IT: Where only an invoice had been raised and work had not even commenced it did not constitute income for that year since revenue recognition on completion of certain milestone of work is an accepted method in mercantile system of accounting
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[2013] 33 taxmann.com 264 (Bangalore - Trib.)
IN THE ITAT BANGALORE BENCH 'C'
Davis Langdon & Seah Consulting India (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Circle 11(1)*
N.V. VASUDEVAN, JUDICIAL MEMBER
AND JASON P. BOAZ, ACCOUNTANT MEMBER
AND JASON P. BOAZ, ACCOUNTANT MEMBER
IT APPEAL NO. 1190 (BANG.) OF 2011
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
DECEMBER 21, 2012
Section 5 of the Income-tax Act, 1961 - Income - Accrual of [Revenue recognition] - Assessment year 2008-09 - Assessee claimed an amount received during relevant assessment year as an advance - Revenue disallowed claim on basis that assessee had been consistently following mercantile system, therefore, amount should have been shown as revenue in year of raising invoice, that is, assessment year 2008-09 - Whether, where only an invoice had been raised and work had not even commenced it did not constitute income for that year since revenue recognition on completion of certain milestone of work is an accepted method in mercantile system of accounting - Held, yes [Para 6.5][In favour of assessee]
Section 133A of the Income-tax Act, 1961 - Survey [Effect of documents found] - Assessment year 2008-09 - Whether where, on basis of documents, information etc., found in course of survey, audited books of account could be totally disregarded - Held, no [Para 5.1][In favour of assessee]
FACTS
| ■ | The profit and loss account found during survey showed an amount of Rs. 72 lakhs as income for the relevant assessment year 2008-09, which was not shown in the return filed by the assessee. | |
| ■ | The assessee claimed that it was an 'advance' received during the relevant assessment year and had been shown as revenue in the subsequent year. | |
| ■ | The Assessing Officer, relying on the document found during survey concluded that entire amount of Rs. 72 lakhs was to be treated as income for the relevant assessment year. | |
| ■ | The Commissioner (Appeals) observed that assessee had been consistently following the mercantile system of accounting and, therefore, the said amount should be accounted as revenue in the year of raising invoice, that is, assessment year 2008-09. | |
| ■ | The assessee contended that the amount was shown as an advance in the audited books of account and further, contended that it is a regular trade practice to receive an advance at the time of signing the contract when the work has not even commenced and the revenue is to be recognized only when the work has progressed to a specified percentage. | |
| ■ | In the instant appeal the question arose at to whether amount of Rs. 72 lakhs was to be shown as income in relevant assessment year as held by revenue or in subsequent assessment year as submitted by the assessee. |
HELD
| ■ | A survey action under section 133A is conducted by the Assessing Officer in order to gather information for ascertaining the correct income eligible to tax in the case of an assessee. The findings that emerge from a survey action are a good indicator for understanding the real affairs of the business of an assessee. To that extent, the documents/information etc. found in the course of survey form an important part of evidence that can be utilized by the Assessing Officer to determine the correct income of the assessee. However, it does not automatically follow that the evidence found/collected in the course of survey is absolutely conclusive and has to be followed without proper examination/verification. Further, it cannot be the case that solely on the basis of documents/information etc., found in the course of survey action, the audited books of account can be totally disregarded. The assessee ought to be afforded adequate opportunity to explain the findings of the survey to reconcile the differences, if any, between the findings of the survey vis-à-vis the corresponding details in return of income. [Para 5.1] | |
| ■ | It was not in dispute that the assessee was consistently following the mercantile system of accounting. The mercantile system of accounting requires the person to account for its income and expenses on an 'accrual' basis rather than on actual basis. When the income accrues is a matter of fact that would depend upon the system of accounting regularly followed by the assessee. Merely because an invoice has been raised for a particular amount, it does not automatically become 'income' in the year of raising of the invoice. Recognition of income/revenue recognition based on certain milestones of work completed is an accepted method of accounting and it would also fall within the realm of mercantile system of accounting. Merely because a document found in the course of survey reflected the total invoice amount of Rs. 72 lakhs as part of 'revenue' for the year ending 31-3-2008, it would not be in the fitness of things to ignore or brush aside the audited books of account on the basis of which the return of income is filed only because the same amount is treated as an 'advance'. In these circumstances, the authorities below ought to have examined the claim of the assessee that the revenue recognition done in respect of this particular invoice is as per the system of accounting regularly followed by the assessee and whether the system of revenue recognition as a percentage of work completed is as per the accepted method of accounting. It was found that the authorities below have neither examined this issue nor brought on record any evidence to show that the assessee's proposition is incorrect. It was also seen that the assessee had claimed that the amount in question of Rs. 72 lakhs has been offered to tax in the subsequent year,i.e., the period relevant to assessment year 2008-09 which claim too, had not been examined by the authorities. In these circumstances in the interest of equity and justice, this issue was remanded back to the file of the Assessing Officer for examination of the claim of the assessee in the light of the facts on record, the views of the authorities below, submissions of the assessee and above observations. [Para 6.5] | |
| ■ | In the result appeal of the assessee is allowed for statistical purpose. |
B.N. Sudarshan for the Appellant. A. Sundar Rajan for the Respondent.
