee was asked as to why these expenses should not be disallowed because assessee is maintaining cash system of accounting. The AO observed that the assessee has changed his stand regarding System of accounting vide reply dated 18.2.2013, stating that the assessee maintains books of accounts on mercantile basis but accounts of its receipts on actual receipts basis. It means that the assessee is declaring its income on Receipt basis which is as per Cash Accounting system and declaring its expenses as per mercantile system of accounting. It means the assessee is following

two method of accounting system in the year under consideration, which is not acceptable. The two system adopted by the assessee affect the net profit very considerably. Therefore, the AO after deducting advance of Rs.28,17,320/- from the total creditors of Rs.92,14,742/- received from Hooghly Holding (P) Ltd., added the balance of Rs.63,97,422/- to the total income of the assessee.

submission of the assessee, Ld. CIT(A) partly allowed the appeal of the assessee. Feeling aggrieved from the order of the Ld. CIT(A) the revenue is in appeal before the Income Tax Appellate Tribunal.

“5.2 I have carefully considered the facts of the case, submission of the appellant and perused material on the record. Here, the maintenance of regular books of accounts which are duly audited is not questionable. Further, the AO has not rejected the

appellant's books of account. I have perused the Tax Audit Report in Form 3CD and copy of the ROI filed before me. I find merit in the appellant's submission that the appellant has shown mercantile system of accounting in the ROI and as well as in the Tax Audit Report. As per the comments in column 11(a), l1(b) and 11(d) of the Tax Audit Report in Form3CD; it appears that the appellant's method of accounting is mercantile and there is no deviation/change in method of accounting employed in preceding year. Here, the appellant has admitted that it has accounted its receipts on the basis of actual realization as there is no certainty at the time of raising bill that how much sum is actually realizable as it is paid after deductions on various reasons; such as technical, error in measurement, inferior quality, etc. etc. as per claims raised in running bills till completion of project. The appellant submitted that accounting of receipts on the basis of actual realization is followed to avoid reversal debit entries on account of various deductions. Before me, it was submitted that since there is no time lag between accrual and realization of income; therefore, the appellant has accounted its receipts on cash basis and expenses on mercantile basis. The Ld. Counsel, placing on reliance on the decision in the case of Varsha G salunke Vs. DCIT ( ITAT Mumbai ) (98 ITD 147 Mum) (TM) contended that contract receipts may be treated accounted for on deemed accrual basis as there is no time lag between accrual and realization of contract receipts/income. Further, it was also submitted that since the appellant is consistently following the same method of accounting over the years which has been accepted, in past, by the AO even under scrutiny in the AY 2009-10; therefore, the accounting method may not be changed in view of principle of consistency.

5.4 In cash system of accounting; the books of account are maintained of actual receipts and actual disbursements entries being posted when money or money's worth is actually received, collected or disbursed, whereas in mercantile system; entries are posted in the books of account on the date of the transaction, i.e., on the date on which rights accrue or liabilities e date of receipt or payment. According to mercantile method actual cash receipts during the year and actual cash outlays during the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year. In some cases these methods may not give a clear picture of true profits earned and certainly not of taxable profits [CIT v. A. Krishnaswami Mudaliar; 53 ITR 122 (SC)]. It is undoubtedly correct that the statute stipulates that the income shall be computed on the system of accounting either cash or mercantile 'regularly' followed by the assessee. It should mean 'during the period under consideration'. However, the provision cannot be interpreted to mean that once a system of accounting is adopted, it can never be changed. 'Regular' cannot in the present context mean permanent. It has not been pointed out with reference to any provision that a change is impermissible or barred even when it is warranted by the existing situation. The choice of the method of accounting lies with the assessee; but the assessee must show that he has followed the method either cash or mercantile regularly for its own purposes. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of McMillan & Co. 33 ITR 182.

