ACIT, CHENNAI vs. M/S. INTEGRATED ENTERPRISES LTD., CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

:-2-: I.T.A. N0s. 1838 & 1839/Mds/2011

While making the assessments for ays 2003-04 & 04-05, in the notes on accounts of the respective ay, the assessee has disclosed that the profit to the extent of Rs.9,47,82,962/- & Rs.276.37 lakhs were understated for ays 2003-04 & 04- 05, respectively. After considering the assessee’s reply, material etc; for the ay 2003-04, the AO held that the assessee recognised the income in the assessment year 2002-03 while charging corresponding expenditure in the assessment year 2003-04. Thus, by adopting a change in the accounting practice, it has shifted loss from one year to another year. Accordingly, the AO considered the income understated in that year as the income of the current assessment year ie ay 2003-04. For the ay 2004-05, the AO held that the income claimed to have been offered in the earlier year is not identifiable.

The assessee has not furnished any details to substantiate that income had already been offered in the earlier years. However, according to the notes forming part of the accounts, it is clear that income to the extent of Rs. 2,76,32,502/- is understated in the current year and the assessee has adopted a change in the accounting practice as per which income is understated. In the absence of any convincing evidences that the amount has suffered tax previously, the AO added Rs. 2,76,32,502/- mentioned in the Notes on Accounts, as the income understated. Further, the AO found that the assessee has excluded Rs. 2,43,14,324/- , infra structure facilitation charges

:-3-: I.T.A. N0s. 1838 & 1839/Mds/2011 related to the year 2002-03. Since, it has not filed any details for having shown the income on accrual basis in the asst. year 2003-04, the AO included Rs. 2,43,14,324/- relating to asst. year 2003-04 as the income from business.

“2. The learned CIT (A) has erred in deleting the addition made on account of understatement of income to the extent of Rs. 276.32 lakhs as the same was already offered as income in AY 2002-03 and there was no change in the method of accounting. 2.1 It is submitted that the assessee has been changing method of accounting frequently. Consequently, there was reduction in income and this is against the provisions of section 145 of the IT Act. 2.2 The learned CIT (A) failed to appreciate the facts given by the AO in the remand report and there was no discussion in the order of the CIT(A) on the remand report. 2.3 It is submitted that in para 4.2 of the order, the learned CIT (A) had given a finding that there was no change in method of accounting. But the same was not supported by proper facts and figures as to how the income admitted in the respective years matched with the receipts as per books. 2.4 It is further submitted that the Authorised Representative while making his submissions stated in para 4.1.1 of the order that the alleged change in the method of accounting had only resulted in payment of tax u/s. 115JB.

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3. The learned CIT(A) has erred in deleting Rs. 2,43,14,324/- being infrastructure facilitation charges. 3.1 It is submitted that theCIT (A) has allowed the assessee’s claim based on fresh evidence submitted before him and the same was not produced before the Assessing Officer and hence it amounts to fresh evidence under Rule 46A as the Assessing Officer was not given an opportunity to verify the fresh evidence submitted before him. 3.2 The learned CIT (A) ought to have appreciated the fact that the reconciliation figures according to the details furnished works out to Rs. 443.87 lakhs and 243.14 lakhs for assessment years 2004-05 and 2003-04 which was stated to be 80% of the total infrastructure income. 3.3 The learned CIT(A) failed to note that the income admitted under infrastructure facilities was only Rs. 138.79 lakhs according to the annual report for assessment year 2003-04 and not Rs. 243.14 lakhs as per the break- up details given by the assessee for assessment year 2004-05.”

