MOHAMMED REZAKABUL, MUMBAI v. JTCIT RG 11(3), MUMBAI

ITA 3870/MUM/2009 | 2005-2006
Pronouncement Date: 25-02-2011 | Result: Partly Allowed

Appeal Details

RSA Number 387019914 RSA 2009
Assessee PAN AACPK6324P
Bench Mumbai
Appeal Number ITA 3870/MUM/2009
Duration Of Justice 1 year(s) 8 month(s) 10 day(s)
Appellant MOHAMMED REZAKABUL, MUMBAI
Respondent JTCIT RG 11(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 25-02-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted F
Tribunal Order Date 25-02-2011
Date Of Final Hearing 18-11-2010
Next Hearing Date 18-11-2010
Assessment Year 2005-2006
Appeal Filed On 15-06-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F MUMBAI BEFORE SHRI S V MEHROTRA ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO JUDICIAL MEMBER ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) MOHAMMED REZA KABUL PLOT NO.78A 2 ND FL THANER ROAD BANDRA MUMBAI-400050 PAN:AAACPK6324P . APPELLANT VS JT.CIT RANGE 11(3) AAYAKAR BHAVAN M K ROAD MUMBAI-400020. .. RESPONDENT APPELLANT BY : SHRI VIPUL JOSHI RESPONDENT BY : SMT.ASHIMA GUPTA O R D E R PER VIJAY PAL RAO JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 20.02.2009 OF CIT(A) FOR THE ASSESSME NT YEAR 2004-05. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS : 11. THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN REJECTING THE BOOK RESULTS BY INVOKING TH E PROVISIONS OF SECTION 143(3) R.W.S 145 OF THE ACT. ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 2 1.2 WHILE DOING SO THE LD CIT(A) ERRED IN : (I) NOT GIVING SUFFICIENT ADEQUATE AND PROPER OPPORTUNITY OF BEING HEARD TO THE APPELLANT; (II) NOT APPLYING HIS MIND TO AND NOT DEALING WITH THE DETAILED SUBMISSIONS MADE BY THE APPELLANT BEFORE HIM; (III) BASING HIS FINDING ON SURMISES CONJECTURE AN D SUSPICION AND (IV) TAKING INTO ACCOUNT EXTRANEOUS AND IRRELEVANT CONSIDERATIONS WHILE IGNORING THE MATERIAL CONSIDERATIONS 1.3 IT IS SUBMITTED THAT IN THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW NO SUCH ACTI ON WAS CALLED FOR. WITHOUT PREJUDICE TO THE ABOVE: 2.1 THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION O F THE AO IN COMPUTING THE GROSS RECEIPTS OF THE APPELLANT AT RS.2 89 61 836/- IN PLACE OF RS.2 48 98 206/- AND THE NET PROFIT AT RS.1 37 19 301/- IN PLACE OF RS.1 02 12 029/- 2.2 IT IS SUBMITTED THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CALCULAT ION IS ERRONEOUS AND /OR NOT IN ACCORDANCE WITH LAW. 3.3 THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN MAKING ADDITION OF RS.18 80 157/- TO T HE INCOME OF THE APPELLANT WHICH INCOME WAS ALREADY ADDED BY THE AO IN THE EARLIER YEARS AND THE ISSUE HAD NOT REACHED FINALITY. 3.2 IT IS SUBMITTED THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW NO SUCH ACT ION WAS CALLED FOR. ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 3 4.1 THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN WHICH THE AO HAD DISALLOWED RS.32 830/ - OUT OF SERVICE TAX PAYMENT 4.2 IT IS SUBMITTED THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW NO SUCH DISALLOWANCE WAS CALLED FOR 3. AT THE TIME OF HEARING THE LEARNED COUNSEL OF TH E ASSESSEE ALONG WITH THE ASSESSEE STATED THAT THE AS SESSEE DOES NOT WANT TO PRESS THE GROUNDS OF APPEAL NO.1.1 1.3 AND 1.4THE SAME MAY BE DISMISSED AS NOT PRESSED FOR WHI CH THE LEARNED DR HAS NO OBJECTION. ACCORDINGLY WE DISMI SS THESE GROUNDS BEING NOT PRESSED. 4. THE ONLY GROUNDS REMAINED FOR OUR CONSIDERATION AND ADJUDICATION ARE 2.1 AND 2.2 WHICH ARE REGARDING C OMPUTATION OF GROSS RECEIPTS. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN ARCHITECT BY PROFESSION AND IS ENGAGED IN THE BUSINESS OF DESIGNING RESIDENTIAL BUILDINGS OFFICES ETC. THE A SSESSEE STATED TO HAVE BEEN FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING IN THE EARLIER YEARS. THE ASSESSEE W AS RECOGNIZING THE INCOME AS AND WHEN PAYMENT WAS RECE IVED FROM THE CLIENTS. AT THE END OF THE ACCOUNTING YEA R THE ASSESSEE USE TO RECOGNIZE ONLY THAT PART OF THE OU TSTANDING PAYMENT OF RECEIVABLES BILLS WHICH WERE APPROVED B Y THE CLIENTS BY PASSING GENERAL ENTRY AT THE END OF THE YEAR. THUS ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 4 THE ASSESSEE WAS FOLLOWING THE CASH SYSTEM OF ACCO UNTING THROUGH OUT THE YEAR AND ONLY AT THE END OF THE YE AR THE ACCRUAL OF INCOME WAS RECOGNIZED TO THE EXTENT OF S UCH BILLS APPROVED BY THE CLIENTS. FOR THIS YEAR THE ASSESSEE DID NOT RECOGNIZED THE ACCRUED INCOME EVEN TO THE EXTENT WH ICH WAS APPROVED BY THE CLIENTS THEREFORE THE ASSESSEE OF FERED ONLY THE INCOME RECEIVED DURING THE YEAR. THE AO NOTICE D FROM THE AUDIT REPORT THAT THE ASSESSEE HAD CHANGED THE METH OD OF ACCOUNTING FROM MERCANTILE TO CASH BASIS. THE AO I SSUED SHOW CAUSE NOTICE TO THE ASSESSEE AS TO WHY THE CAS H SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE FOR THIS YEA R IS NOT TO BE REJECTED AS PER THE PROVISIONS OF SECTION 145 AN D 144 OF THE ACT. 5. IN REPLY THE ASSESSEE MAINLY SUBMITTED THAT SIN CE IN THE EARLIER YEARS THERE WAS A DISPUTE ON ACCRUED INCOME RECOGNIZED BY THE ASSESSEE ON THE BASIS OF BILLS AP PROVED BY THE CLIENTS THEREFORE TO VOID ANY DISPUTE AND LIT IGATION THE ASSESSEE CHANGED THE METHOD OF ACCOUNTING FROM 2005 -06 TO CASH SYSTEM. THE ASSESSEE CONTENDED THAT THE CH ANGE IS BONAFIDE AND FOLLOWED CONSISTENTLY. THE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HAS RECORDED THE RE ASONS AT PAGE 2 OF THE ASSESSMENT ORDER ARE AS UNDER : THERE WAS AN ACTION U/S 133A OF THE ACT ON 21.3.2005 AT THE ASSESSEES OFFICE PREMISES. IN HIS ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 5 STATEMENT RECORDED DURING THE COURSE OF SURVEY ACTION THE ASSESSEE STATED THAT HE HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND AS ON THE DATE OF SURVEY THE WORK IN PROGRESS IS UNDER STATED BY RS.30 LAKHS. THIS CATEGORICAL STATEMENT O F THE ASSESSEE CLEARLY SHOWS THAT THE ASSESSEE HAS FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING FIRM 1 ST APRIL 2004 TO THE DATE OF SURVEY ON 21 ST/22ND MARCH 2005 AND THE CHANGE FROM MERCANTILE TO CASH WAS EFFECTED ONLY DURING THE LAST 9 DAYS OF THE RELEVANT ACCOUNT ING YEAR. THIS INDICATES THAT THE ASSESSEE FOLLOWED MI XED ACCOUNTING SYSTEM DURING THE YEAR. THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE FOLLOWED CASH SYSTEM OF ACCOUNTING FOR THE PREVIOUS YEAR 2004-05. SECTION 145(3) STATES THAT WHERE THE AO IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETIONS OF T HE ACCOUNTS OF THE ASSESSEE OR WHERE THE METHOD OF ACCOUNT PROVIDED IN SUB-SECTION (1) OR ACCOU8NTING STANDARDS NOTIFIED UNDER SUB-SECTION (2) HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144. IN THE CASE OF THE ASSESSEE HE HAS FOLLOWED MERCANTILE SYSTEM UP TO 21/22.3.2005 AND THEREAFTER TILL THE END OF ACCOUN TING YEAR ON 31.3.2005 CASH SYSTEM THAT IS FOR 9 DAYS AS PER THE DETAILS FURNISHED BY THE ASSESSES THE GR OSS PROFESSIONAL RECEIPTS UNDER THE MERCANTILE SYSTEM A RE RS.2 89 61 836/- AGAINST RS.2 48 98 206/- SHOWN UNDER THE CASH SYSTEM. THIS SHOWS THAT THE ASSESSE E HAS UNDERSTATED HIS PROFESSIONAL RECEIPTS BY RS.40 63 630/- UNDER THE CASH SYSTEM. THUS THE BOOKS OF A/CS MAINTAINED BY THE ASSESSEE UNDER CAS H SYSTEM DO NOT REFLECT THE TRUE PROFIT OF THE PROFES SIONS THEREFORE I REJECT THE BOOK RESULT SHOWN BY THE ASSESSEE AND COMPUTE THE PROFIT TAKING THE GROSS PROFESSIONAL RECEIPTS AS PER MERCANTILE SYSTEM. ALTHOUGH THE BOOKS RESULT ARE REJECTED TO ARRIVE AT THE PROFIT SHOWN BY THE ASSESSEE AS PER THE MERCANTILE SYSTEM OF ACCOUNTING THE EXPENSES INCURRED DURING THE YEAR AND THE ACCRUED EXPENSES HAVE BEEN CONSIDERED TOGETHER AS PER THE MERCANTILE SYSTEM TO DECIDE THE ALLOWABILITY OF THE EXPENSE. IN HIS LET TER DATED 24.12.2007 THE ASSESSEE STATED THAT IF THE GROSS RECEIPTS ARE TAKEN UNDER THE MERCANTILE SYSTE M AT RS.2 89 61 836/- INSTEAD O F RS.2 48 98 206/- T HEN ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 6 THE PROVISION FOR EXPENSES INCURRED SHOULD ALSO BE DEDUCTED WHILE ARRIVING AT THE INCOME OF THE YEAR. THE ASSESSEE HA QUANTIFIED SUCH EXPENSES AT RS.5 56 358/- AND FURNISHED THEIR DETAIL AND THE SA ME IS CONSIDERED AGAINST THE GROSS RECEIPTS OF RS.2 89 61 836/- AS PER THE FOLLOWING DISCUSSION. ACCORDINGLY THE NET PROFIT OF THE ASSESSEE FOR THE YEAR IS WORKED OUT AS UNDER : GROSS RECEIPTS AS PER MERCANTILE SYSTEM RS.2 89 61 836 LESS :EXPENSES RS.1 52 42 535 NET PROFIT RS.1 37 19 301 THIS NET PROFIT IS SUBSTITUTED IN PLACE OF RS.1 02 12 029/- SHOWN BY THE ASSESSEE AND THE DISALLOWANCE OF EXPENSES IS CONSIDERED AGAINST THIS NET PROFIT. 