5.5 The Hon'ble Supreme Court in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row; CIT 61 ITR 428 has held that the section 145 is mandatory. Accordingly, the assessee, after amendment in section 145 with effect from 01.04.1997, is bound to maintain its books of account either on cash or mercantile system. Mixed system of accounting, after 01.04.1997, is neither recognized nor permitted u/s 145. The Hon'ble Supreme Court in the case of McMillan & Co.; 33 ITR 182 has held that the AO even when he accepts the assessee's method of accounting,is not bound by the figure of profits shown in the account. The AO must refer to the inherent defect in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of account maintained by the assessee. It is not open to the AO to intervene and substitute a different system of accounting from the one which is followed by the assessee, on the ground that the system which commends to the ITO is better [CIT v. Margadarsi Chit Funds (P.) Ltd. [1985] 155 ITR 442 (AP)]. The Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT; 82 ITR 363 has held that whether the assesee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his right nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The inherent defects in books of account found by the AO are mentioned above in para 5.3. By reading the impugned order; it appears that the AO has held that true profits of the appellant can not be deduced from the appellant's books of account and thus indirectly rejected the appellant's books of account. However, specific narration for the same is not mentioned in the impugned order. Therefore, in

view of above, I am of the considered view that it is a fit case for invoking the section 145(3) and thus I reject the appellant's books of account. The finding of the AO in this regard is thus stand modified to this extent. Now the next question arises here is that how much is the income of the appellant and in what way it can be worked out.

5.6 The next question is quantification of income. The Hon'ble Supreme Court in the case of British Paints India Ltd. 188 ITR 44 has held as under: "What is the profit of a trade or business is a question of fact and it must be ascertained, as all facts must be ascertained, with reference to the relevant evidence, and not on doctrines or theories: "no assumption need be made unless the facts cannot be ascertained, and then only to the extent to which they cannot be ascertained. There is no room for theories as to flow of costs. Minister of National Revenue v. Anaconda American Brass Ltd. [1956J AC 85; [1956) 30 ITR 84,99 (PC). Section 145 of the Income-tax Act, 1961, confers sufficient power upon the officer-nay it imposes a duty upon him-to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where, accounts are prepared without disclosing the real cost of the stock in- trade, albeit on sound expert advice in the interest of efficient administration of the company, it is the duty of the Income-tax Officer to determine the taxable income by making such computation as he thinks fit. Any system of accounting which excludes, for the valuation of the stock-in trade, all costs other than the cost of raw 9

materials for the goods-in-process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessments. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income cannot properly be deduced there from. It is therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power he has done in the in ant case, for determining what, in his opinionis the correct taxable income. The Tribunal's order, affirming that of the Assessing Officer, was based on findings of fact made on cogent evidence and in accordance with correct principles. The High Court was clearly wrong in interfering with those findings.

Accordingly, we set aside the judgment of the High Court and allow the appeals of the Revenue with costs throughout." 5.7 The Hon'ble Supreme Court, in the case of Dhakeswari Cotton Mills Ltd. reported in 26 ITR 775 held as under:

"In making an assessment under section 23(3) of the Indian Income-tax Act, the Income-tax Officer is not fettered by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in a court of law, but the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3)."

5.8 The Hon'ble Delhi High Court in the case of Jagjit Industries Ltd. in ITA No. 848/2010, order dated 06.09.2010 has held as under:

"11. A Division Bench of the Gauhati High Court in CIT V. Doom Dooms India Ltd. [1993J 200 ITR 496 (Gauhati)

CIT v. Kataria Road Lines, [2009] 316 ITR 115 (Raj.)

5.9 The Hon'ble Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd.; 119 ITR 573 has held that the provisions of the section 145 are only machinery provisions and it cannot override charging provision. The section 145(1) is only an enabling provision to effectuate the charge. The section cannot be used for destroying the charge to tax. It is only a machinery provision and cannot qualify the charging section so as to make the latter otiose, nor can it be given overriding effect so as to defeat the charge. Here, the current year liability of expenses has been disallowed by the AO on the reasoning that the same can not be allowed in cash system of accounting in the relevant AY. The corollary to this finding is thus that the expenditure should be allowed in the year of payment. In case the AO's reasoning is accepted that the

expenses have to be allowed only on payment basis, then in principle, the liability of expenses as on 31.03.2009 paid in the relevant AY, in principle, have to be allowed in the relevant year. However, the AO has not allowed it. Allowing the liability of expenses of as on 31.03.2009 which was paid in the relevant AY 2010-11 as expenses in this year would amount to double deduction because it goes against the accounting principle as well as Income Tax Act as the expenses which were allowed in the AY 2009-10 on accrual basis could not be allowed again in the relevant AY on payment basis. On same analogy, the appellant's contention for exclusion of contract receipts accrued in the preceding year (as TDS was claimed in that year/preceding year) offered for tax in the relevant AY on actual receipt basis appears convincing if the AO's finding is accepted as such subject to taxation of such contract receipts in the preceding year. However, such exercise has not been done by the AO. Since liability of expenses as on 31.03.2009 has been allowed in the AY 2009-10 or prior to that on accrual basis and contract receipts accrued in the AY 2009-10 have not been offered for tax in the AY 2009-10; therefore, the AO's action in not allowing liability of expenses as on 31.03.2009 paid in the relevant AY as expense in the relevant AY vis-a-vis not excluding contract receipts accrued in the preceding year offered for tax in the relevant AY on actual receipt basis is held justified though theoretically it looks quite attracting.

