DCIT Vs Stup Consultants Pvt. Ltd.
(Decided on 09.09.2011)
Assessee has been following cash system of accounting and this method has been regularly employed by the assessee in recording its day today business transaction. It is not a case where the assessee has been maintaining its accounts of day to day business under the mercantile system of accounting and thereafter prepares accounts in accordance with cash system of accounting for income tax purposes. The AO has placed strong reliance on the decision of the ITAT Delhi in the case of Amarpali Mercantile Pvt. Ltd.(supra).
On a closer examination of the facts of that case it is seen that consequent to introduction of section 209(3) of the Companies Act 1956 the assessee in that case started maintaining its accounts on mercantile system of accounting w.e.f. 1/4/1988. The relevant assessment year was 1988-89. For A.Y 1988-89 the assessee filed its return of income on cash system of accounting. It was a finding of fact in that case that method of accounting regularly employed by the assessee for the purpose of its business was mercantile system of accounting. It is only for income tax purposes accounts had been drawn up as per cash system of accounting. In the case of the assessee in the present case the facts are otherwise. As we have already held that the assessee regularly employing cash system of accounting for the purpose of its day to day business activities. Further in the case of the assessee it was not the dispute in the year of change. As we have already seen the assessee’s method of accounting for tax purposes has been cash system of accounting and had been accepted by the revenue from A.Y 1983-84. Therefore, the decision in the case of Amarpali Mercantile Pvt. Ltd(supra) will not be applicable.
On the other hand the decision in the case of Chennai Finance Co. Ltd. (supra) it has held that the provisions of section 209(3) of the Company Act 1956 do not override provisions of section 145 of the Act. The other reasons given by the CIT(A) for coming to the conclusion that section 209(3) of the Companies Act 1956 does not override provisions of section 145 of the Act are also found to be justified. One aspect which we find missing in the CIT(A) order is the reasons given by the AO for rejecting the books of account of the assessee under section 145 of the Act. On this aspect we notice that the AO was of the view that when the assessee was following cash system of accounting there cannot be any sundry creditors appearing in the balance sheet. On this query of the AO the assessee has given a detailed reply. The AO has not dealt with that reply at all. In our opinion the reply given by the assessee justifies the action of the assessee in showing sundry creditors in the balance sheet. Therefore, this cannot be a valid basis for rejecting the books of account. We are of the view that the system followed by the assessee does not in any way detract from the cash system of accounting. We, therefore, hold that the reasons assigned by the AO for rejecting the books of account are not proper. Even with regard to the accounting standard (AS-9) of the ICAI which was the reasons assigned by the AO for rejecting the books of account of the assessee in A.Y 2006-07, we find that those accounting standards are applicable only to the assesses, who follow mercantile system of accounting. Since the assesse, in the present case follows cash system of accounting, we are of the view that the rejection of books of accounts on this basis cannot be upheld. Lastly we also agree with the submissions of the ld. counsel for the assessee that the rule of consistency will be very much applicable in the present case. As we have already seen right from A.Y 1983-84 till A.Y 2003-04 the revenue has accepted the cash system of accounting followed by the assessee and has completed the assessment on that basis. In A.Y 2004-05 the AO cannot be allowed to take a different stand. As rightly contended on behalf of the assessee there should be finality and certainty in all litigation including litigation arising out the Act. Apparently no fresh facts have been brought on record to show that the system of accounting followed by the assessee is arbitrary or perverse. In such circumstances we are of the view that the principle of consistency will apply and the revenue should not be allowed to take a different stand. For the reasons given above we are of the view that the orders of the CIT(A) do not call for any interference. Consequently the orders of the CIT(A) are confirmed and all the three appeals by the revenue are dismissed.