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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ NEW DELHI
ORDER
Per L.P. Sahu, Accountant Member:
This is an appeal by the Revenue against the order of ld. CIT(A)-VII, New Delhi dated 25.08.2010 for the assessment year 2007-08 on the following grounds : “
1. The order of the learned IT(A) is erroneous & contrary to facts and Law.
2. On the fact and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of Rs.3,00,88,607/- made by the AO by disallowing the provisions directly debited in the balance sheet.
2.1. The Ld. CIT(A) ignored the fact that the assessee did not route the expenses in question through profit & loss account and also ignored the fact that the expenses have been claimed only to reduce the tax liability of the year.”
The brief facts of the case are that the assessee company is engaged in the business of providing fleet management services. The assessee filed its return of income declaring income of Rs.35,01,314/-. The assessment was completed u/s. 143(3) of the IT Act at an income of Rs.3,35,89,921/- and the AO made the addition of Rs.3,00,88,607/- on account of provision created by the assessee out of the income. The AO made this addition on the ground that this amount was appearing during the year in the buffer account as current liabilities and no explanation was furnished by the assessee with regard to the query raised by AO in this regard and the assessee did not route the expenses in question through profit & loss account. The case of the Assessing Officer is that the balance in buffer account are shown as current liabilities due to which a part of income from vehicles engaged in pick-up/drop facility has not been routed through profit and loss account and only a part of income is transferred to the profit and loss account as service income terminated contracts and the remaining amount is transferred to the balance sheet as a current liability and this is equivalent to creating a provision against future liabilities related to maintenance expenses, damage costs, replacement costs and risk associated costs which did not crystallize during the year. To be more clear, the Assessing Officer made this addition of Rs.3,00,88,607/- on account of amount received during the year towards repairs and maintenance and other incidental services provided by the assessee to its customers in respect of cars leased, after reducing the actual expenses incurred in providing the aforesaid services during the relevant previous year and thus considered the said amount as income in the hands of the assessee. The assessee carried the matter before the ld. CIT(A), who after considering the detailed reply of the assessee and various decisions of Hon’ble High Court and Supreme Court, deleted the addition vide impugned order. The relevant observations of the ld. CIT(A) read as under : “I have carefully considered the submissions made on behalf of the appellant, the findings of the Assessing Officer and the facts on record. I have also perused the case laws relied upon by the Assessing Officer as well as by the appellant. The Assessing officer has made an addition of Rs.3,00,88,607/- which is the amount appearing during the year in the buffer account as current liabilities on the ground that no explanation was furnished by the appellant with regard to the query raised in this regard. There is no dispute over the fact that the assessee is following completed service contract method of accounting as per which income has to be accounted in the year in which the contract regarding lease and management of vehicles is complete. The assessee in the earlier years followed the same method which has been accepted by the department. It is also observed that in assessment year(s) 2001-02 and 2006-07, the assessment has been completed under section 143(3) of the Act on 31.03.2004 and 04.11.2008 respectively wherein the method of accounting followed by the assessee has been accepted. These assessments have become final and method followed by the assessee in these years stands accepted by the department. However, in the year under consideration, the Assessing officer has tried to assess the income on a different basis according to which the income has to be assessed on accrual basis during the year. The case of the Assessing officer is that the balance in buffer accounts are shown as current liabilities due to which a part of income from vehicles engaged in pick-up/drop facility has not been routed through profit and loss account and only a part of income is transferred to the profit and loss account as service income terminated contracts. The remaining amount is transferred to the balance sheet as a current liability and this is equivalent to creating a provision against future liabilities related to maintenance expenses, damage costs, replacement costs and risk associated costs, which have not crystallized during the year. In the opinion of the A.O. , if the transaction would have been routed through the profit and loss account, the amount transferred to the balance sheet as buffer would have been shown as below:- Income accrued from customers Rs.25,06,58,510 Less: Actual expenses incurred Rs.