“ 2. The learned Assessing Officer should not have added the said amount of Rs. 2,76,32,S02/-as understated income from depository services. The following will clarify the position. Extracts from the Annual Report 2001-02 The auditor of the company has remarked that the company has admitted Rs.1567.94 lacsas DP income for the year 2001-02 as against the :-5-: I.T.A. N0s. 1838 & 1839/Mds/2011 entitlement of 770.67 lacs only and that the income has been overstated to the extent of Rs. 797.26 lacs. Extracts from the Annual Report 2002-03. Similarly, the service charges received in advance under various depository service schemes as on 31.03.2002 were treated as income of that year in the books. The company has introduced two schemes consequent upon the upward revision of depository charges with effect from 01.05.2002 and treated the balance under the two schemes as advance money for OP operations. Consequently, the profit to the extent of Rs.947.82 lacs has been understated. The directors have clarified the same, which forms part of the directors' report for the year 2001-02 as follows: The company has been adopting the practice of charging the customer in advance for one year and treating the same as income of the year in which such charges were raised. The balance standing to the credit of the customer was clearly shown as advance from customers for services to be rendered. The regulatory authorities' took a different view by issuing a public circular advising us to refund such advances and without citing any reasons. We took a suitable legal recourse and our stand was vindicated in appeal. In the meantime, NSDL has rationalised the charges effective from 01.05.2002 and if the new rates are adopted for the future, the amount standing to the credit of the customers will be wiped out within a period of one year. Hence, the management thought it fit to treat the entire balance standing to the credit of customers as income after making a provision for Rs.200 lacs towards contingencies and introduced a new rate structure for customers to avoid complications. (The actual repayment during the next year was Rs.107.65 lacs only) The following table will explain the total picture to how the income was accounted for:

Asst. Income Income Closing Closing Year as per admitte Balance Balance AS-9 d as per as per as per books AS-9 Books 1999-00 17.97 17.97 93.40 93.40 2000-01 387.60 387.60 1478.82 1478.82 2001-02 773.15 1234.69 1611.90 1150.36

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2002-03 770.68 1567.94 1258.81 - 2003-04 947.83 - 1394.74 1083.76 2004-05 1178.87 902.55 1594.03 1559.38

The observation of the learned officer that the appellant is adopting change in accounting practice as perwhich income 'is under stated is not correct." 3) The learned Assessing Office has stated that he' has gone through the previous records.Having i done so, he should have definitely observed and concluded that the proposed addition has already suffered tax. Hence there cannot be addition during the current year on this account. 4) The appellant did not have the intention to shift the loss from one year to another year by adopting this accounting practice. The reason for adopting this accounting practice is dearly mentioned in .the 2001-02 directors' report itself. Further the learned Assistant Commissioner of Income Tax is very much aware of the loss incurredin the subsequent yearsupto the assessment year 2005- 2006(based on the returns of income filed). 5) Without prejudice to the above stand it is submitted that taxing the said sum here would amountto taxinq the income in two assessment years. Having taxed' the income for this assessment year 2004-05,the learned Assistant Commissioner of Income Tax should have consequently reduced the income to that extent for the assessment year 2002-03 and accordingly reworked the carry forward loss position. The then learned Assessing Officer has made similar addition for the assessment year 2003-04 and appeal has been filed against the same. A rectification petition was also filed before the learned officer for that year and the same is pending.”

“4. The first issue pertains to addition of income understated based on the notes on account. In the notes to the account, the appellant has stated that it had introduced two new schemes on account of upward revision in the depository charges w.e.f. 01.05.2002 and had treated a sum of Rs.1559.39 lakhs being balance under the scheme as on 31.03.2004 as advance money

:-7-: I.T.A. N0s. 1838 & 1839/Mds/2011 received from clients. Since the service charges received in advance under various depository service scheme upto 3l.03.2002 were treated as income of that year, the profit to the extent of Rs.276.32lakhs could be stated to have been understated for the current year. During the assessment proceedings, the appellant stated that out of the deposits/charges collected an amount of Rs.9,92,55,021/- related to the service rendered and the same was shown as income in the accounts. As regards Rs.2,76,32,502/- mentioned in the notes, is stated that the amount was increased to set off excess income offered in earlier years. The AO had not accepted the contention of the assessee. He observed that the income claimed to have been offered in earlier years is not identifiable. The assessee has also not furnished any details that the income has already been offered in the earlier years. But the note clearly stated that income has been understated by Rs2,76,32,502/-. Further, the assessee is adopting change in the accounting practice. Hence, he added the above amount to the total income of the assessee. In the remand report, the AO stated that the appellant has changed the accounting policy as compared to what was followed in earlier year by offering the entire advance received as income of A.Ys. 2001-02 & 2002-03. However, in A.Ys. 2003-04 &2004-05 the assessee has not offered the advances against DP services as income of the respective years.

