ACIT, RANGE-I, LUCKNOW vs. CI HOSPITALITY WORLDWIDE PRIVATE LIMITED, LUCKNOW

PER ANADEE NATH MISSHRA:A.M.

(A) This appeal has been filed by Revenue against the impugned appellate order dated 21/09/2020 for assessment year 2017-18 of learned Commissioner of Income Tax (Appeals) [“CIT(A)” for short]. Cross Objection has been filed by the assessee. The grounds taken in Revenue’s appeal and assessee’s Cross Objection filed by the assessee are as under:

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“1. The learned CIT(A) has erred in law and on facts and allowed the addition of Rs.2,14,26,699/- (Rs.1,85,97,372 as advance from customers + Rs.28,29,327/- as membership fee) whereas the assessee has failed to explain the reason for mismatch of amount of gross receipt shown in profit & loss account against the amount of gross receipt shown in service tax return.”

C.O. No.01/Lkw/2021 (in I.T.A. No.449/Lkw/2020 (A.Y.17-18)

“1. Because the learned CIT(A)-1, Lucknow has erred on facts and law while restricting disallowance to the extent of Rs.1,07,17,124/- on account of commission expenses.

(A.1) The appeal filed by Revenue is beyond the time prescribed u/s 253(3) of Income Tax Act, 1961 (“IT Act” for short). In the petition filed by Revenue for condonation of delay, it is stated that there is no limitation in view of order of Hon'ble Supreme Court, dated 23/03/2020 taking cognizance for extension of limitation in Suo Motu Writ Petition in the situation arising out of the challenge faced by the country on account of COVID-19 virus. It was accordingly requested to condone the delay. At the time of hearing before us, learned Counsel for the assessee submitted that the assessee had no objection to request of Revenue for condonation of delay. Accordingly, we do not treat the appeal as barred by limitation. The

I.T.A. No.449/Lkw/2020 3 C.O.No.1/Lkw/2021 Assessment year:2017-18 appeal is treated as having been filed in time, and is admitted for hearing on merits.

(B) In this case the assessee filed the return of income on 30/10/2017 declaring loss of Rs.1,29,72,750/-. Assessment order dated 04/12/2019 was passed by the Assessing Officer whereby the assessee’s total income was assessed at Rs.1,91,71,073/- (rounded off to Rs.1,91,71,070). The assessee claims to be in the business of selling time share holidays to the purchasers who have become its members and who avail yearly holidays for stipulated duration of time during the period of their membership. The duration of Membership varied: 5 years/10 years/15 years. The Membership fee varied not only with the duration of Membership years; but also with season for which the Membership was applicable. Depending on whether the season was peak or not, the seasons were divided into categories Red/White and Blue. The assessee company was incorporated on 28/01/2016 and started its operation from January, 2016. During the previous year, relevant to assessment year 2016-17, the assessee received an amount of Rs.56,73,407/- towards membership fees and during previous year, relevant to assessment year 2017-18, the assessee received Rs.2,61,63,526/- as membership fees from its customers (Members). The total amount of Membership fees received, comes to Rs.3,18,36,933/-, being Rs.56,73,407/- plus Rs.2,61,63,526/-. The Membership Fees was charged by the assessee only for providing hotel stay, and did not include meals. Further, in addition, the assessee also charges AMC (Annual Maintenance Charges) of Rs.7,500/- + taxes per year if the Member actually avails of Hotel Stay Services, though Membership Fees for the entire duration of Membership is collected already at the time of the customer taking Membership. However, the assessee recognized revenue amounting to Rs.28,29,927/- (being Rs.8,61,810/- relating to assessment year 2016-17