ORDER
Jason P. Boaz, Accountant Member - This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-I, Bangalore dated 12.09.2011 for Assessment Year 2008-09.
2. The facts of the case, in brief, are as under :
2.1 The assessee company (hereinafter referred to as 'the assessee') is in the business of Quality Surveying Services, providing the estimation of expenditure of already completed or partially completed or to be commenced works of civil constructions and electrical installations. It filed its return of income for Assessment Year 2008-09 on 24.9.2008 declaring income of Rs.5,75,68,722. In the case of the assessee, a survey action under section 133A of the Income Tax Act, 1961 (herein after referred to as 'the Act') was conducted at its business premises on 31.3.2008. In the course of survey, a document was found containing the computation of profit and loss for the F.Y. 2007-08 in which the net profit for the said period was Rs.6,57,08,388. A sworn statement of Mr. Lorimer A Doig, Director of the assessee was also recorded at the time of survey in which he stated that while the turnover for the year ending 31.3.2008 was approx. Rs.17 to 18 Crores and the net profit is around Rs.6 to 7 Crores. In the course of assessment proceedings the Assessing Officer called upon the assessee to explain the difference/shortfall of Rs.81,39,668 i.e. between the net profit of Rs. 6,75,61,800 reflected in the profit and loss account found in the course of survey on 31.3.2008 and the net profit of Rs.5,94,22,132 declared in the profit and loss account filed along with the return of income for Assessment Year 2008-09. The assessee stated that consultancy charges booked at Rs.17,72,25,886 in the profit and loss account found at the time of survey were inflated as it included a wrongly reported amount Rs.72,00,000 which was transferred to advances and an invoice having value of Rs.10 lakhs was reversed and that this reconciled the differences in the figure of net profit as was reflected at the time of survey vis-à-vis the net profit in the return of income for the relevant period. This explanation put forth by the assessee did not find favour with the Assessing Officer, who was of the view that the profit shown in the document found in the course of survey was conclusive and added the difference of Rs. 81,39,668 to the assessee's income thereby determining the income of the assessee at Rs.6,57,08,388 in the order of assessment for Assessment Year 2008-09 passed under section 143(3) of the Act on 29.11.2010.
2.2 The assessee was aggrieved by the order of assessment for Assessment Year 2008-09 dt.29.11.2010 and carried the matter in appeal before the CIT (Appeals). The CIT (Appeals) agreed with the findings of the Assessing Officer and dismissed the assessee's appeal by his order dt.12.9.2011.