4.1 Theld. AR has strongly argued against the addition made by the AO and the submission made in the remand report. He has also relied on the grounds of appeal In the written submission he has argued as under: "The main business activity of the company was providing one of Total Investment Solutions to investors spread across the country One of its activities was providing Depository Participant Services. The company is acting as representative (Depository Participant) of investor in the depository systems providing the link between the company and investor through depository (NSDL). It maintains electronic records of securities account balance and intimate the status of holding to the account holder from time to time - The clients of the DP needs to open an account to deal in shares in electronic form for which the company is raising bills towards Demat, Remat, Transaction, Custodial and Maintenance charges. This type of :-8-: I.T.A. N0s. 1838 & 1839/Mds/2011 operating income is called E Share- DP income and shown in the P&L Account as such. When Demat account (Eshare) is opened by investor, the company collects initial amount as per Scheme prevailing at the time with exit option at any time after one year from the date of account opening. Whenever transaction takes place such as Demat, Remat, Purchase of shares, sale of shares, Monthly charges are raised along with maintenance charges depending upon the scheme. Further the charges are collected to maintain the initial amount of respective scheme at the end of each quarter. The Charges on the above transaction are treated as E Share income at monthly interval and the charges are collected at quarterly intervals. Further if not paid by client the same amount is adjusted with the initial amount at the end of the period and the balance standing to the credit of customers was clearly shown as a liability as "advance from customers for services to be rendered. The company has been adopting the practice of charging the customer in advance for one year and treating the same as income of the year in which the charges accrued. This was done purely to reduce the cost of collection. The company charged Rs.300 from the clients as annual maintenance charges for the period from 01-01-2001. Though the annual maintenance charges is for the period from 1.1.2001, in respect of clients who have opened their accounts prior to 1.1.2001 and operated their accounts for more than 12 months, the company did not refund the amount as the clients have enjoyed their services for more than one year Hence the entire amount received under DP charges was treated as income of the year ended 31.3.2001. Consequently income was overstated to the extent of Rs. 461.54 lakhs. The Company's auditors duly noted the same in their reports, which was also duly considered by the Board and accordingly dealt with in their report for the year. The assessment for the assessment year 2001-02 was completed u/s. 143(3) on March, 2004. For the assessment year 2002-03, the Petitioner filed the return of income admitting income of Rs. RS.1567.94 lacs. During the :-9-: I.T.A. N0s. 1838 & 1839/Mds/2011 year, SEBI took a different view by issuing a public circular advising the Petitioner to refund such advances. In the meantime, NSDL also rationalized the charges effective from 1.5.2002 and if the new rates were adopted, the amount standing to the credit of the customers was sufficient for adjustment towards services to be rendered for the next 10 or 12 months only. Considering all these facts, the Petitioner company thought it fit to treat the entire balance standing to the credit of customers as income after making a provision of RS.200 lacs towards 'probable refund possibilities'. The company also introduced a new rate structure (two schemes) to avoid such complications in future. Consequently, income was over stated for the year ended 31- 03-2002 to the extent of Rs. 797.26 lakhs. The Auditors of the Petitioner Company duly noted the same in their report which was also duly considered by the Board and accordingly dealt with in their report for the year. While the assessment for the assessment year 2001-02 was completed u/s. 143(3), the assessment was originally completed for the assessment year 2002-03 under Sec 143(1) of the Act. (The assessment for assessment year 2002-03 was subsequently reopened u/s. 148 of the Act and the assessment has now been completed u/s. 143(3) of the Act resulting in a demand of RS.8.04Iakhs consequent to the addition made to the extent of Rs. 75. 90 lakhs. Consequent to the over statement of income for the assessment years 2001-02 and 2002-03, there was understatement of income for the assessment year 2003-04 and 11 2004-05 to the extent of Rs. 947.83 lacs and RS.276.32 lakhs. While completing the assessment for the assessment for the a.y. 2003-04 and 2004-05 u/s. 143(3) of the Act, the assessing officers did not consider these facts. Based on the qualifications made in the audit reports of the respective years, the Learned Assessing Officer assessed the understated income as additional income of the respective years. This is in addition to the income already offered and assessed for the a.y. 2001-02 and 2002-03 by the Petitioner Company.

