[2013] 30 taxmann.com 277 (Article)
Events occurring after the end of account year vis-a-vis revised return
V.K. SUBRAMANI
CA
Introduction
1. Events occurring after the balance sheet date, i.e., after the end of the accounting year might confirm the state of affairs on the balance sheet date. Accounting Standard 4 (AS4) issued by the Institute of Chartered Accountants of India permits adjustment of assets and liabilities at the balance sheet date if the events occurring after that date confirm the conditions existing on the balance sheet date. However, events which do not relate to the conditions as at the balance sheet date cannot be adjusted and are non-adjustable events.
In the context of income-tax, when the return is filed and, subsequently, because of the events occurring after that date, if the books of account are revised and the returned income is also revised, whether the law permits such alteration of data having enormous significance on the income chargeable to tax vis-a-vis the tax liability discussed recently in Lok Housing & Construction Ltd. v. Asstt. CIT [2012] 27 taxmann.com 15 (Mum.)(Trib.). The host of issues in this case included : (i) validity of filing a revised return when there was no mistake or omission in the original return; (ii) revising the financial statements to give effect to the events occurring after the balance sheet date and derecognizing certain items of income which had not fructified in taxpayer's favour; and (iii) applicability of section 2(47) defining the term 'transfer' for immovable property held as stock-in-trade of the business of the assessee.
Factual matrix of the case
2. The assessee did not file its return of income for the assessment year 2007-08 till it was visited by a survey team in September, 2008. At the time of survey, the audited financial statements disclosed profit before tax of Rs. 142.45 crores. A statement was recorded from the Chairman and Managing Director of the company who agreed to file the return of income and to pay tax on the total income in consonance with the income recorded in the books of account of the company. A notice under section 142(1) was issued immediately and the assessee filed a return.
No tax was paid on the income admitted in the original return and a revised return was filed in January, 2009 declaring the total income as'nil' with revised annual accounts of the company. The reason for such revised return was stated as certain income recognized as per its accounting policy, viz, recognition of income from sale transactions on the basis of agreement of sale which were subject to execution of conveyance and compliance with applicable legal formalities, having become null and void had to be revised/reversed in the books of account.
The statutory auditors of the company qualified their report on the revision of accounts by stating that a company (being a public listed company) could not reopen and revise the accounts which were adopted at its annual general meeting. The Board of Directors revised the accounts based on the Circular of the Ministry of Finance and Company Affairs, dated 13-1-2003.
There were certain issues leading to part of the dispute, which were as follows:
| (i) | The Assessing Officer did not agree with the revised return which disclosed 'nil' income and, hence, completed the assessment by accepting the income admitted in the original return. The CIT (Appeals) held that the revised return of the assessee was non est,since the revised return could be filed only when the taxpayer 'discovers' any omission or wrong statement in the original return which was not known at the time of filing the original return. The revised return was filed in January, 2009 whereas the books of account were revised only in March, 2009. He, accordingly, held that the revision of accounts prompting revised return as not abona fide reason. | |
| (ii) | In the preceding years the assessee had carried out transactions such as tenements of housing projects which could be sold even after cancellation to some other party, whereas in the year under appeal the dispute was regarding transfer of land and rights therein. Cancellation of such transactions being mere agreement on paper had no commercial value upon cancellation and, hence, revision of accounts was resorted to by the assessee. | |
| (iii) | The Managing Director of the company accepted the audited financial statements and agreed to pay tax and file the return at the time of survey, i.e., 13-9-2008 and the return was originally filed on 23-9-2008 with a total income of Rs. 135.47 crores for the financial year ended 31-3-2007 without payment of tax on the admitted income. | |
| (iv) | The cancellation of sale contracts took place in November and December, 2008 and the revised return after derecognizing the incomes admitted earlier was filed in January, 2009. The books of account were, however, revised in March, 2009 much after the revised return was filed declaring 'nil' income. |
Validity of reversal of income
3. The Revenue argued that the transactions originally made in the financial year 2006-07 were sought to be reversed after two years, i.e.,in the financial year 2008-09 by revisiting and revising the books of account. It cited the Apex Court's decision in the case of CIT v. Shiv Prakash Janak Raj & Co. (P.) Ltd. [1996] 222 ITR 583/88 Taxman 536 in which the Apex Court discussed a classic decision in the case ofState Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 where interest on sticky loans was recognized in the books but was not transferred to revenue account and was held as chargeable to tax.
The assessee in this case had consistently been recognizing the cancellations in the respective years instead of giving their effect in the original year in which it was treated as income. It had done so in the financial years 2002-03 to 2005-06 by reducing cancellation of sale from its sales figure instead of altering the respective years' sales figure.
Validity of statement recorded at the time of survey
4. The accounting entries made by the assessee and statement of the Chairman and Managing Director to file the return of income was also one of the grounds for treating the original return as adequate for completing the assessment and ignoring the revised return filed subsequently. The statement of the Managing Director at the time of survey under section 133A was not binding on the taxpayer. There are so many decisions to hold that retraction of the statement recorded at the time of survey under section 133A as valid in law. This is because a statement recorded at the time of survey is not on oath and does not have evidentiary value [CIT v. S. Khader Khan Son [2008] 300 ITR 157 (Mad.) ; Paul Mathew & Sons v. CIT [2003] 129 Taxman 416 (Ker.)].
Dissecting the accounting policy
5. The assessee submitted that it had filed its original return relying on the first limb of the accounting policy, viz., recognizing revenue on the basis of agreement of sale and the revised return was based on the second limb of the same accounting policy, viz., 'subject to execution of conveyance and compliance of applicable legal formalities'.
The assessee submitted that when the parties had not acted upon the transactions/agreements and were cancelled by mutual agreement subsequent to filing of original return, it became aware of the wrong statement and, hence, was entitled to file a revised return under section 139(5).
Taxing real income and innocuous book entries
6. Cancellation of bookings at the end of the year could result in reversal of sale which could be given effect to in the books of account by revising the financial statements or even without such revision of books, the tax officers had to see substance over form which was a ticklish issue.
It is worth referring to the case of CIT v. Birla Gwalior (P) Ltd. [1973] 89 ITR 266 (SC) where the Apex Court referred to the famous case ofCIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 where the Apex Court observed as under:
"Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz. the accrual of income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account".
Similarly, hypothetical income, though recognized in the books of account, could not be subjected to tax was the dictum in Godhra Electricity Co. Ltd. v. CIT [1998] 225 ITR 746/[1997] 91 Taxman 351 (SC) where the increase in electricity tariff recognized in the books of account by the assessee-company was held as not chargeable to tax, since there was a long drawn out litigation and finally the assessee could not collect the same.
There was a definite substance in the argument of the assessee that events occurring after the balance sheet date when they confirm the state of affairs on the balance sheet date in spite of not giving effect in the books of account, the revenue must tax only the income and when the income had not resulted at all it could not be taxed merely on the basis of book entries.
Decision of the tribunal
7. The tribunal in Lok Housing & Construction Ltd. case held that income-tax is charged on the income, i.e., received or accrued or deemed have been received or deemed to have accrued in India to the taxpayer.
Such computation of income must be in accordance with the method of accounting regularly employed by the assessee. If the accounts are maintained under mercantile system it is necessary to see whether income has really accrued in favour of the assessee. When the agreements were cancelled it was necessary to decide whether income had really accrued to the assessee in that year?
It was held that the entries in the books of account were not conclusive of the matter. It cited the Apex Court's decision in Sutlej Cotton Mills' case (supra) where it was held that the assessee may by making entries which are not in conformity with the accounting principles, conceal profits or show loss but such entries cannot be regarded as conclusive in one way or the other. What is required is the true nature of the transaction and whether it has resulted in profit or loss to the assessee.
The objection of the Revenue as regards the entries in the books of account or revision of figures was held as not sustainable. It held that the five transactions in immovable property cancelled subsequent to filing of original return must be considered in the light of the true nature of the transactions and whether they have resulted in profit to the assessee. The bona fides of the cancellation of the agreement prompting reversal of revenue and income was not doubted or disputed and, hence, such argument was also negatived by it.
Section 2(47) not applicable to stock-in-trade
8. The last and final contentious issue was whether section 2(47) dealing with the term 'transfer' would cover 'agreement of sale' when the subject matter was stock-in-trade? The tribunal held that the agreements entered into by the assessee did not result in sale or transfer of properties which were stock-in-trade, as the title to the said properties did not pass on to the other parties and had remained with the assessee throughout.
The Madras High Court in R. Gopinath (HUF) v. Asstt. CIT [2010] 5 taxmann.com 80 held that sale/transfer of immovable property being stock-in-trade could not be equated with the transfer of capital asset and, hence, section 2(47) meant for transfer of capital asset could not be applied in the case of sale / transfer of stock-in-trade.
Conclusion
9. The decision of the tribunal discussing elaborately both concepts of accounting and tax law backed up by fund of legal decisions led one to the following conclusions:
| (a) | Section 2(47), having an elaborate definition of the term 'transfer', does not cover immovable property when it is forming part of stock-in-trade of the assessee. | |
| (b) | Entries in the books of account are not determinative of the taxability or otherwise of an item. When a transaction brings certain income, the eligibility for recognizing the same must be looked into before treating it as an income. When subject to certain conditions income could accrue in favour of the assessee satisfaction of those conditions becomes prerequisite for treating the same as income. | |
| (c) | Revision of books of account may be mandatory under some other law but under the Income-tax law, the books of account are indicative of the intention or underlying motive of the taxpayer. Regardless of such entries in the books of account taxability of a transaction is always based on the provisions of law, substance and other contextual factors. | |
| (d) | The statement recorded at the time of survey has no binding value. Hence, even after admitting to file the return at the time of survey, the assessee on valid grounds could retract the same and be taxed on the basis of the concept of real income. | |
| (e) | Legal embargo under some other law is not an impediment, so far as taxation of income and the substance of the event and transaction would decide accrual of income. Merely because the book results are adopted in the annual general meeting will not mean that the results are determined and no more variation is possible. | |
| (f) | This decision could be a trend setter for revising the book results, based on the events occurring after the balance sheet date, but such tendency would only reflect how nebulous our tax laws and the administrative procedures are. |
Regards
Prarthana Jalan
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