I.T.A. No.449/Lkw/2020 4 C.O.No.1/Lkw/2021 Assessment year:2017-18 and Rs.19,68,117/- relating to assessment year 2017-18) only, as against aforesaid amounts of Rs.56,73,407/- and Rs.2,61,63,526/- respectively for assessment year 2016-17 and 2017-18 totaling Rs.3,18,36,933/-. The assessee’s case for recognizing highly reduced amounts as revenue is that the assessee recognized revenue on a ‘Systematic Basis As Regards to Timing and Nature of Services Provided for Respective Period to its Clients/Customers’ (Systematic Basis’ for short). The remaining amounts of Membership Fees, which have not been recognized as revenue, i.e. Rs.2,93,14,496/- has been shown as ‘OTHER CURRENT LIABILITIES’ under the head ‘Membership Fee’ in the balance sheet as on 31/03/2017, pertaining to assessment year 2017-18. The assessee disclosed revenue amounting to aforesaid Rs.28,29,927/- entirely in assessment year 2017-18 in the return filed for assessment year 2017-18, and did not disclose any revenue in assessment year 2016-17. No return was filed for assessment year 2016-17. The assessee incurred an expenditure of Rs.1,15,88,882/- on account of commission expenses against total receipt of Rs.3,18,36,933/- (being total of aforesaid amount of Rs.56,73,407/- and Rs.2,61,63,526/-). The entire expenditure of commission expenses amounting to aforesaid amount of Rs.1,15,88,882/- was claimed by the assessee in toto in return filed for assessment year 2017-18. As stated earlier, return was not filed for assessment year 2016-17. Further, the assessee did not spread the commission expenses to future assessment years to follow in accordance with number of years for which membership was purchased by the customers. In a nutshell, the assessee collected Membership Fee for the entire duration of Membership Years, and also paid commission on it for the entire amount of Membership Fee collected for Membership Years; but while the assessee claimed commission expenses as expenditure entirely, the assessee recognized revenue only pertaining to the assessment year under consideration, showing remaining amount as ‘OTHER CURRENT

I.T.A. No.449/Lkw/2020 5 C.O.No.1/Lkw/2021 Assessment year:2017-18 LIABILITIES’ under the head ‘Membership Fee’. The Assessing Officer treated the entire amount of Rs.3,21,43,832/- (being Rs.28,29,927 plus Rs.2,93,14,496/-) as revenue for the assessment year 2017-18, and also allowed the entire claim of expenditure towards commission, amounting to Rs.1,15,88,882/-. In facts, the total amount comes to Rs.3,21,43,832/- and not Rs.3,21,43,823/- as stated in the assessment order, in what seems to be typographical mistake. The difference between the two figures is petty and miniscule; therefore, following the “Materiality” concept in accountancy, we shall ignore it. [“Materiality” is a concept that determines whether the omission or the misstatement or the mistake is of a magnitude that will impact a reasonable user’s decision-making. If the information is significant enough, the information is material, and if it is irrelevant or insignificant, it is said to be immaterial.] Accordingly, the figure will be taken as Rs.3,21,43,823/- as stated in the assessment order. Thus, as a result, the income of the assessee was determined at Rs.1,91,71,073/- (rounded of to Rs.1,91,71,070/-) as against loss of Rs.1,29,72,750/- claimed by the assessee in return of income. The relevant portion of the assessment order dated 04/12/2019 passed by the Assessing Officer u/s 143(3) of IT Act is reproduced below for the ease of reference:

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(B.1) The assessee filed appeal against the aforesaid assessment order dated 04/12/2019 before learned CIT(A). Vide impugned appellate order dated 21/09/2020, the learned CIT(A) accepted the assessee’s recognition of revenue on account of membership fees amounting to aforesaid Rs.28,29,927/- while disagreeing with the Assessing Officer’s action in recognizing revenue amounting to aforesaid Rs.2,93,14,496/-. However, he directed the Assessing Officer to restrict the commission expenses to Rs.8,71,758/- on pro rata basis. Thus, he disallowed commission expenses amounting to Rs.1,07,17,124/- (being Rs.1,15,88,882/- minus Rs.8,71,758). In other words, the Assessing Officer and the learned CIT(A) are on the same page as far as the basic principle of ‘matching’ is concerned. Both are

