INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “F”: NEW DELHI

BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER

AND
SHRI L.P. SAHU, ACCOUNTANT MEMBER

ITA No.363/Del/2015
Asstt. Year: 2010-11

ITO Paragon XT
Ward-53(3), Room No. 1509, 221-Aashirwad Complex,
E-2 Block, Civic Centre, Green Park,
Minto Road New Delhi – 110 016
New Delhi – 110 002 Vs.
PAN AAJFP8032G
(Appellant) (Respondent)

Department by: Shri Surender Pal, Sr. DR

Assessee by : None
Date of Hearing 18/02/2019
Date of 14/03/2019
pronouncement

ORDER

PER L. P. Sahu, A.M.

This is an appeal filed by the assessee against the order of Ld.

CIT(Appeals)-XXVI, New Delhi vide order dated 29.10.2014 for the

assessment year 2010-11 on the following grounds :

 “On the facts and circumstances of the case and in law the Ld.

CIT(A) erred in

1. Whether the Ld. CIT(A) has erred by allowing receipts at Cash

basis and Sundry Creditors simultaneously and thereby

deleting the addition amounting to Rs. 68,08,746/- (Rs.

63,97,422 + Rs. 4,11,324/-)

2. Whether the Ld. CIT(A) has erred in deleting addition

amounting to Rs. 81,000/- on account of disallowance of

accounting charges claimed in Profit & Loss account

3. Whether the Ld. CIT(A) has erred in Restricted disallowance of

donation amounting to Rs. 5,000/- in absence of supporting

proof

4. Whether the Ld. CIT(A) has erred in deleting addition

amounting tot Rs. 15,450/- on account of under recording of

contract payment by Rs. 15,450/-

5. The appellant crave leave to add, alter or amend any/all of the

grounds of appeal before or during the course of hearing of the

appeal.”

2. Brief facts of the case are that assessee filed return of income on

13.10.2010 declaring income of Rs. 1,63,960/-. The case was selected

for scrutiny and statutory notices were issued to the assessee. The

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assessee is partnership firm and engaged in the business of civil

construction work during the impugned year. During the year under

consideration, the assessee declared net profit at 0.38% as against

5.31% declared in the preceding year, thereby the profit declined by

4.93%. The AO noticed from the audit report that auditor has stated

that the assessee is maintaining mercantile system of accounting

whereas in the ITR –V the assessee stated that the cash system of

accounting is employed during the year and in the reply dated

10.12.2012 the assessee also submitted that the assessee is

maintaining his books of account on cash basis and bank interest is

accounted for only on accrual basis. The assessee also submitted

before the AO on 24.1.2013 that the it has adopted only cash system

of accounting since its incorporation. Ld. AO noticed that the assessee

has shown creditor of Rs. 92,14,742/- and expenditure payable Rs.

5,89,362/-. Accordingly assessee was asked as to why these expenses

should not be disallowed because assessee is maintaining cash system

of accounting. The AO observed that the assessee has changed his

stand regarding System of accounting vide reply dated 18.2.2013,

stating that the assessee maintains books of accounts on mercantile

basis but accounts of its receipts on actual receipts basis. It means

that the assessee is declaring its income on Receipt basis which is as

per Cash Accounting system and declaring its expenses as per

mercantile system of accounting. It means the assessee is following

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two method of accounting system in the year under consideration,

which is not acceptable. The two system adopted by the assessee

affect the net profit very considerably. Therefore, the AO after

deducting advance of Rs.28,17,320/- from the total creditors of

Rs.92,14,742/- received from Hooghly Holding (P) Ltd., added the

balance of Rs.63,97,422/- to the total income of the assessee.

3. On scrutiny of accounts AO further noticed that assessee

claimed accounting charges as expenditure in the profit and loss

account to the tune of Rs. 81,000/- but no TDS has been deducted by

the assessee thereon as per section 194C of the Income Tax Act.

Therefore Ld. AO disallowed this expenditure. The AO further noticed

that assessee has claimed deduction to the tune of Rs. 8,000/- in the

profit and loss account without any supporting evidence. Therefore,

the AO disallowed it being not incurred for the purpose of business

and added into the total income of the assessee. The AO further

noticed that from the TDS certificate and AIR report, the assessee has

received total contract payment from DYNA AIRCON Pvt. Ltd. of Rs.

1,65,450/- as against Rs. 1,50,000/- declared by the assessee

therefore the difference of Rs. 15,450/- was added to the income of the

assessee. Feeling aggrieved from the additions the assessee is in

appeal before the Ld. CIT(A) and the assessee has made detailed

written submissions before the Ld. CIT(A) and after considering the

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submission of the assessee, Ld. CIT(A) partly allowed the appeal of the

assessee. Feeling aggrieved from the order of the Ld. CIT(A) the

revenue is in appeal before the Income Tax Appellate Tribunal.

