Validity of addition due to mismatch between professional receipts as per Form 26AS and that shown in return of income

Short Overview:

 

 Where AO made additions on account of mismatch between gross professional receipts as per Form 26AS and gross receipts disclosed by assessee in return of income. Matter was remanded back to AO to re-compute income of assessee in accordance with cash system of accounting as regularly employed by the assessee, and to give credit for pre-paid taxes on account of tax deducted at source, as per law, having regard to section 199 read with rule 37BA.

AO made additional because of mismatch between gross professional receipts as per Form 26AS and receipts shown by assessee in the return of income. Assessee’s case was that as it followed cash system of accounting and not mercantile system, therefore, it could not be expected that gross receipts as per Form 26AS would not match with gross receipts recognized in accordance with cash system.

Judgment – AO was directed to re-compute  income of  assessee in accordance with cash system of accounting, as  regularly employed by the assessee; and to give credit for prepaid taxes on account of tax deducted at source, as per law, having regard to section 199 read with rule 37BA.

Decision: Matter remanded.

IN THE ITAT, DELHI BENCH

AMIT SHUKLA, J.M. & ANADEE NATH MISSHRA, A.M.

Dhruv Sachdeva v. ACIT

ITA No. 6261/Del/2015

18 September, 2018

Assessee by: Rajan Bhatia and Sunil Dhamija, Advocate

Revenue by: Ashima Neb, Sr. DR

ORDER

Anadee Nath Misshra, A.M.

Assessee filed return of income declaring total income of Rs. 49,91,720. This was initially processed under section 143(1) of Income Tax Act, 1961 (“I.T. Act”, for short) wherein returned income was accepted. Subsequently, proceedings under section 147 read with section 148 of Income Tax Act were initiated vide notice dated 28-3-2013. Assessment order under section 143(3) of the Act, dated 27-3-2014 was passed wherein total income was determined at Rs. 1,01,74,431 as against returned income of Rs. 49,91,720. The assessing officer made following additions in the assessment order :–

(i) Rs. 48,19,659 on account of Difference in TDS receipt.

(ii) Rs. 1,32,047 on account of Telephone Expenses.

(iii) Rs. 84,700 on account of car R& M expenses/Car repair & maint./Insurant/Depreciation on Car expenses.

(iv) Rs. 1,46,305 on account staff welfare/misc. expenses/entertainment to customers.

2. The assessee filed appeal before the learned Commissioner (Appeals), in which the aforesaid additions/disallowances were contested. Vide order dated 28-9-2015, the learned Commissioner (Appeals) confirmed the aforesaid additions of Rs. 48,19,659 and allowed partial relief out of expenses related to Car and Telephone Expenses. The present appeal before us is against the aforesaid order dated 28-9-2015 of the learned Commissioner (Appeals). The assessee has taken the following grounds in the appeal :–

“1. That the order of the learned Commissioner (Appeals) is bad both in law and on the facts of the case.

2. That the action of the assessing officer under section 147/148 is bad in law and on facts. Section 147/148 is not applicable to the facts of the case.
3. That the proceedings under section 1471/48 are time barred.
4. That there was ‘No reason to believe’ to take action under section 147/148. That the assessing officer acted merely under “suspicion” and this vitiates the assessing officer’s action. Further, there was no “nexus” between the primary facts and belief under section 147/148 and this vitiates the action under section 147/148.
5. That the reasons to reopen were neither recorded nor supplied to the assessee and this vitiates the action taken.
6. That the action of the assessing officer is mechanical and suffers from non-application of his own mind on the part of assessing officer and this vitiates the action taken.
7. That action and the proceedings under section 147 suffer from material irregularity and are void ab initio as the assessing officer has attempted to do indirectly what he would have done and failed to do directly and in particular —

(a) The action of the assessing officer is based on stale information.

(b) is mere attempt to make further investigation.

(c) is based mechanically merely on information received which information is also wrong and wholly vague.