I.T.A. No.449/Lkw/2020 9 C.O.No.1/Lkw/2021 Assessment year:2017-18 of the opinion that the assessee should match revenue with expenditure in a fair and reasonable manner, and the assessee cannot be permitted to, on one hand, recognize revenue for only the assessment year under consideration having already received Membership Fee for the entire period of Membership; and on the other hand, to claim commission expenses pertaining to the entire amount of Membership Fee received for the entire duration of Membership. The Assessing Officer kept the commission expenses as constant, and scaled up revenue by including entire amount of Membership Fees for the full duration of Membership. The learned CIT(A) took a different approach. He accepted the revenue recognised by the assessee and scaled down allowable commission expenses to the extent commission expenses was attributable to, and pertained to Membership Fee recognized by assessee during the year. Both Revenue and assessee have agitated against the impugned appellate order of learned CIT(A). While Revenue has filed the appeal, the assessee has filed Cross Objection. There is substantial reduction in assessee’s income as a result of order of learned CIT(A); but the assessee is dissatisfied with reduction in allowable commission expenses, which in assessee’s opinion, amounts to enhancement of income by learned CIT(A) for which show cause notice (“SCN" for short) not being issued to the assessee was, in the opinion of the assessee, a ‘fatal error’. The relevant portion of the aforesaid impugned appellate order dated21/09/2020 of the learned CIT(A) is reproduced as under:

“4.1 The appellant has objected to the addition of Rs.3,21,43,823/- (Rs.2,93,14,496/- claimed as advance from customers and Rs.28,29,327/- claimed as Membership Fee from customers), made by the Assessing Officer vide the above grounds of appeal. The Assessing Officer held as under:

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(B.2) During appellate proceedings in Income Tax Appellate Tribunal, a paper book was filed from the assessee’s side containing the following particulars:

(B.2) Further, a short note was also filed from the assessee’s side, relevant portion of which is reproduced as under:

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(C) At the time of hearing before us, Revenue was represented by Shri Manu Chaurasiya, learned CIT (D.R.) and assessee was represented by Shri Sandeep Goel, learned Counsel for the assessee. In respect of appeal filed by Revenue, the learned CIT (D.R.) submitted that the learned CIT(A) had placed heavy reliance on the case of ACIT/DCIT vs. Mahindra Holidays & Resorts (India) Ltd. (2010) 39 SOT 438 (Chennai)(SB) in his impugned

I.T.A. No.449/Lkw/2020 53 C.O.No.1/Lkw/2021 Assessment year:2017-18 appellate order dated 21/09/2020. He contended that the facts of the present case are distinguishable from the facts in the aforesaid case of ACIT/DCIT vs. Mahindra Holidays & Resorts (India) Ltd. (supra) and, therefore, the assessee does not deserve any relief on the basis of the aforesaid case. Moreover, he submitted that the other case laws upon which the learned CIT(A) had placed reliance also had no application to the present case. He supported the assessment order dated 04/12/2019 passed by the Assessing Officer and placed strong reliance on the same.

(C.1) The learned Counsel for the assessee placed reliance on the submissions made during assessment proceedings before Assessing Officer, and during appellate proceedings before the learned CIT(A). Relevant portions of the aforesaid orders containing the submissions made by the assessee have already been reproduced in foregoing paragraphs No. (B) and (B.1) of this order. The learned Counsel for the assessee further placed reliance on the short note filed during appellate proceedings in Income Tax Appellate Tribunal, relevant portion of which has already been reproduced in foregoing paragraph (B.2) of this order. In addition, the learned Counsel for the assessee placed reliance on the order of Hon'ble Supreme Court in the case of CIT vs. Bilahari Investment (P) Ltd. reported in [2008] 4 Supreme Court Cases 232 : (2008) 299 ITR 1 : 2008 SCC OnLine SC 396 and Hon'ble Allahabad High Court in the case of Pr. CIT vs. Friends Land Developers in I.T.A. No.119 of 2017. He also read out the relevant portion from the aforesaid submissions, short note and the cases reported as CIT vs. Bilahari Investment (P) Ltd. (supra) and Pr. CIT vs. Friends Land Developers (supra).