4. Ld. DR relied upon the order of the AO. He submitted that the

assessee has himself accepted before to have maintained books of

accounts on cash basis. No any credible evidence was produced before

the AO for substantiating that the assessee is maintaining his books

of accounts on mercantile basis. Therefore, the AO was justified in

making additions. Ld. CIT(A) has accepted the submissions of the

assessee and deleted the additions without any good reason.

5. None is present on behalf of the assessee nor any adjournment

request is received. We, therefore, have no option but to decide this

appeal exparte qua assessee.

4. After hearing to the DR we notice that the Ld. CIT(A) has

examined the issue in detail after considering the submissions of th4e

assessee and order of the AO. He has made good reasoned order

which reads as under :-

“5.2 I have carefully considered the facts of the case, submission

of the appellant and perused material on the record. Here, the
maintenance of regular books of accounts which are duly audited
is not questionable. Further, the AO has not rejected the

5
appellant's books of account. I have perused the Tax Audit Report
in Form 3CD and copy of the ROI filed before me. I find merit in
the appellant's submission that the appellant has shown
mercantile system of accounting in the ROI and as well as in the
Tax Audit Report. As per the comments in column 11(a), l1(b) and
11(d) of the Tax Audit Report in Form3CD; it appears that the
appellant's method of accounting is mercantile and there is no
deviation/change in method of accounting employed in preceding
year. Here, the appellant has admitted that it has accounted its
receipts on the basis of actual realization as there is no certainty
at the time of raising bill that how much sum is actually realizable
as it is paid after deductions on various reasons; such as
technical, error in measurement, inferior quality, etc. etc. as per
claims raised in running bills till completion of project. The
appellant submitted that accounting of receipts on the basis of
actual realization is followed to avoid reversal debit entries on
account of various deductions. Before me, it was submitted that
since there is no time lag between accrual and realization of
income; therefore, the appellant has accounted its receipts on cash
basis and expenses on mercantile basis. The Ld. Counsel, placing
on reliance on the decision in the case of Varsha G salunke Vs.
DCIT ( ITAT Mumbai ) (98 ITD 147 Mum) (TM) contended that
contract receipts may be treated accounted for on deemed accrual
basis as there is no time lag between accrual and realization of
contract receipts/income. Further, it was also submitted that since
the appellant is consistently following the same method of
accounting over the years which has been accepted, in past, by
the AO even under scrutiny in the AY 2009-10; therefore, the
accounting method may not be changed in view of principle of
consistency.

6
5.4 In cash system of accounting; the books of account are
maintained of actual receipts and actual disbursements entries
being posted when money or money's worth is actually received,
collected or disbursed, whereas in mercantile system; entries are
posted in the books of account on the date of the transaction, i.e.,
on the date on which rights accrue or liabilities e date of receipt or
payment. According to mercantile method actual cash receipts
during the year and actual cash outlays during the year are
treated in the same way as under the cash system, but to the
balance thus arising, there is added the amount of the
outstandings not collected at the end of the year and from this is
deducted the liabilities incurred or accrued but not discharged at
the end of the year. In some cases these methods may not give a
clear picture of true profits earned and certainly not of taxable
profits [CIT v. A. Krishnaswami Mudaliar; 53 ITR 122 (SC)]. It is
undoubtedly correct that the statute stipulates that the income
shall be computed on the system of accounting either cash or
mercantile 'regularly' followed by the assessee. It should mean
'during the period under consideration'. However, the provision
cannot be interpreted to mean that once a system of accounting is
adopted, it can never be changed. 'Regular' cannot in the present
context mean permanent. It has not been pointed out with
reference to any provision that a change is impermissible or
barred even when it is warranted by the existing situation. The
choice of the method of accounting lies with the assessee; but the
assessee must show that he has followed the method either cash
or mercantile regularly for its own purposes. Reliance is placed on
the decision of the Hon'ble Supreme Court in the case of McMillan
& Co. 33 ITR 182.

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5.5 The Hon'ble Supreme Court in the case of Nalinikant Ambalal
Mody v. S.A.L. Narayan Row; CIT 61 ITR 428 has held that the
section 145 is mandatory. Accordingly, the assessee, after
amendment in section 145 with effect from 01.04.1997, is bound
to maintain its books of account either on cash or mercantile
system. Mixed system of accounting, after 01.04.1997, is neither
recognized nor permitted u/s 145. The Hon'ble Supreme Court in
the case of McMillan & Co.; 33 ITR 182 has held that the AO even
when he accepts the assessee's method of accounting,is not
bound by the figure of profits shown in the account. The AO must
refer to the inherent defect in the system and record a clear
finding that the system of accounting followed by the assessee is
such that correct profits cannot be deduced from the books of
account maintained by the assessee. It is not open to the AO to
intervene and substitute a different system of accounting from the
one which is followed by the assessee, on the ground that the
system which commends to the ITO is better [CIT v. Margadarsi
Chit Funds (P.) Ltd. [1985] 155 ITR 442 (AP)]. The Hon'ble Supreme
Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT; 82 ITR
363 has held that whether the assesee is entitled to a particular
deduction or not will depend on the provision of law relating
thereto and not on the view which the assessee might take of his
right nor can the existence or absence of entries in the books of
account be decisive or conclusive in the matter. The inherent
defects in books of account found by the AO are mentioned above
in para 5.3. By reading the impugned order; it appears that the
AO has held that true profits of the appellant can not be deduced
from the appellant's books of account and thus indirectly rejected
the appellant's books of account. However, specific narration for
the same is not mentioned in the impugned order. Therefore, in

