Accounting of Income -whether on receipts or accrual basis

The Hon’ble Income Tax Appellate Tribunal, Amritsar in the case of Income Tax Officer, Ward 1(2), Jalandhar (Appellant) vs. Mala Tandon, wife of Shri Rohit Tandon, Jalandhar having PAN : ABNPT2401J  (Respondent) being I.T.A. No.319(Asr)/2010 in connection with a query that Accounting of Income -whether on receipts or accrual basis- for Assessment year 2006-07 has held that income could arise to the assessee on receipts or accrual basis.

The judgment was passed by Mehar Singh, AM.

Accounting of Income -whether on receipts or accrual basis

Pleaders engaged for the case- Accounting of Income -whether on receipts or accrual basis:

The Income Tax Department was represented by Shri Tarsem Lal, DR and on the other hand, Assessee was represented by Shri Y.K. Sud, C.A.

Backgrounds of the appeal- whether Accounting of Income -whether on receipts or accrual basis- 

The appeal was filed by the Revenue against the order of the Ld. CIT (A), Jalandhar, dated 29.04.2010, passed under section 250 of the Income Tax Act, 1961 in connection with the assessment year 2006-07.

Grounds of appeal:

The revenue raised the following grounds of appeal before the Tribunal:

1. That, the Ld. CIT (A), erred in law in deleting the addition of Rs.13, 78,601/- and Rs.48, 000/- made towards interest on capital and remuneration from M/s. Dynamech.
2. That the Ld. CIT (A), failed to appreciate that the AO was enabled to change the profit or income during the assessment proceedings.
3. That the Ld. CIT (A), failed to appreciate that interest and remuneration had to be provided to all the partners at the rate provided in the partnership deed. If the contents of the partnership deed were ignored, the sanctity of the partnership deed would be washed away.
4. That the Ld. CIT (A), failed to appreciate that income could arise to the assessee on receipts or accrual basis. The income received on accrual basis is a deeming provision; as such the interest and remuneration accrued to the assessee could be taxed by the Assessing Officer rightly during the assessment year under consideration.

Prayer of the appellant:

The appellant, the Revenue, prayed for setting aside the order of the CIT (A) and to restore the order of the A.O.

Facts of the case: whether Income needs to be recognized on receipts or accrual basis- 

The Facts of the case were that during the assessment proceedings, the Assessing officer observed that the assessee had received a sum of Rs.43, 81,102/- as her 50% share of profit from the firm M/s. Dynamech.

However, the firm had not paid any interest to the partners though the partnership deed provided to do so at the rate of 18% per year. It was also noticed by the Assessing officer that the partnership deed of M/s. Dynamech provided for payment of remuneration of Rs.48, 000/- per year to all the partners, but no payment was made by M/s. Dynamech.

The Assessing officer believed that M/s. Dynamech had not declared the income which provided the interest and remuneration to the partners to claim higher deduction under the provisions of section 80IB of the Act on its profits.

The Assessing officer served a show cause notice upon the assessee. Upon considering the reply of the assessee, it was held that the assessee had increased its profit by not showing the interest and remuneration paid to the partners.

The provisions of section 80(1A)of the Act were invoked by the Assessing Officer and the Assessing Officer recomputed the profit and gains of the firm for the purpose of deduction under the provisions of section 80IB of the Act.

The Assessing Officer, held that interest on capital amounting to Rs.13, 78,601/- and remuneration of R.48, 000/- were both the income and added them to her total income.

Being aggrieved by the aforesaid order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT (Appeals), who allowed the same filed by the assessee.

Aggrieved with the order of the CIT (A), the Department filed an appeal before the Tribunal.

Arguments of the parties- Whether Income Needs to be considered on Accrual or Cash Basis:

The Ld. DR relied on the order of the Assessing Officer. On the other hand, the Ld. Counsel for the assessee relied on the order of the CIT (A) and reiterated the contentions made before him.

The judgment with reasoning- Income to be accounted for on Cash or Accrual Basis:

After hearing both the parties and after giving a thoughtful consideration to the rival submissions, and upon examining the facts of the case, evidence and all documents placed on record by the respective parties and after going through the orders of the lower authorities, it was revealed that the Ld. CIT (A), has adjudicated the issue in detail, after appreciation of the evidences and the facts of the case.

It was held that the impugned appellate order was well reasoned and based on the material and facts of the case.

Accordingly, this appeal of the revenue is dismissed. The order was pronounced in the open court on 14.6. 2011.

Also read: Under what circumstances can assessing officer reject the books of accounts?