(D) In respect of Cross Objections filed by the assessee, the learned Counsel for the assessee submitted that the learned CIT(A) did not allow the commission expenses as claimed by the assessee, and drastically

I.T.A. No.449/Lkw/2020 54 C.O.No.1/Lkw/2021 Assessment year:2017-18 reduced the allowable amount of commission expenses, which resulted in hardship to the assessee specially as no show cause notice (“SCN" for short) was issued to the assessee before reducing the allowable portion of commission expenses. He submitted that the commission expenses claimed by the assessee should be allowed fully. For this purpose he placed reliance on short note filed during appellate proceedings in Income Tax Appellate Tribunal, relevant portion of which has already been reproduced in foregoing paragraph no. (B.2) of this order.

(E) We have heard both sides and perused the materials available on record. There is no basic dispute in the principle that will apply in the present case. The Assessing Officer, the learned CIT(A), and the assessee; all three of them are in agreement that the matching principle is to be applied for determining the assessee’s income. Matching principle implies that revenue for the accounting period should be matched against expenditure for the same accounting period to determine the true profit/loss. There is further no dispute that the assessee follows mercantile system of accounting whereby revenue and expenditure are recognized on accrual basis and not on receipt basis. There is also no dispute that the assessee’s income is to be determined in accordance with nature of accounting regularly followed by the assessee, which in the present case is mercantile system of accounting. The dispute lies in the details of how these principles will apply to the facts of the present case. The assessee claims that the entire amount of commission expenses paid during the accounting period has accrued to the assessee and deserves to be allowed. However, the assessee contends that the Membership Fees received from customers during the accounting period is not be recognized entirely and instead, only the Membership Fees pertaining to the accounting period under consideration is to be recognized and not the entire amount of

I.T.A. No.449/Lkw/2020 55 C.O.No.1/Lkw/2021 Assessment year:2017-18 Membership Fees already received during the accounting period for the specified periods of membership of customers. The Assessing Officer has taken a different approach regarding recognition of revenue. According to her, since the assessee has claimed commission expenses for the entire amount of Membership Fees received for the entire duration of membership, consistent method is to be adopted for recognition of revenue also. According to her, therefore, the entire amount of Membership Fees received for the entire duration of membership is to be recognized as revenue. The learned CIT(A) has adopted an approach different from the approach taken by both the assessee and by the Assessing Officer. He has accepted the recognition of revenue by the assessee but has allowed commission expenses attributable to, and pertaining only to the Membership Fees applicable for the accounting period under consideration and has not accepted assessee’s claim that that the entire amount of commission expenses pertaining to the full amount of Membership Fees for the entire duration of membership is to be allowed. In a nutshell, as stated earlier, the assessee collected Membership Fee for the entire period of duration of Membership, and also paid commission on it for the entire amount of Membership Fee collected for Membership Years; but while the assessee claimed commission expenses as expenditure entirely, the assessee recognized revenue only pertaining to the assessment year under consideration, showing remaining amount as ‘OTHER CURRENT LIABILITIES’ under the head ‘Membership Fee’.

(E.1) We have discussed the factual background of the case in foregoing paragraph (B) of this order. Here we take into consideration additional facts, which are relevant for deciding the issue. In the Service Tax return, the assessee has shown the entire amount of Membership Fees received for the entire duration of membership, as receipts of the accounting period

I.T.A. No.449/Lkw/2020 56 C.O.No.1/Lkw/2021 Assessment year:2017-18 (except small amount of Rs.97,530/-). Thus, the Membership Fees not recognized in the accounting year for income tax purposes and shown as ‘other current liabilities’ under the head ‘Membership Fees’ in the balance sheet, has, however, been shown as revenue receipts in Service Tax return for the accounting period. Further, the assessee has collected GST from members for the entire amount of Membership Fees for full duration of membership period, and has shown the entire amount of Membership Fees for the entire duration of membership duration in Service Tax return. However, for Income Tax purposes the assessee has chosen a self-serving approach of not recognizing the entire amount of Membership Fees for the entire duration of membership period. Further, in the terms of contract between the assessee and customer, it is nowhere mentioned that the receipt amount will be treated partly as advance. Moreover, the entire amount of Membership Fees, received for the entire duration of membership period, is non refundable. There is no provision in the contract that excess amount as ‘OTHER CURRENT LIABILITY’ will have to be returned in case service was not performed in subsequent year. Thus, in respect of entire amount of Membership Fee received by the assessee, no debt by way of amount refundable, came into existence against the assessee even if the assessee did not perform the obligation to provide hotel stay in subsequent period(s). The assessee is, moreover, not owner of any hotel in which the customers/members are to be provided hotel stay. Instead the assessee has entered into arrangement with hotel owners at various places to provide hotel stay to the assessee’s members/customers.