8
view of above, I am of the considered view that it is a fit case for
invoking the section 145(3) and thus I reject the appellant's books
of account. The finding of the AO in this regard is thus stand
modified to this extent. Now the next question arises here is that
how much is the income of the appellant and in what way it can
be worked out.

5.6 The next question is quantification of income. The Hon'ble

Supreme Court in the case of British Paints India Ltd. 188 ITR 44
has held as under:

"What is the profit of a trade or business is a question of fact

and it must be ascertained, as all facts must be ascertained,
with reference to the relevant evidence, and not on doctrines
or theories: "no assumption need be made unless the facts
cannot be ascertained, and then only to the extent to which
they cannot be ascertained. There is no room for theories as
to flow of costs. Minister of National Revenue v. Anaconda
American Brass Ltd. [1956J AC 85; [1956) 30 ITR 84,99
(PC).

Section 145 of the Income-tax Act, 1961, confers sufficient

power upon the officer-nay it imposes a duty upon him-to
make such computation in such manner as he determines
for deducing the correct profits and gains. This means that
where, accounts are prepared without disclosing the real
cost of the stock in- trade, albeit on sound expert advice in
the interest of efficient administration of the company, it is
the duty of the Income-tax Officer to determine the taxable
income by making such computation as he thinks fit.

Any system of accounting which excludes, for the valuation

of the stock-in trade, all costs other than the cost of raw
9
 materials for the goods-in-process and finished products, is
likely to result in a distorted picture of the true state of the
business for the purpose of computing the chargeable
income. Such a system may produce a comparatively lower
valuation of the opening stock and the closing stock, thus
showing a comparatively low difference between the two. In
a period of rising turnover and rising prices, the system
adopted by the assessee, as found by the Tribunal, is apt to
diminish the assessment of the taxable profit of a year. The
profit of one year is likely to be shifted to another year which
is an incorrect method of computing profits and gains for the
purpose of assessments. Each year being a self-contained
unit, and the taxes of a particular year being payable with
reference to the income of that year, as computed in terms of
the Act, the method adopted by the assessee has been
found to be such that income cannot properly be deduced
there from. It is therefore, not only the right but the duty of
the Assessing Officer to act in exercise of his statutory
power he has done in the in ant case, for determining what,
in his opinionis the correct taxable income.

The Tribunal's order, affirming that of the Assessing Officer,

was based on findings of fact made on cogent evidence and
in accordance with correct principles. The High Court was
clearly wrong in interfering with those findings.

Accordingly, we set aside the judgment of the High Court

and allow the appeals of the Revenue with costs
throughout."

5.7 The Hon'ble Supreme Court, in the case of Dhakeswari Cotton Mills
Ltd. reported in 26 ITR 775 held as under:

10
 "In making an assessment under section 23(3) of the Indian
Income-tax Act, the Income-tax Officer is not fettered by technical
rules of evidence and pleadings, and he is entitled to act on
material which may not be accepted as evidence in a court of law,
but the Income-tax Officer is not entitled to make a pure guess and
make an assessment without reference to any evidence or any
material at all. There must be something more than bare suspicion
to support the assessment under section 23(3)."

5.8 The Hon'ble Delhi High Court in the case of Jagjit Industries Ltd.
in ITA No. 848/2010, order dated 06.09.2010 has held as under:

"11. A Division Bench of the Gauhati High Court in CIT V. Doom

Dooms India Ltd. [1993J 200 ITR 496 (Gauhati)

12. CIT V. Guttoffnungashutto Sterkrado, [1992] 197 ITR 66

(Orissa),

CIT v. Kataria Road Lines, [2009] 316 ITR 115 (Raj.)