3.1 Aggrieved by the order of the learned CIT (Appeals) dt.12.9.2011, the assessee is now before this Tribunal. In the grounds raised in this appeal the assessee contends as under :
| 1. | The learned CIT (A) I has simply and merely gone by the Assessing officers order without considering the facts and documents produced before him, without verifying the veracity and correctness of the figures shown in the Audited Balance sheet and appreciating the facts and substance of the case. | |
| 2. | The survey was conducted on 31/03/2007 at 11 clock in the morning and even if the records are maintained on minutes basis one full day was left for accounting entries. This fact is not considered by the assessing officer. How can the A O expect the company to close its books of its account in the morning. | |
| 3. | The A O failed to recognize the basis of accounting certain expenses on accrual basis and especially for the year ending where certain expense details are to come from various quarters and provision need to be made for expenses incurred but not paid as on a particular day. The AO has overlooked the basic accounting policy on accrual basis and proceeded on cash system of accounting. We would like to further state that the assessee had 4 branches at that time and had to wait for the details from branches for finalizing accounts. | |
| 4. | The CIT has not appreciated the fact that rectification of mistakes is part of life and that the accounts are audited subsequent to last day of March of any year and any mistake pointed out by auditor needs to be recognized by the company and correct it's books accordingly. If everything is accepted as shown on a particular day, then there was no need for audit of accounts and other statutory obligations. | |
| 5. | The AO has not gone in to the substance and nature of entries. Instead simply gone by the form, letters and words mentioned. | |
| 6. | The CIT has not discussed the documents/evidences presented before him in the order and has not rejected the documents. CIT did not appreciate the fact that the AO has not considered the technical reports to establish when the work was started and when it was completed. The Director of the company was present in the hearing once to explain the details and the officer refused to hear him and get further details. | |
| 7. | Given an opportunity we can prove that the amount received from Aliens Group is an advance and an income. | |
| 8. | Regarding the travelling expenses AO has not verified the bills though the company in its letter to the AO that it is ready to furnish voucher/ documents and arbitrarily disallowed the expenses. It is a fact that the directors and other employees who take up foreign tours and pay the amount through the credit cards take about 1 to 1/ ½ months for submitting bills and can be paid only after they come to office. We are ready to submit all the bills for verification. | |
| 9. | The assessee submits that the disallowance made by the CIT(A) I be rejected and pass necessary orders to give relief from payment of Rs 29,85,090 and restore the justice. | |
| 10. | The assessee be allowed to produce proof of advance and travelling expenditure vouchers at the time of hearing. | |
| 11. | The assessee preys the tribunal to allow the assessee to file revised return for the assessment year 2009-10 as the income has been recognized in that year in case the appeal is dismissed. Otherwise the assessee will be made to pay tax twice on the same income, which is against the principles of Justice. | |
| 12. | The assessee be allowed to give any other grounds that may be available at the time of hearing. |
3.2 We have heard both the learned Authorised Representative and learned Departmental Representative and carefully perused and considered the material on record.
4. On perusal of the grounds raised, this appeal involves the following issues :
(i) Whether the document found in the course of survey carried out on 31.3.2008, depicting the net profit for the year ending 31.3.2008 at Rs.6,75,61,600 is conclusive evidence and can be relied upon, in preference to the audited final accounts as appended to the return of income for Assessment Year 2007-08.
(ii) Whether or not the reporting of Revenue of Rs.72 lakhs by the assessee is as per the mercantile system of accounting and
(iii) Whether the expenditure of Rs. 10 lakhs on travel of the Director has not been properly reported in the return of income for Assessment Year 2008-09.
5.1 A survey action under section 133A of the Act is conducted by the Assessing Officer in order to gather information for ascertaining the correct income exigible to tax in the case of an assessee. The findings that emerge from a survey action are a good indicator for understanding the real affairs of the business of an assessee. To that extent, the documents/information etc. found in the course of survey form an important part of evidence that can be utilsied by the Assessing Officer to determine the correct income of the assessee. However, it does not automatically follow that the evidence found/collected in the course of survey is absolutely conclusive and has to be followed without proper examination/verification. Further, it cannot be the case that solely on the basis of documents/information etc found in the course of survey action, the audited books of accounts can be totally disregarded. The assessee ought to be afforded adequate opportunity to explain the findings of the survey to reconcile the differences, if any, between the findings of the survey vis-à-vis the corresponding details in return of income.
5.2 In the instant case, it is a matter of record that the assessee had neither disputed nor disowned the veracity of the document reflecting the net profit of Rs. 6,75,61,800 for the year ending 31.3.2008. It is the contention of the assessee that -
| (i) | the amount of Rs. 72 lakhs which was shown as Revenue relating to one particular invoice and reflected in the net profit of Rs. 6,75,61,800 for the year ending 31.3.2008 in the document found in the course of survey, is in fact an "advance" received during this year and has been reflected/shown as "revenue" in the subsequent year and | |
| (ii) | that certain travel expenditure of Rs. 10 lakhs pertaining to the Directors travel relating to the relevant period ending on 31.3.2008 was not booked in the document found in the course of survey action. |
These changes, it is submitted, have been effected in the books of account of the assessee after the survey action on 31.3.2008 and the net profit of Rs. 5,96,22,132 declared in the return of income for Assessment Year 2008-09 filed on 24.9.2008 is as per the audited books of account after incorporating these two changes.