(E.2) The assessee has placed heavy reliance on Mahindra Holidays & Resorts (India) Ltd. (supra). The learned CIT(A) has also followed Mahindra Holidays & Resorts (India) Ltd. (supra) while accepting the assessee’s method of recognition of revenue. The learned CIT(A) has discussed the

I.T.A. No.449/Lkw/2020 57 C.O.No.1/Lkw/2021 Assessment year:2017-18 case of Mahindra Holidays & Resorts (India) Ltd. (supra) in paragraph 4.6 to 4.12 of his impugned appellate order. On perusal of the same, it is noticed that in the case of Mahindra Holidays & Resorts (India) Ltd. (supra), Special Bench of the Income Tax Appellate Tribunal was dealing with clearly distinguishable facts. In Mahindra Holidays & Resorts (India) Ltd. (supra), some portion of Membership Fees was to be used for financing new properties. In the present case before us, the assessee does not own any property and therefore, there is no question of Membership Fees being used for financing new property. In Mahindra Holidays & Resorts (India) Ltd. (supra), heavy importance was given to the possible contingencies that sometimes the assessee would not be able to provide accommodation in any of its notified resorts and the assessee will try to procure alternate accommodation for which the assessee would incur additional expenditure. However, in the present case before us, the Membership Fees varies according to whether, Membership was obtained by the customer for the peak period and non peak period. Therefore, the assessee has already charged extra amount from the members for the contingency that because of peak season the assessee may not be able to provide hotel stay. Further, in Mahindra Holidays & Resorts (India) Ltd. (supra), the contingency of hotel stay being not available for customers is based on two possibilities: (i) Firstly, that most of the members would opt for a holiday during the peak season which may result in certain members not getting accommodation in assessee’s properties and making alternate arrangement may invite outflow of resources; (ii) secondly, some properties of the assessee might be under major repair/renovation because of which accommodation may not be available. In the present case before us, these considerations do not have any relevance. Firstly, as we have noted earlier, additional fees have already been charged by the assessee from members/customers who wish to avail of hotel stay during peak period. Secondly, the assessee charges an

I.T.A. No.449/Lkw/2020 58 C.O.No.1/Lkw/2021 Assessment year:2017-18 additional amount of Rs.7,500/- plus tax per year by way of AMC if the member actually avails of hotel stay service though Membership Fees for the entire duration of membership has already been collected at the time of customer taking membership. Thirdly, under the contract with the customers, the assessee charges a further annual subscription fee of Rs.6,500/- payable every year even for the lapsed holiday entitlements. It means that whether the customer avails of holiday stay in a year or not, the customer is liable to pay Rs.6,500/- every year even for the lapsed holiday entitlements. In view of the foregoing, the assessee has adequate financial protection on its side to deal with possible contingency of the assessee not being able to provide accommodation to customers. Moreover, the assessee does not own any property and has instead made arrangements with hotels at different places for providing hotel stay to its Members/Customers. Therefore, there is no question of assessee’s property being under major repair/renovation. Furthermore, even if one or more of the hotels with which the assessee has made arrangements is under repair or renovation because of which the hotel is not able to provide stay to the assessee’s customers, the liability will be of the concerned hotel to make arrangement for alternate accommodation, and the assessee is protected from such contingencies. Further the assessee makes no commitment regarding any other facility except hotel stay. Thus, for example meals/food etc. are not part of the agreement of the assessee with the members. Therefore, the considerations based on which Special Bench of the Income Tax Appellate Tribunal decided the issue in favour of the assessee in Mahindra Holidays & Resorts (India) Ltd. (supra) have no relevance to the present case before us, and, therefore, the case of Mahindra Holidays & Resorts (India) Ltd. (supra) has no application to the case before us. For similar reasons; the case of Aakash Lavlesh Leisure (P.) Ltd. vs. ITO [2017] 78 taxmann.com 338 (Mumbai-Trib.), also has no application to the case before us; due to