6. THUS THE AO REJECTED THE BOOK RESULT SHOWN BY T HE ASSESSEE AND COMPUTED THE PROFIT BY TAKING A GROSS PROFESSIONAL RECEIPTS AS PER THE MERCANTILE SYSTEM. ACCORDINGLY THE AO WORKED OUT THE NET PROFIT OF THE ASSESSEE ON THE BASIS OF GROSS RECEIPT (-) MINUS EXPENDITUR E ON MERCANTILE SYSTEM AT RS.1 37 19 301/-. 7. ON APPEAL THE CIT(A) CONFIRMED THE ACTION OF THE AO. 8. BEFORE US THE LEARNED AR OF THE ASSESSEE HAS SUB MITTED THAT IT IS NOW VERY WELL ESTABLISHED LEGAL POSITIO N UNDER THE INCOME TAX ACT 1961 THAT IT IS THE PREROGATIVE OF AN ASSESSEE TO CHANGE HIS METHOD OF ACCOUNTING AND THE AO CANN OT OBJECT TO SUCH CHANGES PROVIDED THAT THE CHANGED METHOD I S A RECOGNIZED METHOD AND THE ASSESSEE HAS FOLLOWED THE ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 7 CHANGED METHOD CONSISTENTLY THEREAFTER. THE LEARNE D AR SUBMITTED THAT IT IS NOT DISPUTED THAT THE ASSESSE E HAS FULFILLED THIS BASIS CONDITION. THER3FORE THE ACTION OF THE AO IN REJECTING THE CHANGED METHOD OF ACCOUNTING IS BAD A ND ILLEGAL ON FACT AND IN LAW. 9. THE LEARNED AR SUBMITTED THAT AS AGAINST THAT T HE ONLY REASON GIVEN BY THE AO IN SUPPORT OF HIS ACTION IS THE ALLEGED ADMISSION MADE BY THE ASSESSEE DURING THE COURSE OF SURVEY U/S 133A OF THE ACT CARRIED OUT AT THE OFFICE PREMI SES OF THE ASSESSEE ON 21.3.2006. IN SUPPORT OF HIS CONTENTIO NS HE HAS FURTHER SUBMITTED THAT : I) FIRST OF ALL IT IS SUBMITTED THAT A STATEMENT OF AN ASSESSEE CANNOT BE THE SOLE BASIS OF MAKING ADDITION//DISALLOWANCE SPECIFICALLY WHEN SUCH STAT EMENT IS TAKEN DURING SURVEY AND NOT DURING SEARCH U/S 132 OF THE ACT. A STATEMENT TAKEN UNDER SEARCH A STATEMENT T AKEN UNDER SURVEY ARE ON DIFFERENT TWO FOOTING SO FAR A S EVIDENTIARY VALUE UNDER THE ACT IS CONCERNED. RELIANCE I N THIS REGARD IS PLACED ON THE RECENT APEX COURT DECISION IN THE CASE OF VINOD SOLANKI V/S UOI AND ORS IN CIVIL APPE AL NO. 7467 OF 2008. THE COURTS HAVE ALSO TIME AND AGAIN HELD THAT THE CIRCUMSTANCES UNDER WHICH AN ANSWER IS GIVEN AND THE SURROUNDING CIRCUMSTANCES SHO ULD ALWAYS BE ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 8 KEPT IN MIND WHILE PLACING RELIANCE UPON A STATEME NT. II) FURTHER IT IS ALSO A SETTLED LEGAL POSITION TH AT A STATEMENT HAS TO BE READ AND INTERPRETED AS A WHOLE AND IT IS NOT PERMISSIBLE TO PICK UP ONE SENTENCE/ANSWER FROM THE STATEMENT AND PLACED RELIANCE ON THE SAME SANS THE OVER ALL CONTEST AND CIRCUMSTANCE. III) THE ONE SENTENCE RELIED UPON BY THE AO SHOUL D ALSO BE APPRECIATED IN THE BACKGROUND OF FACT THAT THE ASSE SSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING FOR MANY YEARS TILL THE LAST YEAR. THIS WAS THE FIRST YEAR OF CHANGE O VER AND THE YEAR WAS NOT EVEN OVER. IMPORTANTLY AS EXPLAINED HEREIN ABOVE TILL 30 TH MARCH THE SYSTEM WAS SAME THAT IS TO ACCOUNT INCOME ONLY UPON RECEIPT FROM THE CLIENTS. IT WAS ONLY THAT MERCANTILE SYSTEM