8. That the assessing officer has acted without jurisdiction and assessing officer’s action under section 147/148 is without any basis. In fact jurisdictional facts were absent to take/justify action under section 147/148.
9. That when the time to issue 143(2) notice or complete the original assessment under section 143(3) has not elapsed no notice under section 148 can be issued.
10. That the assessing officer erred in adding to income an amount of Rs. 48,19,659 on account of difference in TDS receipts by absolutely ignoring that the assessee is following Cash Method of Accounting which is well recognized as per section 145 of the Income Tax Act, 1961 and Commissioner (Appeals) erred in upholding the same.
11. That the assessing officer erred in by not allowing the assessee the Cash Method of Accounting being followed by the assessee regularly since the inception and thereby making a bogus addition of Rs. 48,19,659 and the Commissioner (Appeals) erred in upholding the same.
12. That the assessing officer erred in treating the difference of receipts as Income (as shown/offered and available in Form 26AS) by not appreciating the fact that the assessee is following Cash Method of accounting regularly and consistently and Commissioner (Appeals) erred in upholding the same.
13. That the assessing officer’s order is absolutely defective and bad in law as it is against the spirit of section 145 of the Income Tax Act, which allows the assessee to follow either of the system of accounting viz. Cash System or Mercantile System and the Commissioner (Appeals) erred in upholding the same. The order of assessing officer is mechanical, non reasoned and passed without affording a proper opportunity of being heard to the assessee.
14. That the assessing officer’s order is null and void as assessing officer did not record any clear finding as to the defect in the system of accounting being followed by the assessee and the Commissioner (Appeals) erred in upholding the same.
15. That the income of Rs. 48,19,659 had not accrued to the assessee. The assessing officer did not consider the submissions of the Appellant and the so called difference in TDS receipts amount is not taxable at all as the same has been offered for taxation in subsequent year following the Cash System of accounting and Commissioner (Appeals) erred in by upholding the same.
16. That it was not open to the assessing officer to intervene and substitute the different method of accounting then the one which being followed by the assessee uniformly and regularly since the inception and Commissioner (Appeals) erred in by upholding the same.
17. That the learned Commissioner (Appeals) erred in by applying rule 37BA of Income Tax Rules, and by ignoring the fundamental fact that under the Income Tax Act, it is the choice of the assessee to follow either of the system of accounting viz. Cash System or Mercantile System under section 145 of the Income Tax Act, 1961, and rules are to be read in conjunction with the Act.
18. That the order of the assessing officer is null and void in view of the legal precedents of the various courts in assesses favour and Commissioner (Appeals) erred in by not following/adhering to the same inspite of the written submissions.
19. That the assessing officer erred in by disallowing l/5th, i.e., amounting to Rs. 1,32,047 on ad hoc basis out of the Telephone Expenses incurred by the assessee wholly and exclusively for the business purposes and Commissioner (Appeals) erred in by not quashing the entire amount.
20. That the assessing officer erred in by disallowing 1/5th of the Car running & Maintenance, Insurance, Depreciation on Car amounting to Rs. 84,700 in a mechanical manner towards the personal usage by the assessee and the Commissioner (Appeals) not deleting the entire amount.
21. That the assessing officer erred in by disallowing 1/10th of various Expenses (Accounting Charges, Business Promotion, Conveyance, Entertainment, Office repair & Maintenance & Staff Welfare etc.) amounting to Rs. 1,46,305 on ad hoc basis without any cogent evidence and the Commissioner (Appeals) erred in by upholding the same.
22. That the Order of assessing officer is based on surmises and is absolutely mechanical in nature and further all relevant evidences were ignored while computing the assessment and the assessment framed is time barred, and Commissioner (Appeals) erred in by upholding the same.
23. That the assessing officer passed the order absolutely mechanically without applying his mind and Commissioner (Appeals) erred in by upholding the same.
24. That the assessing officer wrongly charged the interest under section 234(A), 234(B), 234(D) totaling to Rs. 6,65,739 (Rs. 54,506 + Rs. 5,76,524 + Rs. 34,709), and Commissioner (Appeals) erred in by upholding the same.
25. The appellant craves to leave to add, to alter, and to delete all or any grounds of appeal.”

2.1. Although the assessee has taken numerous grounds in the appeal filed in Income Tax Appellate Tribunal (ITAT), broadly the grounds can be classified into the following categories :–

(i) Grounds related to initiation of proceedings under section 147 read with section 148 of Income Tax Act.

(ii) Grounds related to merits of addition of Rs. 48,19,659 on account of difference in TDS receipts.

(iii) Grounds related to merits of disallowances out of Car Expenses, Telephone Expenses and Staff Welfare Expenses.

(iv) Ground related to interest charge under section 234A, 234B, and 234D of the Act.

For the sake of convenience we shall dispose off the grounds of each of the above categories in a consolidated manner, taking up each category of grounds one by one.

3. As far as grounds related to initiation of proceedings under section 147 read with section 148 of Income Tax Act are concerned, the learned Counsel for assessee drew our attention to the reasons recorded by the assessing officer for initiation of proceedings under section 147 read with section 148 of Income Tax Act. The reasons recorded by the assessing officer are reproduced below for ready reference :–

“As per information in Form 26AS available in this office, it revealed that Shri Dhruv Sachdev has received gross receipts to the tune of Rs. 1,94,11,386 from professional receipts during F.Y. 2010-11 relevant to the assessment year 2011-12 against his PAN BAVPS3244Q. However, on perusal of Income Tax return for the assessment year 2011-12, it is revealed that assessee has declared gross received of Rs. 1,38,40,587 only for the F.Y. 2010-11 relevant to the assessment year 2011-12. Therefore, facts are leading to conclusion that the assessee has not declared his income/receipts to the tune 55,70,799 (Rs. 1,94,11,386 minus 1,38,40,587) for assessment year 2011-12 and has evaded tax liability on the income earned during this period.

Keeping in view the facts mentioned above, I have reason to believe that Income of Rs. 55,70,799 chargeable to tax has escaped assessment for the assessment year 2011-12 as defined under section 147 of the Income Tax Act, 1961 in case of Shri Dhruv Sachdev. Therefore, I am satisfied and have reason to believe that it is a fit case for issuance of notice under section 148 of the Income Tax Act, 1961.”

3.1. The learned Counsel for the assessee contended that the only reason recorded by assessing officer for initiation of proceedings under section 147 read with section 148 was mismatch between gross professional receipts as per Form 26AS and gross receipts disclosed by the assessee in Return of Income. The learned Counsel contended that the assessee follows cash system of accounting and not mercantile system of accounting; and therefore, it is to be expected that the gross receipts as per the Form 26AS will not match with gross receipts recognized in accordance with cash system of accounting. However, the learned Counsel fairly conceded that the assessee had claimed credit for prepaid taxes on account of TDS, even in respect of those professional receipts appearing in Form 26AS which were not shown by the assessee as professional receipt in the return of income for this year. Further, when pointed out by learned Departmental Representative appearing for Revenue, the learned Counsel for assessee also conceded that the initiation of proceedings under section 147 read with section 148 of Income Tax Act are being contested by the assessee for the first time before ITAT; and this issue was not contested either at the stage of assessment proceedings or at the stage of appellate proceedings before learned Commissioner (Appeals). During the course of making submissions before us at the time of hearing, the learned Counsel for the assessee decided not to press grounds related to initiation of proceedings under section 147 read with section 148 of Income Tax Act. Therefore, grounds related to initiation of proceedings under section 147 read with section 148 of Income Tax Act are hereby dismissed being not pressed.

4. As far as the grounds related to merits of aforesaid addition of Rs. 48,19,659 are concerned, the learned Counsel for the assessee as well as the learned Departmental Representative were in agreement that the addition has resulted because of mismatch between gross professional receipts as per Form 26AS and the receipts shown by the assessee in the return of income. The learned Counsel for the assessee explained to us that because of cash system of accounting, which is being followed by assessee regularly, part of the professional income has been disclosed in subsequent year(s); in the year in which the corresponding amounts of professional receipts were actually received by the assessee. Thus, although certain amounts appear in Form 26AS for this year because tax was deducted at source, the income was shown in a subsequent year, based on cash system of accounting regularly followed by the assessee. The learned Counsel drew our attention to the reconciliation filed by the assessee before the assessing officer and before the learned Commissioner (Appeals) wherein information was provided as to year in which income was shown by assessee. The learned Counsel strongly contended that the income of the assessee should be determined as per cash method of accounting, which is regular method adopted by the assessee. The learned Counsel for assessee also relied on order dtd. 3-1-2018 of SMC Bench of ITAT in assessee’s own case, in ITA No. 6914/Del/2017 for assessment year 2007-08. The learned Departmental Representative relied on the orders of the assessing officer and the learned Commissioner (Appeals).

4.1 We have heard both sides and perused the materials on record. Before we decide this issue, law as it applies to facts of this case, needs to be understood. In the case of the assessee, i.e., the Payee, deductors have deducted tax at source under section 194J and under section 194A of Income Tax Act. Under these provisions, the deductor is required to deduct tax at source at the time of credit of the specified sum or income (as the case may be) to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier. Thus, the deductor is required to deduct tax at source at the time when the sum or income (as the case may be) is credited to the account of the payee, even if actual payment is made later. At times, a situation may arise, as has happened in the case of the assessee, that actual payment of certain sum(s) or income (as the case may be) may be made to the payee (here, the assessee) in a subsequent year although tax has been deducted at source by the deductor is an earlier year, because the sum or income (as the case may be) was credited by the deductor to the account of the payee, in such earlier year. In such situations, if the payee follows cash system of accounting instead of mercantile system, even though the sum or income (as the case may be) has been credited to the account of the payee and the corresponding amount has accrued as income of the payee in the earlier year, the payee does not recognize it as income of the earlier year, and offers it as income of the subsequent year (the year in which actual payment was received) in accordance with cash system of accounting. This is what has happened in the present case: though certain sums/income appear in Form 26AS for this year (because tax was deducted at source in this year) the assessee has not offered it as income in the Return of Income because actual payment was not received by the assessee in this year; and these amounts have been disclosed by the assessee as income in a subsequent year, in the year in which it was actually received, in accordance with cash system of accounting.

4.2 We find that learned Commissioner (Appeals) confirmed the aforesaid addition of Rs. 48,19,659 made by the assessing officer by taking note of rule 37BA of Income Tax Rules, 1962 (“I.T. Rules”, for short) and upheld this addition on the ground that the assessee had taken credit of the corresponding tax deducted at source. However, we are of the view that the learned Commissioner (Appeals) has not interpreted the provisions of law correctly. As per rule 37BA, credit for tax deducted at source and paid to the Central Government is to be given for the assessment year for which such income is assessable. However, provisions under rule 37BA of Income Tax Rules do not authorize Revenue to bring such amounts to tax which are not assessable during the year on the basis of regular method of accounting followed by the assessee. Section 145(1) of Income Tax Act makes it abundantly clear that income chargeable under the head of “Profit and Gain of business or profession” shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. If the assessee has erroneously taken credit for prepaid taxes on account of tax deducted at source; then having regard to rule 37BA of Income Tax Rules, Revenue will be justified in denying credit for such amount of prepaid taxes on account of tax deducted at source. However, Revenue cannot, merely because credit for tax deducted at source has been erroneously claimed by the assessee, bring corresponding professional receipts to tax, if such receipts are otherwise not assessable as income in accordance with law. We find that both sides, Revenue as well as Assessee, are in error of law. On one hand, the assessee has erroneously claimed credit for prepaid taxes on account of tax deducted at source even in respect of such amounts which are not assessable to tax in this year as per method of accounting regularly followed by the assessee. On the other hand, Revenue has added certain amounts as income of this year, even though these amounts were not actually received in this year and were not, under cash system of accounting regularly followed by the assessee, chargeable as income of this year, in view of unambiguous provisions prescribed under section 145(1) of Income Tax Act. The assessee distorted the law by wrongly claiming credit for prepaid taxes on account of tax deducted at source; even though corresponding amounts are not offered as income, and thus the approach of the assessee was to distort law. On the other side, the approach of Revenue was to wrongly invert the law by erroneously charging such amounts to tax which are not assessable as assessee’s income of this year under cash system of accounting regularly followed by the assessee, merely because assessee has claimed credit for tax deducted at source on corresponding amounts; instead of following the correct approach whereunder Revenue should have allowed credit for tax deducted as source in respect of such amounts only which are assessable as income of this year in accordance with cash system of accounting regularly followed by assessee. We disapprove the approaches of both Assessee and Revenue. It is not permitted for anyone to either distort or to invert law. Therefore, we set aside the orders of learned Commissioner (Appeals) and the assessing officer and we restore this matter to the file of the assessing officer to re-compute the income of the assessee in accordance with cash system of accounting, which is the system of accounting regularly employed by the assessee; and to give credit for prepaid taxes on account of tax deducted at source, as per law, having regard to section 199 of Income Tax Act read with rule 37BA of Income Tax Rules. Grounds related to merits of aforesaid addition of Rs. 48,19,659 on account of difference in TDS receipts are hereby disposed off in accordance with these directions.

5. As far as grounds related to disallowance of expenses out of Car Expenses, Telephone Expenses and Staff Welfare Expenses are concerned; the learned Counsel for the assessee failed to bring any materials for our consideration to prove that the disallowances confirmed by the learned Commissioner (Appeals) were excessive, unreasonable, erroneous or against law. The learned Counsel for assessee failed to make a case for any interference with the order of learned Commissioner (Appeals) on these issues. Therefore, grounds related to disallowances out of Car Expenses, Telephone Expenses and Staff Welfare Expenses are hereby dismissed.
6. Ground related to interest under section 234A, 234B & 234D of Income Tax Act are consequential in nature. The assessing officer is directed to re-compute the interest under these sections of Income Tax Act as per law, at the time of giving effect to this order.
7. In the result, appeal of the assessee is partly allowed.