I.T.A. No.449/Lkw/2020 59 C.O.No.1/Lkw/2021 Assessment year:2017-18 clearly distinguishable facts. Moreover, though the assessee claims to be in the business of selling time share holidays in order to claim parity with Mahindra Holidays & Resorts (India) Ltd. (supra); nomenclature apart, the assessee is essentially in the business of aggregation of hotel stay facility. This is so because the assessee does not own any hotel stay property itself and has merely entered into arrangement with various hotels at different places to provide hotel stay to the assessee’s customers/members.

(E.3) The assessee claimed that the method of accounting followed by it for recognizing revenue and expenditure are based on regular method of accounting followed by the assessee. However, this claim is wrong. In assessment year 2017-18, the assessment year under consideration, is the first year in which the assessee has filed return of income. For a first time return filer, like the assessee, it is not possible to claim that the method of accounting was regularly followed by the assessee. Secondly, the assessee’s business started in assessment year 2016-17 and the assessee earned revenue and also incurred expenditure in accounting period for assessment year 2016-17. However, the assessee did not file any return for assessment year 2016-17. Therefore, the assessee is a non filer of return for assessment year 2016-17. For an assessee who failed to report the accounts in first year of business (assessment year 2016-17) and happened to be in default, being a non-filer for assessment year 2016-17; it is not possible for such an assessee to claim that method of accounting used in assessment year 2017-18 is the regular method of accounting followed by the assessee. The revenue as well as expenses for two assessment years, 2016-17 and 2017-18 have been disclosed by the assessee in one year only i.e. in assessment year 2017-18. Disclosing revenue and expenses pertaining to two different accounting periods in one accounting period is a serious breach of accounting principles as well as Income Tax law as

I.T.A. No.449/Lkw/2020 60 C.O.No.1/Lkw/2021 Assessment year:2017-18 provided u/s 145 of the IT Act. For this reason alone, the accounts as well as the disclosures made in the return lack credibility and the assessee’s books deserve to be rejected u/s 145(3) of the IT Act.

(E.4) It is provided u/s 145(1) of the IT Act that the assessee’s income under the head profit & gains from business or profession be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. What can be readily inferred is that the assessee cannot follow mixed system of accounting wherein some accounting items are recognized on accrual basis and other accounting items are recognized on cash basis. What it also implies is that revenue as well as expenditure both are to be recognized in a consistent, fair, just and reasonable manner without creating a distortion in accounts which might lead to profits and gains not being computed correctly. We have already seen earlier that the assessee cannot be said to have regularly employed the method of accounting based on which revenue and expenses have been recognized. The assessee has created further distortion in the accounts by recognizing revenue (Membership Fees) only pertaining to accounting period though Membership Fees has been received fully for the entire period of membership. However, commission expenses pertaining to entire amount of Membership Fees received for the full duration of membership has been claimed as deduction. The assessee’s accounts, because of this distortion, is both incorrect and incomplete as a result of which profits and gains of business or profession cannot be determined in a just, fair, reasonable and correct manner based on the accounts maintained by the assessee. In this context, we take guidance of order of Hon'ble Supreme Court in CIT vs. British Paints India Ltd. 188 ITR 44 (SC). It was held in this case by Hon'ble Supreme Court that it is not only the right, but the duty of the Assessing Officer to consider whether or not the books disclosed the true state of

I.T.A. No.449/Lkw/2020 61 C.O.No.1/Lkw/2021 Assessment year:2017-18 accounts and the correct income can be deduced therefrom. Hon'ble Supreme Court further held that it is incorrect to say 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 the officer is not bound by the method followed in the earlier years, Hon'ble Supreme Court held. Hon'ble Supreme Court further held in this case that if the assessee adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business………, it is the duty of the Assessing Officer to adopt such method of computation as he deems appropriate for proper determination of the true income of the assessee.