(21,35,34,129) Less: Provision for maintenance & other expenses Rs.(3,00,88,607) Income from services Rs.70,35,774 4.2 It is established legal position that an assessee can follow any recognized method of accounting and condition is that the same method has to be followed consistently. The assessee has followed completed service contract method which was one of the prescribed methods and the same method has been accepted by the department in the earlier years. In accordance with the said method of accounting, any profit or loss in respect of contract regarding lease and management of vehicles is reflected only at the end of the period of the contract and is accordingly transferred to the Profit & Loss Account at that stage. Hence, incomes and expenses are allocated for over the period of the contract in this regard. The Assessing Officer cannot reject the method and apply a different method of accounting in a subsequent year unless he is able to demonstrate that there is under-estimation of profits by giving facts and figures in that regard. It was observed by the Hon'ble Supreme Court in CIT vs. Realest Builder & Services Ltd. [2008J 307 ITR 202 (SC) as under:- "7........ln cases where the Department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being underestimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is under-estimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in under-estimation of profits and is, therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral. In this case, that exercise has never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the Department. In the circumstances, we see no reason to interfere with the conclusion given by the High Court and the Tribunal. " 4.3 This view is also supported by several decisions some of which are cited below:- (i) CIT vs. Bilahari Investments (P.) Ltd. [2008] 299 ITR 1 (SC); (ii) Bakshi Vikram Vikas Construction Co. (P.) Ltd. vs. Dy. CIT [2007] 158 Taxman 61 (Delhi) (Mag.): (iii) IRB Infrastructure Ltd. vs. ITO [2008] 115 ITD 374 (Mum.); and (iv) Awadhesh Builders vs. ITO [2010] 37 SOT 122 (Mum). 4.4 Under the facts and circumstances of the case stated above, it is held that the addition of Rs.3,00,88,607/- on account of provision created out of income cannot be sustained and accordingly, the same is directed to be deleted. As a result, Grounds of appeal
No. 1 to 2.2 are allowed.”
3. The ld. DR relying upon the assessment order, submitted that the ld. CIT(A) was not justified in deleting the addition and the transactions reflected in the buffer account were not routed through the profit and loss account in order to reduce the tax liability. It was also submitted that the assessee could not offer any explanation before the AO in response to the queries made in this regard. Only part income was transferred to profit and loss account and the remaining amount was transferred to the balance sheet as a current liability which amounts to be a provision for future liabilities. It was submitted that the ld. CIT(A) did not consider all these aspects of the case before deleting the addition.
4. On the other hand, the ld. AR of the assessee repudiating the contentions of the ld. DR, submitted that the assessee has been following the buffer accounting method of determining profit and loss in respect of the aforesaid transactions at the end of the lease term since inception of its business and this method of accounting is one of the recognized system of accounting as ‘Completed Service Method’ as provided in the AS-9. The department has also been accepting this method of accounting in the past and therefore, there is no reason to change the system of accounting consistently being followed by assessee-company and accepted by the Revenue authorities. Reliance was placed on the decision of Hon’ble Supreme Court in the case of CIT vs. Bilahari Investment P. Ltd., 299 ITR 1 (SC) and plenty of other decisions of Hon’ble High Courts and Tribunal. He, therefore, submitted that the conclusion reached by the ld. CIT(A) on this count is not in any way be said to be illogical or illegal.
5. Having considered the rival submissions in the light of relevant material available on record, we find no justification to interfere with the order of the ld. CIT(A) on the issue under consideration. It is notable that the ld. CIT(A) after considering the recognized system of accounting followed consistently by the assessee and accepted by department in previous years and keeping in view the rule of consistency as envisaged by Hon’ble Apex Court in the case of CIT vs. Realest Builder & Services Ltd., 307 ITR 202 (SC), has rightly observed that the Assessing Officer cannot reject the method adopted by assessee and also cannot apply a different method of accounting in a subsequent year unless he is able to demonstrate that there is under-estimation of profits by giving facts and figures in that regard. In the instant case no such facts and figures have been assigned by the Assessing Officer to discard the findings reached by the ld. CIT(A). Moreover, the treatment of the assessee with regard to accounting of income and expenses from the business of Fleet Management