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Even during the course of reopened assessment for asst. year 2002-03, it was requested before the learned assessing officer that the income voluntarily offered by the assessee for this year which was once again assessed in the asst. years 2003-04 and 2004-05 be executed. But this was not considered by the learned assessing officer. This has resulted in doubly taxing the same income. In view of the jurisdiction already filed for offering the entire amount to the credit of the customers as income for the asst. year 2002-03 (which has also been accepted by the Department in the course of reassessment proceedings for the asst. year 2002-03). It is requested that the addition made for the asst. years 2003-04 and 2004-05 may please be deleted and justice rendered."

4.1.1 The ld. AR further stated that the Institute of Chartered Accountants of India (ICAI) has issued AS9 regarding recognition of income for service contracts. He has filed a reconciliation whereby the income offered for various years matches with the income accrued for various years. He has also filed reconciliation for the AYs. 1999-00 to 2004-05 whereby the income offered to tax has been matched with the income accrued. As regards the contention of the AO in the remand report for AYs. 2003-04 and 2004-05 that there waschange in the accounting policy, the ld. AR stated the AO has not understood the facts properly and that there was no change in the method of accounting. Even assuming for argument sake that there wasa change in the method of accounting, the department will have to prove that the change of accounting policy resulted in tax evasion. For this he relied on the decision of the Hon'ble Madras High Court in CIT v . Annamalai Finance Ltd, 275 ITR 451 (Mad) and CIT v Annamalai Finance Ltd, 319 ITR 196 (Mad). In the instant case, the department is not in a position to prove that duetothe alleged change of accounting method adopted by the appellant, the department suffered any loss or such a change of methodology attracts tax evasion. On the contrary, by offering the entire receipts as income for the AY. 2003-04, there was book profit of Rs.3,29,69,323/-. Net assessable income for income-tax purpose was a loss only after setting off earlier years' carry forward loss. The appellant has only paid book profit tax of Rs.25,22, 153/- u/s 155JB. Thus, the alleged

:-11-: I.T.A. N0s. 1838 & 1839/Mds/2011 change in the method of accounting has only resulted in payment of tax u/s 115JB tax by the appellant.

4.2 I have carefully considered the facts, submission of the Id. AR and the remand report of the AO. I have also gone through the decisions relied on by the Id. AR I have also gone through the reconciliation and other details given for AYs. 1999-00 to 2004-05. The argument of the appellant that the income overstated in AYs. 2001-02.& 2002-03 has again suffered tax in the AYs. 2003- 04 & 2004-05 has substance in it. Even the rectification said to have been filed for the AY 2002-03 to exclude the income offered as overstated has not yet been disposed off. According to the AO, the appellant has changed the accounting policy as compared to what was followed in earlier years by offering the entire advance received as income of AYs. 2001-02 & 2002-03. This is factually not correct because the entire balance outstanding was offered as income for AY 2002-03 only and not for the above two years. Further, the appellant has offered this only for the depository income and not for other sources of income. Thus auditors have also only quantified the overstated income of the two years and have not commented that there was change in the accounting policy. I also agree that there was no change in the method of accounting. The decisions relied on by the Id. AR also supports the case of the appellant. In view of the above facts, the addition made by the AO is deleted and the ground is allowed.”