(E.5) We also take guidance from the order of Hon'ble Supreme Court in the case of United Commercial Bank vs. CIT 240 ITR 355 (SC). It was held in this case that u/s 145 of the IT Act, in a case where accounts are correct and complete but the method employed is such that in the opinion of the Income Tax Officer, the income cannot be properly deduced therefrom, the computation shall be made in such manner and on such basis as the Income Tax Officer may determine. The Hon'ble Supreme Court further held that the concept of real income is certainly applicable……..but, in every case, it must be applied with care and within recognized limits. The Hon'ble Supreme Court also held that whether the income has really accrued or arisen to the assessee must be judged in the light of reality of the situation.

(E.6) We have guidance also available in order of Hon'ble Supreme Court in the case of CIT vs. A. Krishnaswami Mudalliar and Others 53 ITR 122 (SC). Hon'ble Supreme Court held in this case that a statutory duty is imposed on the Income Tax Officer to examine in every case the method of accounting

I.T.A. No.449/Lkw/2020 62 C.O.No.1/Lkw/2021 Assessment year:2017-18 employed by the assessee and to see whether or not it has been regularly employed, and to determine whether the income, profit and gains of the assessee could properly be deduced therefrom.

(E.7) We also take guidance from order of Hon'ble Supreme Court in the case of CIT vs. McMillan & Co. 33 ITR 182 (SC). In this case it was held by Hon'ble Supreme Court that the Assessing Officer does not merely have discretion but statutory duty to examine in every case the method of accounting employed by the assessee and to see whether or not it is regularly employed, and (ii) to determine whether the income, profits and gains of the assessee can properly be deduced therefrom.

(E.8) Based on the aforesaid orders of Hon'ble Supreme Court in the case of British Paints India Ltd., United Commercial Bank, A. Krishnaswami Mudalliar and Others and McMillan & Co., (supra), it is obvious that the book results of profit/loss disclosed by the assessee in account books deserve to be rejected because, factually, we have already noted earlier that the assessee’s income/loss cannot be deduced in a just, fair, reasonable and correct manner based on the assessee’s books of account.

(E.9) The assessee has placed reliance on the order of Hon'ble Supreme Court in CIT vs. Bilhari Investment (P) Ltd. [2008] 299 ITR 1 (SC). However, this case has no application to the present case before us because of clearly distinguishable relevant facts. In Bilhari Investment (P) Ltd. (supra), there was no finding that method followed by the assessee had resulted in distortion of profit. In the present case before us, we have already noted that the method of accounting followed by the assessee has resulted in distortion of profit. Further in CIT vs. Bilhari Investment (P) Ltd. (supra), the issue under consideration of Hon'ble Supreme Court was an entirely different issue, a choice between completed contract method and

I.T.A. No.449/Lkw/2020 63 C.O.No.1/Lkw/2021 Assessment year:2017-18 percentage of completion method in the business of civil contract. The present case before us is entirely on a different subject, i.e. whether matching principle has been correctly applied by the assessee. On proper consideration, in fact, the case of CIT vs. Bilhari Investment (P) Ltd. (supra) acts, in facts of the case before us, against the assessee. In this case, Hon'ble Supreme Court took notice of Madras Industrial Investment Corpn. Ltd. vs. CIT (1997) 4 SCC 666 wherein Hon'ble Supreme Court made the following observation:

“'Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.'

Therefore, the matching concept, which we have referred to is well recognised by various judgments of the Supreme Court. In this case, the issue is whether the entire expenditure distorts the profits of a particular year."

Moreover, in CIT vs. Bilhari Investment (P) Ltd. (supra), Hon'ble Supreme Court also took notice of order of Hon'ble Supreme Court in the case of J. K. Industries Ltd. vs. Union of India (2007) 13 SCC 673 in which it was held as under:

"82. Matching concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is

I.T.A. No.449/Lkw/2020 64 C.O.No.1/Lkw/2021 Assessment year:2017-18 necessary that 'revenues of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue.”

As can be seen readily, the combined reading of order of Hon'ble Supreme Court in CIT vs. Bilhari Investment (P) Ltd. (supra), Madras Industrial Investment Corporation Ltd. vs. CIT (supra) and J. K. Industries Ltd. vs. Union of India (supra); actually the principles contained act against the assessee.