5.10 I have considered the entire issue in-depth and come to conclusion that in case the expenses shown payable in the relevant year are disallowed in this year, then the same have to be allowed in subsequent year on payment basis as the genuineness of expenses are not in dispute. Similar stand has to be taken in case of contract receipts also' in case the mercantile

system of accounting is strictly followed. Then, such exercise also requires to be done in preceding years; to reopening of the assessment of preceding years since the appellant's existence from AY 2008-09. However, it will go against the ratio laid down by the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra) wherein the Hon'ble Supreme Court has not allowed the valuation of opening stock on principle on which the closing stock was valued. In case the appellant's contention is accepted then its cases for the AY 2008-09 and 2009-10 have to be reopened. Similarly, the assessments of subsequent years also have to be reopened as per the law. Without prejudice to finding herein after the AO is free to reopen the appellant's assessments for preceding and subsequent years in accordance with the law.

5.11 After considering facts of the case in entirety and particularly (i) non-allowance of liability of expenses as on 31.03.2009 paid in the relevant AY as expense in the relevant AY, (ii) non-exclusion of contract receipts accrued in the preceding year offered for tax in the relevant AY on actual receipt basis (iii) inclusion of mobilization advance in the relevant AY and (iv) inclusion of contract receipts accrued in the relevant AY but received in the subsequent AY, I am of the considered view that the AO has not truly & strictly followed the cash system of accounting. By disallowing the current year liability of expenses in the relevant AY & allowing it in the year of payment and excluding contract receipts accrued in the preceding year offered for tax in the relevant AY & taxing advance contract receipts accrued/received in the relevant year; at most, there may be some gain of interest u/s 234B and 234C with consequential payment of. interest u/s 244A though it is a revenue neutral exercise over the years as the genuineness of either the contract receipts or expenses are not questionable. The

decision in the case of Varsha G salunke (98 ITD 147) deals various aspect of the matrix of this case and thus finding of the Third Member therein is held applicable here. The relevant portion of this decision (98 ITD 147) reads as under:

"THIRD MEMBER ORDER Shri G. E. Veerabhadrappa, Vice- President. – There being a difference of opinion between the Members constituting the Division Bench, the Hon'ble President has referred, under section 255(4) of the Income Tax Act, 1961, the following point of difference to me as a Third Member to resolve the controversy:

"1. Whether in the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) is justified in confirming the addition of Rs.2,96,460.92 ps., made by the assessing officer in respect of 3 TDS certificates pertaining to the period 1-4-1996 to 31-3-1997 issued to the assessee by RCF ?" 2. The facts in brief are the assessee, an individual, was carrying on the business of providing security and housekeeping services to different clientele. the assessment year involved is 1997-98. There is no dispute that the assessee was following mercantile system of accounting for reporting the income for the purpose of assessment.

providing a reconciliation statement, except in respect of three TDS certificates received for the services rendered to Rashtriya Chemicals & Fertilizers (RCF hereinafter after referred to as), Chembur. The details of the certificates as also the amounts credited are as under:

Date of credit Amount credited TDS 9-4-1997 2,46,268 4,925 3-4-1997 8,954 179 21-4-1997 41,239825. The assessee explained that the aforesaid three receipts were not included in his income for the assessment year 1997-98 on the reasoning that these TDS certificates were received after the close of the relevant previous year ending on 31-3- 1997. The assessing officer included the actual billed amounts as per the TDS certificates to the declared income and has also allowed the credit of tax deducted at source amounting to Rs. 5,929. The Commissioner of Income Tax (Appeals) confirmed the action of the assessing officer. 4. It was contended before the Tribunal that the assessee was raising the bills against his clientele for the services rendered in a month only in the succeeding month and on that basis the bills in respect of the services rendered in March 1997 were placed only in the month of April 1997. Accordingly, the receipts corresponding to services rendered in March, 1997 have been credited in the accounts of the succeeding assessment year. The learned counsel submitted that this method has been consistently followed by the assessee. The assessee has already included the receipts for twelvemonths in the accounts for the year under consideration and by adding the receipts for March, 1997 the assessing officer would be considering the receipts of