6.1 As regards the issue of revenue reporting, the assessee in the relevant period had raised an invoice bearing No.1130/239 dt.31.1.2008 for Rs. 72 lakhs on M/s. Alliance Group Infra Pvt Ltd., Hyderabad towards professional fees. This amount of Rs. 72 lakhs was reflected in the document found in the course of survey and formed part of the net profit of Rs. 6,75,61,800 reflected therein for the year ending 31.3.2008. It is however seen that this amount of Rs. 72 lakhs is shown as an "advance" in the return of income for Assessment Year 2007-08 filed on the basis of the audited books of account reportedly as per the advice of the statutory auditors. It is the submission of the assessee that this amount of Rs. 72 lakhs has been declared as income and applicable tax liability was discharged during the subsequent year viz. Assessment Year 2009-10.
6.2 The issue boils down to whether the amount has to be shown as income in the year under consideration viz. Assessment Year 2008-09 as held by the authorities below or as income of the subsequent year in 2009-10 as submitted by the assessee.
6.3 We find from the records that the Assessing Officer has relied on the document found during survey on 31.3.2008 to come to the conclusion that the entire amount of Rs. 72 lakhs has to be treated as income in the year under consideration, relevant to Assessment Year 2008-09 only. The learned CIT (Appeals) while aggreeing with the Assessing Officer's reliance on the document found during the survey, has also observed that the assessee has been consistently following the mercantile system of accounting and hence the entire amount of Rs. 72 lakhs has to be accounted as Revenue in the year of raising the invoice viz. Assessment Year 2008-09.
6.4 Per contra, the assessee's contention is that it is a regular trade practice to receive the advance amount at the time of signing the contract when the work has not even commenced and the Revenue is to be recognized only when the work has progressed to a specified percentage. It is also submitted that Revenue recognition is based on technical reports as to when the work commenced and when it was completed. In support of this proposition, the assessee submits that it has produced before the authorities below confirmation from the client evidencing that the payment of Rs. 72 lakhs received represented "advances". In written submission filed on 31.10.2012 the learned Authorised Representative has submitted as under :
"An amount of Rs 72,00,000 + service tax was billed on a customer Allians Group. This being 10% of advance on signing the document. It is an Industrial practice to collect 10% of the total project on signing the contract. This is just to make sure the client is serious enough to do business. In case for some reason the project is shelved before the beginning of the contract work, the Advance amount is subject to refund. Against 72,00,000 only 15,00,000 was received before 31/03/2008.
Please find attached in Annexure 1, the copy of the Invoice No 294 dated 31/01/2008 wherein it is clearly mentioned the amount is for Advances-confirmation of appointment.
It is practice of the company to treat such amounts as Advances till such time the actual work begins and then treat as income.
In the subsequent year on 30/09/2008, the said invoice for Rs 72,00,000 is reversed and an amount of Rs 14,15,023 is accounted as income, as the party did not agree to pay the balance. Please refer to Annexure II for the proof of cancellation and fresh accounting.
The Assessing officer has treated a transaction as income amount of which has not been received fully and subsequently the contract getting cancelled only on the basis that it was treated as income as on 31.03.20008 ie the day of Survey without actually going in to the merits and independently establishing whether it was an Advance or income. With this the assessee has lost an opportunity to reverse the income in subsequent year and the tax levied on this is unjustified.
The Appellant has mentioned that it was an error of accounting and the same was rectified at the time of Audit after the mistake was pointed by the Statutory Auditor based the accounting standard and practices for Revenue Recognition.
All the relevant documents have been produced before both the Assessing office and the Learned CIT appeals (1).
We request the Honourable Bench instill the justice by allowing the Appellant to treat the amount as Advance as on 31/03/2008."
6.5 It is not in dispute that the assessee is consistently following the mercantile system of accounting. The mercantile system of accounting requires the person to account for its income and expenses on an "accrual" basis rather than on actual basis. When the income accrues is a matter of fact that would depend upon the system of accounting regularly followed by the assessee. Merely because an invoice has been raised for a particular amount, it does not automatically become "income" in the year of rising of the invoice. Recognition of income/revenue recognition based on certain milestones of work completed is an accepted method of accounting and it would also fall within the realm of 'mercantile system of accounting.' Merely because a document found in the course of survey reflected the total invoice amount of Rs. 72 lakhs as part of 'revenue' for the year ending 31.3.2008, it would not be in the fitness of things to ignore or brush aside the audited books of accounts on the basis of which the return of income is filed only because the same amount is treated as an "advance". In these circumstances, the authorities below ought to have examined the claim of the assessee that the revenue recognition done in respect of this particular invoice is as per the system of accounting regularly followed by the assessee and whether the system of revenue recognition as a percentage of work completed is as per the accepted method of accounting. We find that the authorities below have neither examined this issue nor brought on record any evidence to show that the assessee's proposition is incorrect. It is also seen that the assessee has claimed that the amount in question of Rs. 72 lakhs has been offered to tax in the subsequent year i.e. the period relevant to Assessment Year 2008-09 which claim too, we find, has not been examined by the authorities below. In these circumstances, we are constrained, in the interest of equity and justice, to remand this issue back to the file of the Assessing Officer for examination of the claim of the assessee in the light of the facts on record, the views of the authorities below, submissions of the assessee and our observations in paras 6.1 to 6.5 above. It is ordered accordingly.