(E.10) The assessee seeks the benefit of Excel Industries 358 ITR 29 (SC) by claiming revenue neutrality. This is a wrong claim. The assessee has claimed loss of Rs.1,29,72,750/- in the return filed. The Assessing Officer has assessed the income at Rs.1,91,71,070/- which is substantially higher. The order of learned CIT(A), places the assessee’s income at somewhere in- between the above figures. Thus, the claim of revenue neutrality made by assessee is wrong.

(E.11) The assessee has contended that receipts not recognized as revenue in this year, have however been offered as revenue in subsequent year. The assessee has also contended that “………..it is not the case of Assessing Officer that receipts are not taxed subsequently and by no sermon of reasoning double taxation can be allowed on same receipt in different years”. This, again, is a wrong contention. If the assessee indulges in underreporting of income in a year; the assessee cannot claim the benefit of its own mischief, by claiming that the amount underreported in a year was disclosed in a later year. If some part of income is underreported or postponed every year, as the mischief indulged in by the assessee implies, then some part of income remains untaxed for ever. It is well settled that an assessee cannot claim benefits of its own mischief. Section 4 of IT Act,

I.T.A. No.449/Lkw/2020 65 C.O.No.1/Lkw/2021 Assessment year:2017-18 which is the charging section, is categorical that total income of the year is to be charged to tax in accordance with law. The fact that income of a particular year is offered in a subsequent year cannot save the assessee from being liable for tax on income of the particular year. In this regard, we take guidance from orders of Hon'ble Supreme Court in Sir Kikabhai Premchand vs. CIT 24 ITR 506 (SC), Income Tax Officer vs. Murlidhar Bhagwandas 52 ITR 335 (SC), CIT vs. British Paints India Ltd. (supra) and CIT v s. Basant Rai Takht Singh 1 ITR 197 (SC) for the proposition that for the purposes of assessment, every previous year is a distinct unit of time; and profits/losses made or after the relevant previous year is immaterial in assessing income of a particular year.

(E.12) The learned CIT(A), in this impugned appellate order, has interfered with the assessment order based primarily, on orders of ITAT in ACIT/DCIT vs. Mahindra Holidays & Resorts (India) Ltd. (supra) and Akash Lavlesh Leisure (P) Ltd. vs. Income Tax Officer (supra). We have already noted earlier that these decisions of ITAT has no application to the present case before us, due to clearly distinguishable facts. Further, in view of the foregoing, discussion in earlier part of this order, we are of the view that the assessment order passed by the Assessing Officer is just, fair, reasonable and in accordance with law having regard to facts and circumstances of the case, decided precedents and applicable law. Therefore, we set aside the impugned appellate order dated 21/09/2020 of learned CIT(A) and we restore the assessment order dated 04/12/2019 of the assessment order.

(F) As have set aside the impugned appellate order of learned CIT(A); and we have restored the assessment order dated 04/12/2019; the Cross Objection filed by the assessee has no legs to stand and lacks any force. This is because, the reduction in allowable portion of commission expenses, as order by learned CIT(A) in his impugned order, also ceases to have

I.T.A. No.449/Lkw/2020 66 C.O.No.1/Lkw/2021 Assessment year:2017-18 effect. In any case, as a result of impugned order of learned CIT(A) the taxable income assessed by the Assessing Officer in assessment order is reduced. So, there was no enhancement in income of assessee as a result of impugned order of learned CIT(A). For this reason also, there is no merit in Cross Objection filed by the assessee and non issue of show cause notice did not cause any prejudice to the assessee. In view of the foregoing, the Cross Objection filed by assessee is dismissed.

(G) In the result, the appeal filed by Revenue is allowed and Cross Objection filed by assessee is dismissed.

(Order pronounced in the open court on 29/10/2024)

Sd/. Sd/. (SUBHASH MALGURIA) (ANADEE NATH MISSHRA) Judicial Member Accountant Member

Dated:29/10/2024 *Singh

Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow

Asstt. Registrar