thirteen months in the assessment for the year under consideration. The learned Accountant Member in his proposed order accepted the claim of the assessee after having found satisfied with the method of accounting consistently employed by the assessee. However, the learned Judicial Member was of the view that the assessee has claimed credit for tax deducted at source in assessment year 1997-98 whereas, in fact, the amounts received were offered for taxation in the succeeding assessment year. He opined that in the light of the provisions of sections 198 and 199 of the Act, the action of the assessee is not justified. According to the learned Judicial Member, section 198 of the Act provides that all sums deducted under Chapter XVII are required, for the purpose of computing the income of the assessee to be deemed to be the income received and, therefore, the tax deducted at source has to be treated as income received in the assessment year 1997-98 itself. The learned Judicial Member further opined that according to section 199 of the Act, the credit for tax deducted at source is required to be given for the amount so deducted on production of the certificate furnished under section 203 of the Act in the assessment made under this Act for the assessment year for which such income is assessable. According to him, a bare perusal of section 199 of the Act shows that credit for tax deducted as source is required to be given in the assessment in which the income relating thereto is assessable. The assessing officer having allowed credit for tax deducted at source in the assessment year 1997-98, it is undisputable that the income referable to that credit should also be brought to tax in the same assessment

year and in no other assessment year. According to the learned Judicial Member, section 199 of the Act prohibits the credit for tax deducted at source to be given in an assessment year different from the one in which the income relating thereto is assessable. The learned Judicial Member further opined that the system of accounting cannot defeat the express provisions of law contained in section 199 of the Act, which mandate that credit for tax deducted at source shall be given for the assessment year in which the income relating thereto is assessable. According to him, the Hon'ble Supreme Court in Tuticorin Alkali Chemical & Fertilizers Ltd.'s case (supra) has held that income-tax law does not march step by step in the divergent foot prints of the accountancy profession. The learned Judicial Member further observed that having claimed corresponding expenditure under mercantile system of accounting, the assessee cannot defeat the taxability of the income on the ground that he has not raised the bills. According to him, this is a case where the assessee has executed the work, received the benefit of tax deducted at source and was also allowed expenditure in executing the said work.

Therefore, the assessee cannot, in the opinion of the learned Judicial Member turn around to say that corresponding income is not taxable. He, therefore, upheld the order of the assessing officer. The expression of different opinions on this matter has brought before me the question as abstracted above. 5. I have heard both the sides extensively and have carefully gone through the records. On the facts, both the

learned Members are clear. The difference is the result of understanding the exact purpose and intent of the provisions of sections 198 and 199 of the Income Tax Act, 1961. On the method of accounting consistently followed by the assessee for billing, there is absolutely no difference. I, therefore, take up the provisions of sections 198 and 199 of the Act by extracting the same under as applicable to the assessment year under consideration:

Both the sections viz., 198 and 199, fall within Chapter XVII of the Income Tax Act, 1961 which are titled as "Collection and Recovery-Deduction at source". In other words, these are machinery provisions for effectuating collection and recovery of the taxes that are determined under the other provisions of the Act. In other words, these are only machinery provisions dealing with the matters of procedure and do not deal with either the computation of income or chargeability of income. The basis of charge of income to tax in the case of business income is provided in section 28 of the Act. The computation provisions of sections 28 to 43A deal with the assessment of profits and gains of business. In computing the income from business or profession, the method of accounting followed by the assessee becomes relevant. After all, the profits and gains of business or profession carried on by the assessee should be computed in accordance with the method of accounting regularly followed by the assessee as provided in section 145(1) of the Income Tax Act, 1961. In fact, the words "Profits and Gains" referred to in sections 28 and 29 of the Act deal with only commercial profits as understood in the commercial parlance as held by Lord Halsbury in Gresham Life Assce. Soc. v.