8. The next issue is the addition towards infrastructure facilitation charges.

In this regard , the assessee’s submissions in its grounds of appeal before the CIT(A) for ay 2004-05 is extracted as under :

“ 6) Regarding Infrastructure facilitation charges the following is submitted. The appellant entered into a working arrangement with Insight Share Broking services Limited whereby the appellant is entitled to have a share in the brokerage income earned from our clients. As the arrangement was oral, and the sharing ratio was not clearly determined, the appellant admitted the entire amount received from Insight and its parent company as income from Infrastructure facilitation charges. An agreement was reached in April, 2005 for sharing 60% of the income but Insight went back on its arrangement and agreed to settle the terms at 50% only with retrospective effect. Due to strained relationship, the arrangement was cancelled in March, 2006 with the appellant starting its own share broking activity. The income agreed to be shared by Insight as per final arrangement and income as admitted by the appellant is given below. (The matter is still under negotiation and final amount if any received from Insight will be offered as income in the year receipt) Assessment Year Income admitted Rs. In lakhs Income as agreement 2003-04 243.14 72.86 2004-05 443.88 291.24

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2005-06 100.13 355.06 2006-07 120.00 187.99 Total 907.15 907.15

The appellant has thus admitted the entire income that too earlier than when accrued. The infrastructure facilitation income in the books of the appellant for the year ended 31~03.2003 is Rs 138.79 lakhs whereas the amount received from Insight share Brokers was Rs.243.14 lakhs as above. This is on account of the fact a portion of Expenses relating to DPDivision was written off this income.”

8.1 The relevant portion of the order of the CIT(A) is extracted as under:

“5. The next issue pertains to addition towards infrastructure facilitation charges. The AO found that an amount of Rs 4,43,87,573/- was credited as infrastructure income. He called the details in this regard and made the addition for the following reasons: "As per the details, the total collection is Rs .8,58,77,370/- and 80% of this comes to Rs.6, 87,01,897/-. At the time of hearing, it was clarified that Insight Share Broking is a business associate of the assessee company and as compensation for services rendered as above, the assessee is given 80% of the charges collection by Insight Share Broking. It is further stated that the ratio was subsequently reduced to 50% and now they have separated each other. On going through the details filed, I find that the assessee has excluded an amount of Rs. 2,43,14,324/- being charges related to the year 2002-03. However, no details are filed for having shown the income on accrual basis in the asst. year 2003-04. Therefore, the amount of RS. 2,43, 14,324/- relating to asst. year 2003-04 received this year is included in the income from business returned." 5.1 The ld. AR has stated that the AO has simply added the same without verifying the "acts. The appellant had only tried to reconcile the income earned during the four years namely, A.Ys. 2003-04 to 2006-07 upto which there was an arrangement with the Insight Share Brokers for the sharing of income. The :-14-: I.T.A. N0s. 1838 & 1839/Mds/2011 appellant has offered income more than what is due on the earlier understanding that the appellant is entitled to higher share of income. The income offered for A.Ys. 2003-04 and 2004-05 worked out to nearly 95% and 75% respectively. Thereafter when the relationship strained, the sharing percentage was also finally agreed at 50%. The income has been offered in excess of what has accrued to the appellant. By adding the income offered in the AY. 2003-04 again in the AY. 2004-05, the AO has taxed the income twice.

5.2 I have carefully considered the facts of the case and the submission made by the appellant. I have also seen the reconciliation submitted by the Id. AR. It is seen therefrom had the income admitted by the appellant was Rs.138.79 lacs and RsA43.88 lacs for AYs. 03-04 and 2004-05 respectively. The amounts agreed, on the other hand, were RS.70.00 lacs and RS.291.24 lacs respectively. Hence, the appellant has admitted excess incomeof Rs.152.64 lacs (i.e. Rs.443.88 lacs - RS.291.24 lacs) during the year. In view of the facts narrated above, the action of the AO is not correct and would amount to adding the same amount twice which is not permissible. Accordingly, the addition is deleted and the ground is allowed.”

8.2 Thus, it is clear from the reconciliation submitted by the assessee in its grounds of appeal before the CIT(A) that it has admitted excess of income of Rs. 152.64 lakhs (i.e. Rs. 443.88 lacs – Rs. 291.24 lacs) during the year.

Thus, the action of the AO is not correct. The CIT(A) deleted such addition stating that it would amount to adding the same amount twice, which is not permissible. On the facts brought above, the decision of the CIT(A) does not require any interference and hence upheld. The corresponding revenue’s grounds of appeal are dismissed.

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Order pronounced on Monday, the 25th day of September, 2017 at Chennai.