5.9 The Hon'ble Madras High Court in the case of CIT v. Standard
Triumph Motor Co. Ltd.; 119 ITR 573 has held that the provisions
of the section 145 are only machinery provisions and it cannot
override charging provision. The section 145(1) is only an enabling
provision to effectuate the charge. The section cannot be used for
destroying the charge to tax. It is only a machinery provision and
cannot qualify the charging section so as to make the latter otiose,
nor can it be given overriding effect so as to defeat the charge.
Here, the current year liability of expenses has been disallowed
by the AO on the reasoning that the same can not be allowed in
cash system of accounting in the relevant AY. The corollary to this
finding is thus that the expenditure should be allowed in the year
of payment. In case the AO's reasoning is accepted that the

11
expenses have to be allowed only on payment basis, then in
principle, the liability of expenses as on 31.03.2009 paid in the
relevant AY, in principle, have to be allowed in the relevant year.
However, the AO has not allowed it. Allowing the liability of
expenses of as on 31.03.2009 which was paid in the relevant AY
2010-11 as expenses in this year would amount to double
deduction because it goes against the accounting principle as well
as Income Tax Act as the expenses which were allowed in the AY
2009-10 on accrual basis could not be allowed again in the
relevant AY on payment basis. On same analogy, the appellant's
contention for exclusion of contract receipts accrued in the
preceding year (as TDS was claimed in that year/preceding year)
offered for tax in the relevant AY on actual receipt basis appears
convincing if the AO's finding is accepted as such subject to
taxation of such contract receipts in the preceding year. However,
such exercise has not been done by the AO. Since liability of
expenses as on 31.03.2009 has been allowed in the AY 2009-10
or prior to that on accrual basis and contract receipts accrued in
the AY 2009-10 have not been offered for tax in the AY 2009-10;
therefore, the AO's action in not allowing liability of expenses as
on 31.03.2009 paid in the relevant AY as expense in the relevant
AY vis-a-vis not excluding contract receipts accrued in the
preceding year offered for tax in the relevant AY on actual receipt
basis is held justified though theoretically it looks quite attracting.

5.10 I have considered the entire issue in-depth and come to

conclusion that in case the expenses shown payable in the
relevant year are disallowed in this year, then the same have to
be allowed in subsequent year on payment basis as the
genuineness of expenses are not in dispute. Similar stand has to
be taken in case of contract receipts also' in case the mercantile

12
system of accounting is strictly followed. Then, such exercise also
requires to be done in preceding years; to reopening of the
assessment of preceding years since the appellant's existence
from AY 2008-09. However, it will go against the ratio laid down
by the Hon'ble Supreme Court in the case of British Paints India
Ltd. (supra) wherein the Hon'ble Supreme Court has not allowed
the valuation of opening stock on principle on which the closing
stock was valued. In case the appellant's contention is accepted
then its cases for the AY 2008-09 and 2009-10 have to be
reopened. Similarly, the assessments of subsequent years also
have to be reopened as per the law. Without prejudice to finding
herein after the AO is free to reopen the appellant's assessments
for preceding and subsequent years in accordance with the law.

5.11 After considering facts of the case in entirety and particularly

(i) non-allowance of liability of expenses as on 31.03.2009 paid in
the relevant AY as expense in the relevant AY, (ii) non-exclusion of
contract receipts accrued in the preceding year offered for tax in
the relevant AY on actual receipt basis (iii) inclusion of mobilization
advance in the relevant AY and (iv) inclusion of contract receipts
accrued in the relevant AY but received in the subsequent AY, I am
of the considered view that the AO has not truly & strictly
followed the cash system of accounting. By disallowing the
current year liability of expenses in the relevant AY & allowing it
in the year of payment and excluding contract receipts accrued in
the preceding year offered for tax in the relevant AY & taxing
advance contract receipts accrued/received in the relevant year;
at most, there may be some gain of interest u/s 234B and 234C
with consequential payment of. interest u/s 244A though it is a
revenue neutral exercise over the years as the genuineness of
either the contract receipts or expenses are not questionable. The

13
decision in the case of Varsha G salunke (98 ITD 147) deals
various aspect of the matrix of this case and thus finding of the
Third Member therein is held applicable here. The relevant portion
of this decision (98 ITD 147) reads as under:

"THIRD MEMBER ORDER Shri G. E. Veerabhadrappa, Vice-

President. – There being a difference of opinion between the
Members constituting the Division Bench, the Hon'ble
President has referred, under section 255(4) of the Income
Tax Act, 1961, the following point of difference to me as a
Third Member to resolve the controversy:

"1. Whether in the facts and circumstances of the case, the

learned Commissioner of Income Tax (Appeals) is justified in
confirming the addition of Rs.2,96,460.92 ps., made by the
assessing officer in respect of 3 TDS certificates pertaining to
the period 1-4-1996 to 31-3-1997 issued to the assessee by
RCF ?"

2. The facts in brief are the assessee, an individual, was

carrying on the business of providing security and
housekeeping services to different clientele. the assessment
year involved is 1997-98. There is no dispute that the
assessee was following mercantile system of accounting for
reporting the income for the purpose of assessment.