Styles 3 TC 185 (HL) "in its natural and proper sense - in a sense which no commercial man would misunderstand". This principle has been approved by the Privy Council in Pondicherry Railway Co. Ltd. v. CIT 5 ITC 363, and by the Supreme Court in Badridas Daga v. CIT (1958) 34 ITR 10, Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC) and CIT v. BaiShirinbai (K) Kooka (1962) 46 ITR 86. The profits mentioned herein are the real profits and they must be ascertained on ordinary principles of commercial practice and commercial accounting. Therefore, the assessee's method of accounting becomes relevant for determining the income from the conduct of any business or exercise of any profession. The assessee, in this case, is rendering security and house keeping services to various clientele such as UTI, RCF, HOFC, etc.The deductibility of any expenditure incurred by an assessee depends upon the method of accounting followed by him. The assessee, in this case, is following mercantile system of accounting. All expenses, to which liability is accrued in the accounting year, are deductible as business expenditure. In the same manner all business receipts will have to be determined on the basis of method of accounting employed by the assessee. Unless the assessee renders services for the entire month, it is not open to him to raise the bill upon his clientele. In other words, some of the services rendered in March 1997 will have to be necessarily billed after the close of the month which falls outside the accounting year under consideration and, in fact, the assessee has billed the same immediately after the close of the accounting year, in the month of April 1997 which is subsequent to the previous year for the year under

consideration and has treated the same as part of business receipts for the next assessment year. I do not think that there is any flaw in this method of accounting regularly employed by the assessee and accepted by the department from year to year in the past. After all, the TOS certificates which are again dated and received in the months subsequent to the accounting year cannot be accounted in the assessment year under consideration, which has already been closed; It is not necessary for the assessee to account those receipts by re-opening the books of account of the earlier year because the assessee himself has raised the bills in the subsequent month after the close of the accounting year in question. Therefore, it is incorrect on the part of the revenue to workout any addition, on the basis of the bills subsequently raised, in the accounting year which has already passed wherein according to the method of accounting employed by the assessee, such receipts have not been recognized as part of business profits. 6. Sections 198 and 199 of the Act nowhere provide for an exception either to the determination of the income under the aforesaid provisions of sections 28, 29 or as to the method of accounting employed under section 145 of the Act, which alone could be the basis for computation of income under the provisions of sections 28 to 43A of the Act. Section 198 has a limited intention. It only declares the amounts deducted at source under sections 192 to 194, section 194A, section 194B, section 194BB, section 194C, section 194D, section 194E, section 194EE, section 194F, section 194G,section 194H, section 1941, section 194J, section 194K, section 195, section 196A, section 196B, section 196C and section 196D to be

treated as an income received. The purpose of section 198 is not to carve out an exception to section 145 of the Act. Section 199 of the Act has two objectives - one to declare the tax deducted at source as payment of tax on behalf of the person on whose behalf the deduction was made and to give credit for the amount so deducted on the production of the certificate in the assessment made for the assessment year for which such income is assessable. The second objective mentioned in section 199 is only to answer the question as to the year in which the credit for tax deducted at source shall be given. It links up the credit with assessment year in which such income is assessable. In other words, the assessing officer is bound to give credit in the year in which the income is offered to tax. This section 199 does not empower the assessing officer to determine the year of assessability of the income itself but it only mandates the year in which the credit is to be given on the basis of the certificate furnished. In other words, when the assessee produces the certificates of TDS, the assessing officer is required to verify whether the assessee has offered the income pertained to the certificate before giving credit. If he finds that the income of the certificate is not shown, the assessing officer has only not to give the credit for TDS in that assessment year and has to defer the credit being given to the year in which the income is to be assessed. At the cost of repetition, it may be mentioned that sections 198 and 199 do not in any way change the year of assessability of income, which depends upon the method of accounting regularly employed by the assessee. They only deal with the year in which the credit has to be given by the assessing officer. It cannot be disputed that according to the method of accounting

employed by the assessee the income in respect of the three TDS Certificates, which are mentioned in paragraph 3 above, does not pertain to the assessment year in question, but it pertains to the next assessment year and, in fact, in that year the assessee has offered the same to tax. Therefore, the credit in respect of these three TDS Certificates shall not be given in the assessment year under consideration, but the credit for the same shall be given in the next assessment year in which the income is shown to have been assessed. 7. In the light of the above discussions, I agree with the reasoning given by the learned Accountant Member, who has correctly directed the exclusion of the income represented by these three TDS Certificates from being assessed in the assessment year 1997-98, i. e., the year under consideration, But the assessee, in the light of the scheme of the provisions of sections 198 and 199 of the Act, shall not be allowed to claim the credit in respect of these TDS Certificates for which the income has not been returned by her as a result of the method of accounting employed. The credit shall be carried forward and the assessee will get the credit for the present TDS Certificate in the year in which she offers the income to tax 00_ the basis of the method of accounting regularly employed. 8. Before parting with the matter, I think it is necessary for me to deal with certain observations regarding the claiming of the expenditure as discussed by the learned Judicial Member. The claim of deduction for an expenditure depends upon again the method of accounting regularly employed by the assessee. There is no dispute that the assessee has incurred these expenses even in respect of the services rendered to its clientele