7. Disallowance of expenditure on travel
7.1 One of the explanations put forward by the assessee in its attempt to reconcile the difference between the net profit as on 31.3.2008 reflected as per the document found in the course of survey and the net profit as per the return of income filed on the basis of audited books of accounts was that certain travelling expenses amounting to approx. Rs. 10 lakhs incurred by the Director was not fully accounted as on the date of survey. It is contended by the assessee that though the Director had incurred the expenses in the F.Y. 2007-08 relevant to Assessment Year 2008-09, the bills thereof were submitted after 31.3.2008 and since they relate to the period under consideration, these expenses have been accordingly accounted in that year. It is also submitted that since the details/bills of these expenses were not available at the time of survey, these expenses did not find a place or mention in the document found during the survey. Before us, in written submission, it was submitted as under :
"An amount of Rs.9,39,668 representing the difference between expenses accounted as on the date of survey (which was on 31st morning March, 2008 and the audited figures, has been disallowed.
By doing this the Assessing Officer has ignored the audited balance sheet signed by a professional chartered accountant. The Assessing Officer should have rejected the entire books of account and made an independent assessment of the income. The Assessing Officer ought to have examined the genuineness of the transaction independently instead of relying on the survey report, the appellant has submitted all the vouchers, ledger extracts etc to prove the genuineness of the transaction. The Assessing Officer has ignored all these. In the case of travelling expenditure one of the Directors had incurred foreign travel expenses amounting to Rs. 10.49 lakhs. He had returned to office only on that day and hence had not submitted the bill. The payments for these expenses were made through his credit card. Hence there was no urgency of submitting the bill also.
It is quite natural and accepted accounting principle to make provision for expenses as on the year ending date based on the bills received subsequently and related to March or earlier period of the accounting year. As such on 31st March so many entries will be passed though the bills are received subsequently. It is surprising that the Assessing Officer expects all expenses including provision for expenses for which even the bills would not have been received to be accounted on morning of the day of closure of the accounting year. It is highly unjustified."
7.2 The Assessing Officer disallowed the Directors travel expenses on the ground that the assessee had merely filed the ledger account thereof and has not proved that the same were not fully accounted for at the time of survey. The learned CIT (Appeals) while sustaining the disallowance made by the Assessing Officer observed :-
" …. During the course of survey, the persons present did not give an iota of inkling about such travel by the director and it is strange that the director of such prompt company would fail to claim so belatedly. This is against the principle of preponderance of probability and a ploy to explain the balance deficiency."
7.3 From the discussion above and the material on record, we find that both the Assessing Officer and the learned CIT (Appeals) doubted the genuineness of the expenditure incurred on travel of Director. No clear finding has been given as to what was the expenditure that was accounted for at the time of the survey and after the end of the financial year; what were the supporting documents called for by the authorities; what documents were produced/submitted by the assessee and whether these documents support the claim of the assessee that these are business expenditure. Merely because the said expenditure was booked after the last date of the financial year, does not make the expenditure as not genuine. The Assessing Officer ought to have examined the veracity of the claim by verification of the supporting documents to determine whether they were allowable business expenditure; but did not do so and summarily rejected the assessee's claim which is unsustainable. In view of the facts and circumstances, as laid out above, we, in the interest of justice and equity remand this issue back to the file of the Assessing Officer for examination of the assessee's claim in the light of the facts on record, the submissions made and our observations in paras 7.1 to 7.3 above. It is ordered accordingly.
8. In the result, the appeal of the assessee is allowed for statistical purposes.
ESHA*In favour of assessee.
Regards
Prarthana Jalan
__._,_.___
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