3. During the assessment proceedings the assessing officer

found that the business receipts, as per the TDS certificates
submitted by the assessee along with his return of income,
was to the extent of Rs.1,06,15,995 whereas the receipts
credited to the profit & loss account was only to the extent of
Rs.95,19,657. The assessee was asked to explain the
difference. The assessee explained the difference by
14
providing a reconciliation statement, except in respect of
three TDS certificates received for the services rendered to
Rashtriya Chemicals & Fertilizers (RCF hereinafter after
referred to as), Chembur. The details of the certificates as
also the amounts credited are as under:

Date of credit Amount credited TDS 9-4-1997 2,46,268

4,925 3-4-1997 8,954 179 21-4-1997 41,239825. The
assessee explained that the aforesaid three receipts were
not included in his income for the assessment year 1997-98
on the reasoning that these TDS certificates were received
after the close of the relevant previous year ending on 31-3-
1997. The assessing officer included the actual billed
amounts as per the TDS certificates to the declared income
and has also allowed the credit of tax deducted at source
amounting to Rs. 5,929. The Commissioner of Income Tax
(Appeals) confirmed the action of the assessing officer.

4. It was contended before the Tribunal that the assessee

was raising the bills against his clientele for the services
rendered in a month only in the succeeding month and on
that basis the bills in respect of the services rendered in
March 1997 were placed only in the month of April 1997.
Accordingly, the receipts corresponding to services rendered
in March, 1997 have been credited in the accounts of the
succeeding assessment year. The learned counsel submitted
that this method has been consistently followed by the
assessee. The assessee has already included the receipts
for twelvemonths in the accounts for the year under
consideration and by adding the receipts for March, 1997
the assessing officer would be considering the receipts of

15
thirteen months in the assessment for the year under
consideration. The learned Accountant Member in his
proposed order accepted the claim of the assessee after
having found satisfied with the method of accounting
consistently employed by the assessee. However, the
learned Judicial Member was of the view that the assessee
has claimed credit for tax deducted at source in assessment
year 1997-98 whereas, in fact, the amounts received were
offered for taxation in the succeeding assessment year. He
opined that in the light of the provisions of sections 198 and
199 of the Act, the action of the assessee is not justified.
According to the learned Judicial Member, section 198 of the
Act provides that all sums deducted under Chapter XVII are
required, for the purpose of computing the income of the
assessee to be deemed to be the income received and,
therefore, the tax deducted at source has to be treated as
income received in the assessment year 1997-98 itself. The
learned Judicial Member further opined that according to
section 199 of the Act, the credit for tax deducted at source
is required to be given for the amount so deducted on
production of the certificate furnished under section 203 of
the Act in the assessment made under this Act for the
assessment year for which such income is assessable.
According to him, a bare perusal of section 199 of the Act
shows that credit for tax deducted as source is required to
be given in the assessment in which the income relating
thereto is assessable. The assessing officer having allowed
credit for tax deducted at source in the assessment year
1997-98, it is undisputable that the income referable to that
credit should also be brought to tax in the same assessment

16
year and in no other assessment year. According to the
learned Judicial Member, section 199 of the Act prohibits the
credit for tax deducted at source to be given in an
assessment year different from the one in which the income
relating thereto is assessable. The learned Judicial Member
further opined that the system of accounting cannot defeat
the express provisions of law contained in section 199 of the
Act, which mandate that credit for tax deducted at source
shall be given for the assessment year in which the income
relating thereto is assessable. According to him, the Hon'ble
Supreme Court in Tuticorin Alkali Chemical & Fertilizers
Ltd.'s case (supra) has held that income-tax law does not
march step by step in the divergent foot prints of the
accountancy profession. The learned Judicial Member
further observed that having claimed corresponding
expenditure under mercantile system of accounting, the
assessee cannot defeat the taxability of the income on the
ground that he has not raised the bills. According to him,
this is a case where the assessee has executed the work,
received the benefit of tax deducted at source and was also
allowed expenditure in executing the said work.

Therefore, the assessee cannot, in the opinion of the learned

Judicial Member turn around to say that corresponding
income is not taxable. He, therefore, upheld the order of the
assessing officer. The expression of different opinions on
this matter has brought before me the question as
abstracted above.

5. I have heard both the sides extensively and have

carefully gone through the records. On the facts, both the

17
learned Members are clear. The difference is the result of
understanding the exact purpose and intent of the
provisions of sections 198 and 199 of the Income Tax Act,
1961. On the method of accounting consistently followed by
the assessee for billing, there is absolutely no difference. I,
therefore, take up the provisions of sections 198 and 199 of
the Act by extracting the same under as applicable to the
assessment year under consideration:

Both the sections viz., 198 and 199, fall within Chapter XVII
of the Income Tax Act, 1961 which are titled as "Collection
and Recovery-Deduction at source". In other words, these
are machinery provisions for effectuating collection and
recovery of the taxes that are determined under the other
provisions of the Act. In other words, these are only
machinery provisions dealing with the matters of procedure
and do not deal with either the computation of income or
chargeability of income. The basis of charge of income to tax
in the case of business income is provided in section 28 of
the Act. The computation provisions of sections 28 to 43A
deal with the assessment of profits and gains of business.
In computing the income from business or profession, the
method of accounting followed by the assessee becomes
relevant. After all, the profits and gains of business or
profession carried on by the assessee should be computed
in accordance with the method of accounting regularly
followed by the assessee as provided in section 145(1) of the
Income Tax Act, 1961. In fact, the words "Profits and Gains"
referred to in sections 28 and 29 of the Act deal with only
commercial profits as understood in the commercial parlance
as held by Lord Halsbury in Gresham Life Assce. Soc. v.