in the month of March, 1997 (to which the bills are not raised). These expenses have been undoubtedly incurred during the previous year in question. Only the matching receipts have not accrued to the assessee in the accounting year in question due to the method of accounting employed by her. But over the years, the effect on the profit & loss account gets neutralized. Sections 198 and 199, it may again be stressed, do not in any way determine the year of assessability of profits and gains of business. They only deal with the year in which the TDS Certificates have to be given credit to. In my humble opinion, the decision of the Hon 'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) relied upon by the learned Judicial Member, does not in any way alter the year of assessability of income, which is governed under sections 28, 29 and 145 as has been interpreted by the Apex Court and as discussed by me above. A. The appellant also get support from the judgement passed in the case of M/s. Maruti Securities Ltd Vs Addl. Commissioner of Income Tax, Range-16, Hyd, (468/Hyd/2009), relevant portions are reproduced as under:- "21. We have considered the rival submissions and perused the impugned orders of the Revenue authorities and other material on record. We have also gone through the written submissions filed and the decisions relied upon by the parties before us. We are of the opinion that to arrive at a real income, accrual basis cannot be a justifying factor and the commercial and business realties of the assessee, should be considered. The interest income has been recognized in the books of accounts only to the extent of actual collection, which is the recommended/ recognized method as per

Accounting Standard 9 of ICAI which lays down that when uncertainties exist regarding the determination of the amount or its collectability, the revenue shall not be treated as accrued and hence shall not be recognized until collection. The recognition of revenue on accrual basis presupposes the satisfaction of two conditions-

(a) The revenue is measurable

(b) The revenue is collectable with certainty.

The interest income has been admittedly recognised only on receipt basis. The contention of the revenue that the loan agreements have interest clause permitting the assessee to charge interest at the rate of 14% is not tenable. The terms of the agreements, which enabled the assessee company to demand interest were only enabling provisions and those enabling provisions did not guarantee the collection of overdue interest. They only gave a cause of action to the applicant. 22. The method of accounting, as followed by the assessee, does not create any income; but the method of accounting only recognizes income. There is some merit in the submission of the assessee that when the principal itself is overdue and not collected, there is no basis for making out a case that interest income would be collectable with certainty. Even where an assessee is following the mercantile system of accounting, it is only accrual of real income which is chargeable to tax, that accrual is a matter to be decided on commercial belief having regard to the nature of business of the assessee and character of the transaction. Accordingly, for the purpose of determining whether there has been accrual of real income or not, recourse is to be made to ascertain the nature of business and character of 24

the transaction and the realities and peculiarities of the situations. The decision very heavily relied upon by the first appellate authority in the case of State Bank of Travancore Vs CIT (1986) 158 ITR 102 was subsequently overruled in its land mark decision in the case of UCO Bank Vs CIT 237 ITR 889. In this regard, we place reliance on the ratio laid down by various judicial authorities on the proposition that the income cannot be taxed on hypothetical basis, and it is only the real income that is to be brought to tax. In this behalf, we also rely, giving below summary of the ratio laid down, on the following decisions) CIT vs. Godhra Electricity Co. 225 ITR 746 (SC), The view expressed was that if income does not result at all, there cannot be any tax and that if an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted.

[Emphasis in the above submission is provided by me.] 5.12 In view of above discussion and case law reported in 98 ITD 147, I do not find any justification in changing the entire accounting method of the appellant on cash basis as it will result in a distorted picture of true state of the business for the purpose of computing the chargeable income unless reopening of preceding and subsequent assessment years are not done; though it is revenue neutral exercise over the years in case all contract receipts are offered for tax and expenses have been genuinely claimed over the years. After considering the entire comments in column l1(a) to 11(d) of the Tax Audit Report in Form-3CD and the fact that receipts were not certain till bill is cleared as there is chances or deductions out of the billed amount on various accounts as mentioned above; I am of the considered view that the