WAS ADOPTED TO THE EXTE NT THAT THE ASSESSEE USED TO PASS JOURNAL ENTRIES RECOGNIZING I NCOME WITH RESPECT TO THE BILLS THAT WERE ISSUED AND APPROVED BY THAT DAY BUT PAYMENT OF WHICH WAS OUTSTANDING. THEREFORE TH E DIFFERENCE WAS ONLY WITH RESPECT TO THE ENTRIES PA SSED ON 31 ST MARCH AND NOT OTHERWISE. IN OTHER WORDS EXCEPT FO R THE LAST DAY OF ACCOUNTING YEAR THE METHOD OF ACCOUNTING IN COME WAS SAME WHETHER UNDER MERCANTILE SYSTEM OR CASH SYSTE M. IN THE ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 9 CIRCUMSTANCES ANSWER WERE GIVEN ON 21.3.2005 DID NO T HAVE MUCH PRACTICAL RELEVANCE SO FAR AS THIS ASPECT IS C ONCERNED IV) IMPORTANTLY AT THE TIME OF SURVEY ITSELF THE SURVEY PARTY HAD SEIZED PROFIT AND LOSS ACCOUNT THAT WAS PREPA RED UP TO THAT DATE. THIS PROFIT AND LOSS ACCOUNT REFLECTED T HE PROFIT ARRIVED AFTER ON THE BASIS OF RECEIPT AND EXPENSES THAT WERE ACCOUNTED ON CASH BASIS. A COPY OF SUCH PAPER SO S EIZED IS ATTACHED TO THIS SUBMISSIONS AS EX-A (IT SHOULD B E APPRECIATED THAT DUE THE COMPUTER PROGRAMME THE TI TLE MENTIONS THE PERIOD A 1-APR 2004 TO 31-MARCH 2005 THO0UGH ACTUALLY IT IS FOR THE PERIOD 1 ST APRIL 2004 TO 20 TH MARCH 2005. THIS CAN BE VERIFIED WITH THE BOOKS OF ACCOUNT V) IN ANY CASE AS AGAINST THE STATEMENT THE ASSES SEE HAD PRODUCED HIS FULLY AUDITED BOOKS OF ACCOUNT BEFORE THE AO WHICH IN NO UNCERTAIN TERMS DEPICTED THAT THE MET HOD OF ACCOUNTING WAS CASH. THE AUDITORS ALSO HAD CERTIF IED THE SAME TO BE TRUE. THEREFORE ASSUMING BUT NOT ADMI TTING- THAT SOME RELIANCE COULD BE PLACED ON THE ANSWER IN THE STATEMENT IT COULD NEVER OVERRIDE THE ACTUAL AND S TARK FACTS CLEARLY EMERGING FROM THE BOOKS OF ACCOUNT. 10. THE LEARNED AR FURTHER SUBMITTED THAT IT IS N OW A VERY WELL SETTLED LEGAL POSITION THAT REJECTION OF BOOK RESULT BY ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 10 INVOKING THE PROVISIONS OF SECTION 145 IS A VERY DR ASTIC AND SERIOUS ACTION AND THEREFORE SUCH POWER IS CIRCUS ES BY THE LIMITATIONS PLACES IN THE SECTION ITSELF AND SUCH P OWER IS REQUIRED TO BE EXERCISED WITHIN THE PARAMETERS LAID DOWN BY JUDICIAL PRECEDENTS. HE HAS ALSO INVITED OUR ATTENT ION TO ANNEXURE -2 OF THE PAPER BOOK. IN THE PRESENT CASE THE BOOKS ARE AUDITED UNDER THE PROVISIONS OF THE ACT THE AU DITOR HAVE CERTIFIED THE BOOKS A GIVING TRUE AND FAIR VIEW OF THE AFFAIRS OF THE ASSESSEES PROFESSION AND HAVE ALSO CERTIFIED ABOUT THE ABOVE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE . THE ASSESSEE SUBMITS THAT IN THE CIRCUMSTANCES THE AC TION OF THE AO IN RELYING UPON THIS ANSWER IS BAD AND ILLEGAL. 11. THE LEARNED AR ALSO SUBMITTED THAT THE ASSESSEE HAD BROUGHT ALL THESE FACTS ON RECORD BEFORE THE AO V IDE HIS LETTER DATED 24.7.2007 ATTACHED TO THE PAPER BOOK AT PAGE 30. AND LETTER DATED 30.11.2007 (PAGES 55 TO 56 OF THE PAPE R BOOK). THE SUBMISSIONS OF THE ASSESSEE DID NOT ACCEPT BY T HE AO. 12. THE LEARNED AR HAS SUBMITTED THAT IN THE EARLIE R YEAR THIS TRIBUNAL HAS DECIDED THE ISSUE OF RECOGNIZING THE ACCRUED INCOME AS PER THE BILLS APPROVED BY THE CLI ENTS. HE HAS REFERRED THE ORDER OF THIS TRIBUNAL DATED 16. 11.2009 I N ITA NO.6295/MUM/2007 AND 6310/MUM/2007 FOR THE ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 11 ASSESSMENT YEARS 2003-04 AND 2004-05. HE HAS FURTH ER SUBMITTED THAT THE AO HAS REJECTED THE BOOK RESULT ON THE BASIS OF THE STATEMENT RECORDED U/S 133A DURING THE SURVEY ACTION WHICH HAS NO EVIDENTIARY VALUE. THEREFORE REJECTION OF THE BOOKS OF ACCOUNT IS ILLEGAL AND IMPROPER. HE H AS RELIED UPON THE DECISION OF THE HON. SUPREME COURT IN THE OF BRITISH PAINTS INDIA LTD (1991) 188 ITR 44. HE HAS FURTHER CONTENDED THAT THE ASSESSEE DOES NOT UNDERSTAND THE PRINCIPLE OF ACCOUNTING AS WELL AS LEGAL IMPLICATION OF STATEME NT MADE DURING THE SURVEY ACTION. HE HAS REFERRED THE VAR IOUS DECISIONS AND SUBMITTED THAT THE REGULARLY IMPLIED METHOD OF ACCOUNTING IS COMPULSORY BASIS OF COMPUTATION OF IN COME. EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNTING WHEN EVER ADOPTED IT IS ONLY THE ACCRUAL OF REAL INCOME WHIC H IS CHARGEABLE TO TAX. THAT ACCRUAL IS A MATTER OF SUBS TANCE AND THAT IS TO BE DECIDED ON COMMERCIAL PRINCIPLES HAVI NG REGARDS TO THE BUSINESS CHARACTER OF THE TRANSACTIONS AND T HE REALITIES AND SPECIALTIES OF THE SITUATION AND CANNOT BE DETE RMINED BY ADOPTING PURELY THEORETICAL OR DOCTRINAIRE OR LEGAL ISTIC APPROACH. 13. THE LEARNED AR HAS FURTHER CONTENDED THAT TH ERE IS NO NEED TO MAINTAIN BOOKS OF ACCOUNT ON DAY TO DAY BAS IS. THE METHOD OF ACCOUNTING CAN BE CHANGED BEFORE THE END OF THE ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 12 ACCOUNTING YEAR AND THERE IS NO SUCH BAR FOR CHANG E OF ACCOUNTING SYSTEM. 14. ON THE OTHER HAND THE LEARNED DR HAS SUBMITTED THAT DURING THE SURVEY PROCEEDINGS ON 22.3.2005 THE ASS ESSEE IN HIS STATEMENT RECORDED U/S 133A STATED THAT HE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND THE WORK-I N-PROGRESS WAS UNDERSTATED ABOUT 30 LAKHS. THUS IT IS CLEAR THAT THE ASSESSEE HAS CHANGED THE METHOD OF ACCOUNTING FROM MERCANTILE TO CASH SYSTEM ONLY AFTER SURVEY PROCEED INGS WITH A VIEW TO AVOID THE TAX ON THE ESTIMATED WORK-IN-PROG RESS. THERE IS NO BASIS FOR CHANGE OF ACCOUNTING SYSTEM FROM MERCANTILE SYSTEM TO CASH SYSTEM AT THE END OF THE ACCOUNTING YEAR. THE LD. DR HAS REFERRED THE STATE MENT OF THE ASSESSEE RECORDED U/S 133A DURING THE SURVEY PROCEE DINGS AND SUBMITTED THAT THE STATEMENT IS UNAMBIGUOUS WI THOUT ANY COERCION. THE ASSESSEE HAS NOT DISPUTED THE CORRE CTNESS OF THE STATEMENT THEREFORE THE STATEMENT OF THE ASES EEE IS A GOOD PIECE OF EVIDENCE AND THE CHANGE IS NOT BONAFI DE. HE HAS RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES . 15. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND R ELEVANT RECORD. AS EVIDENCE FROM THE RECORD THAT EVEN IN THE EARLIER YEARS THE ASSESSEE WAS RECOGNIZING ACCRUED INCOME ONLY AT ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 13 THE END OF THE ACCOUNTING YEAR AND THAT TOO ONLY TO THE EXTENT FOR WHICH THE BILLS APPROVED BY THE CLIENTS. THE A SSESSEE WAS NOT RECOGNIZING THE INCOME ON THE BASIS OF BILLS RAISED BUT ONLY FOR THE BILLS WHICH WERE APPROVED BY THE CLIEN TS. THE SYSTEM OF ACCOUNTING WAS ACCEPTED BY THE CIT(A) AS WELL AS BY THIS TRIBUNAL FOR THE ASSESSMENT YEAR 2003-04 2004-05 THE TRIBUNAL VIDE ORDER DATED 16.11.2009 DECIDED TH IS ISSUE IN PARAGRAPHS 5 AS UNDER :. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE PERUSED THE ORDERS OF AO AND CIT(A). THE ASSESSEE IS AN ARCHITECT BY PROFESSION AND HAS RAIS ED BILLS OF PROFESSIONAL FEES ON ITS CLIENTS. THE ASSE SSEE WAS FOLLOWING THE SAME MERCANTILE SYSTEM OF ACCOUNTING IN THE EARLIER YEARS AND NO SUCH ADDITIO N WAS MADE BY THE DEPARTMENT IN THE ASSESSMENT OF THE EARLIER YEARS. THE REAL ISSUE BEFORE US IS THAT WHETHER INCOME ACCRUED TO THE ASSESSEE ON MERE RAISING OF BILL OF PROFESSIONAL FEES ON THE CLIENTS . WE FIND ACCORDANCE WITH THE PRINCIPLES OF MERCANTILE SYSTEM OF ACCOUNTING MERE RAISING OF BILLS OF PROFESSIONAL FEES DOES NOT RESULT IN THE ACCRUAL OF INCOME OF THE ASSESSEE. NO ENFORCEABLE RIGHT ACCRUING IN FAVOUR OF THE ASSESSEE TILL THE BILLS O R PROFESSIONAL CHARGES IS APPROVE BY ITS CLIENTS. IN THE CASE OF HE ASESEEE THERE IS NO SUCH FINDING RECORDE D BY THE AO THAT THE BILLS OF PROFESSIONAL FEES RAIS ED BY THE ASSESSEE WERE APPROVED BY ITS CLIENTS DURING RELEVANT YEAR. WE FIND THAT THE AMOUNT OF ADDITION MADE BY THE AO HAS ALREADY BEEN ACCOUNTED FOR BY THE ASSESSEE IN SUCCEEDING YEARS AND THE AO HIMSEL F HAS ALLOWED THE CREDIT OF THE AMOUNT OF ADDITION FO R THE ASSESSMENT YEAR 2003-04 IN THE SUCCEEDING ASSESSMENT YEARS 2004-05. IN THESE FACTS OF THE CAS E WE HOLD THAT THER4E IS NO MISTAKE IN THE ORDER OF T HE CIT(A) IN DECIDING THE ISSUE IN FAVOUR OF THE ASESE EE AND ACCORDINGLY THE ORDER OF THE CIT(A) ON THIS IS SUE IS CONFIRMED AND THE GROUND OF APPEAL NO.1 FOR BOTH THE ASSESSMENT 2003-04 AND 2004-05 IS DISMISSED. ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 14 IT IS WORTHWHILE TO MENTIONED THAT DURING THE SURV EY U/S 133A THE STATEMENT OF THE ASSESSEE WAS RECORDED ON 22.3. 2005 IN WHICH THE ASSESSEE HAS CATEGORICALLY SATED AND DIS CLOSED THAT THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND ABOUT 25 TO 30 LAKHS OF BILLS NOT YET RAISED FOR THE WORK- IN-PROGRESS. THIS WAS STATED BY THE ASSESSEE IN ANSWER TO QUESTION NO.13 AND ANSWER THERETO AS UNDER: Q.13 HOW WILL YOU EXPLAIN THE VALUATION OF THE W ORK IN PROGRESS OF THE PROJECT IN PROGRESS? A. AT PRESENT GIVING BROAD THOUGH I THINK THE WORK IN PROGRESS IS ABOUT 4.00 TO 5.00 LAKHS SQUAR E FEET AND THE SAME SHOULD BE ABOUT BE APPROXIMATELY RS.25.00 TO 30.00 LAKHS FOR WHICH THE BILL ARE NO T YET RAISED AGAINST THE CLIENTS FOR WANT OF COMPLETION O F THE CONSTRUCTION STAGES. HOWEVER ACCEPTING THAT I AM FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING . IT I S ACCEPTED THAT THE VALUE OF THE WORK IN PROGRESS OF THE PROJECTS UNDERTAKING SHOULD BE TAKEN INTO CONSIDERATION FOR WORKING OUT THE BOOK RESULT. THEREFORE I HEREBY STATE THAT THE BOOKS RESULTS MA Y COME OUT OF FINANCIAL STATEMENT FROM THE PRESENT CONDITION OF COMPLETE PRINT OUT IS LESS BY AROUND RS.30.00 LAKHS. THE BREAK UP AND THE FULL WORKING O F THE UNBILLED WORK IN PROGRESS YET TO BE TAKEN INTO ACCOUNT WILL BE SUBMITTED AFTER CONSULTING THE ACCOUNTANT AND THE CONCERNED ASSOCIATE AND ALSO THE DATE SYSTEM PROMISE TO SUBMIT THE SAME AT THE EARLI ER 16. IT APPEARS THAT ONLY AFTER THE SURVEY ON 21.3.2 005 THE ASSESSEE DECIDED NOT TO OFFER THE ACCRUED INCOME EV EN FOR THE BILLS WHICH WERE APPROVED BY THE CLIENTS AS PRACTI CE FOLLOWED BY THE ASSESSEE IN THE EARLIER YEARS. THEREFORE ON LY AFTER THE SURVEY ACTION AND DISCLOSURE IN THE STATEMENT BY T HE ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 15 ASSESSEE THE ASSESSEE DECIDED TO CHANGE THE METHOD OF ACCOUNTING FROM MERCANTILE TO CASH. HENCE IN OUR V IEW THE CHANGE IS NO BONAFIDE BUT TO COUNTER THE DEVELOPM ENT DURING THE SURVEY ACTION. AS FAR AS THE LEGAL OBJECTION R AISED BY THE LEARNED AR ARE CONCERNED WHEN THE ADDITION IS MADE BY THE AO ON THE BASIS OF BOOKS OF ACCOUNTS AND OTHER RECO RDS OF THE ASSESSEE THEN IT CANNOT BE SAID THAT THE ADDITI ON IS SOLELY ON THE BASIS OF THE STATEMENT RECORDED U/S 133A. THEREFORE THE LEGAL OBJECTION OF THE LEARNED AR HAS NO BASIS. THE STATEMENT GIVEN DURING THE SURVEY GOES WITHOUT RE TRACT AND UNDISPUTED BY THE ASSESSEE. EVEN THE SAID STATEMENT WAS CORROBORATED BY OTHER EVIDENCE AS RECORDED IN THE B OOKS OF ACCOUNT OF THE ASSESSEE ON THE BASIS OF WHICH THE A O TOOK GROSS PROFESSIONAL RECEIPTS. HOWEVER WE NOTE THAT WHEN THE EARLIER SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESS EE HAS BEEN FOUND PROPER BY THE CIT(A) AND THE ALSO BY THE TRIBUNAL THE AO IS NOT JUSTIFIED IN MAKING THE ADDITION OF T HE ENTIRE GROSS ACCRUED INCOME. ACCORDINGLY WE REMIT THIS IS SUE TO THE RECORD OF THE AO TO COMPUTE THE INCOME ON THE BASI S OF ACCRUED INCOME AS APPROVED BY THE CLIENTS AS FOLLOW ED BY THE ASESEEE IN THE EARLIER YEARS AFTER ALLOWING THE ADM ISSIBLE EXPENDITURE RELATING TO THIS INCOME. ITA NO. 3870/MUM/2009 (ASSESSMENT YEAR 2005-06) 16 17. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25TH FEB 2011 SD SD (S V MEHROTRA ) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL M EMBER MUMBAI DATED 25TH FEB 2011 SRL:22211 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR ITAT MUMBAI