18
Styles 3 TC 185 (HL) "in its natural and proper sense - in a
sense which no commercial man would misunderstand".
This principle has been approved by the Privy Council in
Pondicherry Railway Co. Ltd. v. CIT 5 ITC 363, and by the
Supreme Court in Badridas Daga v. CIT (1958) 34 ITR 10,
Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC) and CIT v.
BaiShirinbai (K) Kooka (1962) 46 ITR 86. The profits
mentioned herein are the real profits and they must be
ascertained on ordinary principles of commercial practice
and commercial accounting. Therefore, the assessee's
method of accounting becomes relevant for determining the
income from the conduct of any business or exercise of any
profession. The assessee, in this case, is rendering security
and house keeping services to various clientele such as UTI,
RCF, HOFC, etc.The deductibility of any expenditure
incurred by an assessee depends upon the method of
accounting followed by him. The assessee, in this case, is
following mercantile system of accounting. All expenses, to
which liability is accrued in the accounting year, are
deductible as business expenditure. In the same manner all
business receipts will have to be determined on the basis of
method of accounting employed by the assessee. Unless the
assessee renders services for the entire month, it is not open
to him to raise the bill upon his clientele. In other words,
some of the services rendered in March 1997 will have to be
necessarily billed after the close of the month which falls
outside the accounting year under consideration and, in fact,
the assessee has billed the same immediately after the close
of the accounting year, in the month of April 1997 which is
subsequent to the previous year for the year under

19
 consideration and has treated the same as part of business
receipts for the next assessment year. I do not think that
there is any flaw in this method of accounting regularly
employed by the assessee and accepted by the department
from year to year in the past. After all, the TOS certificates
which are again dated and received in the months
subsequent to the accounting year cannot be accounted in
the assessment year under consideration, which has
already been closed; It is not necessary for the assessee to
account those receipts by re-opening the books of account of
the earlier year because the assessee himself has raised the
bills in the subsequent month after the close of the
accounting year in question. Therefore, it is incorrect on the
part of the revenue to workout any addition, on the basis of
the bills subsequently raised, in the accounting year which
has already passed wherein according to the method of
accounting employed by the assessee, such receipts have
not been recognized as part of business profits.

6. Sections 198 and 199 of the Act nowhere provide for an

exception either to the determination of the income under the
aforesaid provisions of sections 28, 29 or as to the method of
accounting employed under section 145 of the Act, which alone
could be the basis for computation of income under the
provisions of sections 28 to 43A of the Act. Section 198 has a
limited intention. It only declares the amounts deducted at
source under sections 192 to 194, section 194A, section 194B,
section 194BB, section 194C, section 194D, section 194E,
section 194EE, section 194F, section 194G,section 194H,
section 1941, section 194J, section 194K, section 195, section
196A, section 196B, section 196C and section 196D to be

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treated as an income received. The purpose of section 198 is
not to carve out an exception to section 145 of the Act. Section
199 of the Act has two objectives - one to declare the tax
deducted at source as payment of tax on behalf of the person
on whose behalf the deduction was made and to give credit for
the amount so deducted on the production of the certificate in
the assessment made for the assessment year for which such
income is assessable. The second objective mentioned in
section 199 is only to answer the question as to the year in
which the credit for tax deducted at source shall be given. It
links up the credit with assessment year in which such income
is assessable. In other words, the assessing officer is bound to
give credit in the year in which the income is offered to tax. This
section 199 does not empower the assessing officer to
determine the year of assessability of the income itself but it
only mandates the year in which the credit is to be given on the
basis of the certificate furnished. In other words, when the
assessee produces the certificates of TDS, the assessing officer
is required to verify whether the assessee has offered the
income pertained to the certificate before giving credit. If he
finds that the income of the certificate is not shown, the
assessing officer has only not to give the credit for TDS in that
assessment year and has to defer the credit being given to the
year in which the income is to be assessed. At the cost of
repetition, it may be mentioned that sections 198 and 199 do
not in any way change the year of assessability of income,
which depends upon the method of accounting regularly
employed by the assessee. They only deal with the year in
which the credit has to be given by the assessing officer. It
cannot be disputed that according to the method of accounting

21
 employed by the assessee the income in respect of the three
TDS Certificates, which are mentioned in paragraph 3 above,
does not pertain to the assessment year in question, but it
pertains to the next assessment year and, in fact, in that year
the assessee has offered the same to tax. Therefore, the credit
in respect of these three TDS Certificates shall not be given in
the assessment year under consideration, but the credit for the
same shall be given in the next assessment year in which the
income is shown to have been assessed.

7. In the light of the above discussions, I agree with the reasoning

given by the learned Accountant Member, who has correctly
directed the exclusion of the income represented by these three
TDS Certificates from being assessed in the assessment year
1997-98, i. e., the year under consideration, But the assessee,
in the light of the scheme of the provisions of sections 198 and
199 of the Act, shall not be allowed to claim the credit in
respect of these TDS Certificates for which the income has not
been returned by her as a result of the method of accounting
employed. The credit shall be carried forward and the assessee
will get the credit for the present TDS Certificate in the year in
which she offers the income to tax 00_ the basis of the method
of accounting regularly employed.

8. Before parting with the matter, I think it is necessary for me to

deal with certain observations regarding the claiming of the
expenditure as discussed by the learned Judicial Member. The
claim of deduction for an expenditure depends upon again the
method of accounting regularly employed by the assessee.
There is no dispute that the assessee has incurred these
expenses even in respect of the services rendered to its clientele

22
 in the month of March, 1997 (to which the bills are not raised).
These expenses have been undoubtedly incurred during the
previous year in question. Only the matching receipts have not
accrued to the assessee in the accounting year in question due
to the method of accounting employed by her. But over the
years, the effect on the profit & loss account gets neutralized.
Sections 198 and 199, it may again be stressed, do not in any
way determine the year of assessability of profits and gains of
business. They only deal with the year in which the TDS
Certificates have to be given credit to. In my humble opinion,
the decision of the Hon 'ble Supreme Court in the case of
Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) relied upon
by the learned Judicial Member, does not in any way alter the
year of assessability of income, which is governed under
sections 28, 29 and 145 as has been interpreted by the Apex
Court and as discussed by me above.

A. The appellant also get support from the judgement passed in

the case of M/s. Maruti Securities Ltd Vs Addl. Commissioner
of Income Tax, Range-16, Hyd, (468/Hyd/2009), relevant
portions are reproduced as under:-

"21. We have considered the rival submissions and perused the

impugned orders of the Revenue authorities and other material on
record. We have also gone through the written submissions filed
and the decisions relied upon by the parties before us. We are of
the opinion that to arrive at a real income, accrual basis cannot be
a justifying factor and the commercial and business realties of the
assessee, should be considered. The interest income has been
recognized in the books of accounts only to the extent of actual
collection, which is the recommended/ recognized method as per

23
Accounting Standard 9 of ICAI which lays down that when
uncertainties exist regarding the determination of the amount or
its collectability, the revenue shall not be treated as accrued and
hence shall not be recognized until collection. The recognition of
revenue on accrual basis presupposes the satisfaction of two
conditions-

(a) The revenue is measurable

(b) The revenue is collectable with certainty.

The interest income has been admittedly recognised only on

receipt basis. The contention of the revenue that the loan
agreements have interest clause permitting the assessee to charge
interest at the rate of 14% is not tenable. The terms of the
agreements, which enabled the assessee company to demand
interest were only enabling provisions and those enabling
provisions did not guarantee the collection of overdue interest.
They only gave a cause of action to the applicant.

22. The method of accounting, as followed by the assessee, does

not create any income; but the method of accounting only
recognizes income. There is some merit in the submission of the
assessee that when the principal itself is overdue and not
collected, there is no basis for making out a case that interest
income would be collectable with certainty. Even where an
assessee is following the mercantile system of accounting, it is
only accrual of real income which is chargeable to tax, that
accrual is a matter to be decided on commercial belief having
regard to the nature of business of the assessee and character of
the transaction. Accordingly, for the purpose of determining
whether there has been accrual of real income or not, recourse is
to be made to ascertain the nature of business and character of
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the transaction and the realities and peculiarities of the situations.
The decision very heavily relied upon by the first appellate
authority in the case of State Bank of Travancore Vs CIT (1986)
158 ITR 102 was subsequently overruled in its land mark decision
in the case of UCO Bank Vs CIT 237 ITR 889. In this regard, we
place reliance on the ratio laid down by various judicial
authorities on the proposition that the income cannot be taxed on
hypothetical basis, and it is only the real income that is to be
brought to tax. In this behalf, we also rely, giving below summary
of the ratio laid down, on the following decisions) CIT vs. Godhra
Electricity Co. 225 ITR 746 (SC), The view expressed was that if
income does not result at all, there cannot be any tax and that if
an income has not materialized, then merely an entry made about
a hypothetical income by following book keeping methods, the
liability to tax cannot be attracted.

[Emphasis in the above submission is provided by me.]

5.12 In view of above discussion and case law reported in 98 ITD

147, I do not find any justification in changing the entire
accounting method of the appellant on cash basis as it will result
in a distorted picture of true state of the business for the purpose
of computing the chargeable income unless reopening of preceding
and subsequent assessment years are not done; though it is
revenue neutral exercise over the years in case all contract
receipts are offered for tax and expenses have been genuinely
claimed over the years. After considering the entire comments in
column l1(a) to 11(d) of the Tax Audit Report in Form-3CD and the
fact that receipts were not certain till bill is cleared as there is
chances or deductions out of the billed amount on various
accounts as mentioned above; I am of the considered view that the

25
appellant has maintained its books of account on deemed
mercantile system of accounting in case of contract receipts as
there is no time lag between accrual and receipt of income.
Definitely, both income and expenditure have to be accounted for
on one system of accounting; cash or mercantile. However, neither
the AO nor the appellant has strictly followed either cash or
mercantile system of accounting.

5.13 In view of above and following the ratio laid down by the
Hon'ble Supreme Court in the cases of Excel Industries Ltd. (Date
of order 09.10.2013), Radhaswami satsang 193 ITR 321,
Parshuram Pottery 106 ITR 1 and British Paints (supra) and the
Hon'ble Delhi High Court in the case of Jagjit Industries Ltd. in ITA
No. 848/2010; I am of the considered view that the appellant's
income can be deduced properly from mercantile system as it will
not result distorted profit. Accordingly, I order so. Accordingly, it is
held that the disallowance of current year liability of expenses
aggregating to Rs. 68,08,746/- (Rs.63,97,422/- plus Rs
4,11,324/- as per para 5 and 6 of the impugned order) is not
justified. Consequently, the disallowance of Rs.68,08,746/- is
deleted. The AO shall give consequential relief.”

6. The next issue is regarding disallowance of accounting charges

of Rs.81,000/-.The AO disallowed it holding that the appellant
has not deducted tax at source as per the section 194C. However,
the appellant's contention is that it is nothing but payment of
salary to the Accountant and thus, it is in the nature of salary and
not in the nature of contractual payment u/s 194C. The Ld.
Counsel contended that the appellant is not required to deduct tax
at source as per the provision of section 192; hence, the
disallowance is not justified. I have carefully considered the facts

26
 of the case, submission of the appellant and perused material on
the record. I find merit in the appellant's submission and
therefore, the disallowance of Rs.81.000/- is hereby deleted. The
AO shall give consequential relief.

7. The next issue is regarding disallowance of donation of Rs.

8,000/- The AO disallowed it holding that the appellant has failed
to substantiate its claim. However, the appellant filed proof of
donation of Rs.3,000/- only before me; which is found in order
being donation given to Helpage India by account payee cheque.
Accordingly, the disallowance of donation is restricted to
Rs.5,000/-. The AO shall give consequential relief.

9. The last issue is regarding disallowance of purchase of iron of

Rs.15,450/-. The AO disallowed it holding that there is difference
in contractual receipts as per the 26AS. The Ld. Counsel argued
this issue by reiterating the content of his submission. The
relevant portion thereof is reproduced here under:

''That the AO has proceeded to make addition on this

account without understanding the entire entry. This amount
pertains to labour charges amounting to Rs. l,50,000/-, on
which the appellant has charged a sum of Rs.15,450/- as
service tax, total invoice being Rs.1,65,450/-. This amount of
Rs.1,65,450/- was paid by the concerned party (M/s. Dyna
Aircon (P) Ltd). The entry of service tax has not been
considered by the AO and deserves to be deleted. Copy of
account of M/s. Dyna Air-con is enclosed herewith. "

5. From the above order of the Ld. CIT(A) we notice that Ld. CIT(A)

has discussed all issues in detail as noted above and we find no

infirmity in the order of the Ld. CIT(A). The assessee has produced

27
credible evidence before the Ld. CIT(A) that he had maintained regular

books of accounts on mercantile basis for the accounting purpose, as

is clear from the tax audit report submitted before CIT(A) which could

not be controverted by the Ld. DR. From the above finding it is also

clear that assessee has recorded the expenses / revenue on mercantile

basis therefore the AO is not justified to make additions regarding

creditors for expenses(63,97,422 + 4,11,324). Further we notice that

the payment to accountant has been explained by the assessee before

the Ld. CIT(A) that it is in the nature of salary and therefore, the

payment of Rs. 81,000/- is under the limit for deducting TDS on the

salary. In respect of donation also, the ld. CIT(A) has rightly sustained

the disallowance of donation to the extent of Rs.5000/- out of

Rs.8,000/- for want of evidence. We, therefore, find no infirmity in the

impugned order on this score. Further in respect of Rs.15,450/- on

account of difference in Form No. 26AS. The assessee has rightly

explained by the ld. CIT(A) and Rs.15,450 was a service tax on

account of supply of labour to M/s. Dyna Aircon Pvt. Ltd. which has

been separately accounted for. Therefore, we do not find any

justification to interfere with the order of ld. CIT(A) on this issue.

28
6. In the result appeal of the revenue is dismissed.

Order pronounced in the open court on 14.03.2019.

sd/- sd/-

(AMIT SHUKLA) (L.P. SAHU)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 14/03/2019
Veena
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi

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