appellant has maintained its books of account on deemed mercantile system of accounting in case of contract receipts as there is no time lag between accrual and receipt of income. Definitely, both income and expenditure have to be accounted for on one system of accounting; cash or mercantile. However, neither the AO nor the appellant has strictly followed either cash or mercantile system of accounting. 5.13 In view of above and following the ratio laid down by the Hon'ble Supreme Court in the cases of Excel Industries Ltd. (Date of order 09.10.2013), Radhaswami satsang 193 ITR 321, Parshuram Pottery 106 ITR 1 and British Paints (supra) and the Hon'ble Delhi High Court in the case of Jagjit Industries Ltd. in ITA No. 848/2010; I am of the considered view that the appellant's income can be deduced properly from mercantile system as it will not result distorted profit. Accordingly, I order so. Accordingly, it is held that the disallowance of current year liability of expenses aggregating to Rs. 68,08,746/- (Rs.63,97,422/- plus Rs 4,11,324/- as per para 5 and 6 of the impugned order) is not justified. Consequently, the disallowance of Rs.68,08,746/- is deleted. The AO shall give consequential relief.” 6. The next issue is regarding disallowance of accounting charges of Rs.81,000/-.The AO disallowed it holding that the appellant has not deducted tax at source as per the section 194C. However, the appellant's contention is that it is nothing but payment of salary to the Accountant and thus, it is in the nature of salary and not in the nature of contractual payment u/s 194C. The Ld. Counsel contended that the appellant is not required to deduct tax at source as per the provision of section 192; hence, the disallowance is not justified. I have carefully considered the facts

of the case, submission of the appellant and perused material on the record. I find merit in the appellant's submission and therefore, the disallowance of Rs.81.000/- is hereby deleted. The AO shall give consequential relief. 7. The next issue is regarding disallowance of donation of Rs. 8,000/- The AO disallowed it holding that the appellant has failed to substantiate its claim. However, the appellant filed proof of donation of Rs.3,000/- only before me; which is found in order being donation given to Helpage India by account payee cheque. Accordingly, the disallowance of donation is restricted to Rs.5,000/-. The AO shall give consequential relief. 9. The last issue is regarding disallowance of purchase of iron of Rs.15,450/-. The AO disallowed it holding that there is difference in contractual receipts as per the 26AS. The Ld. Counsel argued this issue by reiterating the content of his submission. The relevant portion thereof is reproduced here under: ''That the AO has proceeded to make addition on this account without understanding the entire entry. This amount pertains to labour charges amounting to Rs. l,50,000/-, on which the appellant has charged a sum of Rs.15,450/- as service tax, total invoice being Rs.1,65,450/-. This amount of Rs.1,65,450/- was paid by the concerned party (M/s. Dyna Aircon (P) Ltd). The entry of service tax has not been considered by the AO and deserves to be deleted. Copy of account of M/s. Dyna Air-con is enclosed herewith. " 5. From the above order of the Ld. CIT(A) we notice that Ld. CIT(A) has discussed all issues in detail as noted above and we find no infirmity in the order of the Ld. CIT(A). The assessee has produced

credible evidence before the Ld. CIT(A) that he had maintained regular books of accounts on mercantile basis for the accounting purpose, as is clear from the tax audit report submitted before CIT(A) which could not be controverted by the Ld. DR. From the above finding it is also clear that assessee has recorded the expenses / revenue on mercantile basis therefore the AO is not justified to make additions regarding creditors for expenses(63,97,422 + 4,11,324). Further we notice that the payment to accountant has been explained by the assessee before the Ld. CIT(A) that it is in the nature of salary and therefore, the payment of Rs. 81,000/- is under the limit for deducting TDS on the salary. In respect of donation also, the ld. CIT(A) has rightly sustained the disallowance of donation to the extent of Rs.5000/- out of Rs.8,000/- for want of evidence. We, therefore, find no infirmity in the impugned order on this score. Further in respect of Rs.15,450/- on account of difference in Form No. 26AS. The assessee has rightly explained by the ld. CIT(A) and Rs.15,450 was a service tax on account of supply of labour to M/s. Dyna Aircon Pvt. Ltd. which has been separately accounted for. Therefore, we do not find any justification to interfere with the order of ld. CIT(A) on this issue.

Order pronounced in the open court on 14.03.2019.

sd/- sd/-

(AMIT SHUKLA) (L.P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 14/03/2019 Veena Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi