THE issues before the Bench are - Whether when an assessee follows the mercantile system of accounting, it has the freedom to follow the receipt system merely to account for VAT refunds; Whether any income by way of cash incentive accrues to an assessee at the time of filing of the claim in this respect and Whether method of accounting of refund claims can be changed in case there is a procedural delay in release of refund by the Revenue authorities. And the answers to all the questions go against the assessee.
Facts of the case
Assessee concern had been consistently following the receipt method of accounting in respect of the refund of VAT arising to it. Accordingly, the refund of Rs. 22,74,136, pertaining to AYs. 2005-06 & 2006-07, received during the relevant year, was credited in its accounts, and duly
returned as income for the current year. The CIT, however, was of the view that the assessee following mercantile method of accounting, the refund of VAT, which for the current year was in the sum of Rs.25,15,287, was omitted to be accounted for by the assessee for the current year and, thus, there was an escapement of income to that extent. The assessment was, thus erroneous and prejudicial to the interest of the Revenue. For this, AO drew support from the auditor’s report u/s.44AB wherein the auditor had by way of a note stated that the VAT refund claimed from the sales-tax authorities had been, on account of the uncertainty as to its receipt as well as the time thereof, not been accounted for as income. This had been, the assessee’s regular practice from year to year, so that no adverse inference there-from ought to had been derived by the revisionary authority. The second objection raised by him was in respect of non following the prescription of section 145A; the assessee admittedly following exclusive method of accounting, though to not effect, even as established by it before the assessing authority in the proceedings pursuant to impugned section 263 order, placing a copy of the said order on record, whereby no addition stood made by the AO after issuing a finding that there was no impact on the profits disclosed following the exclusive method of accounting as against the inclusive method as mandated by section 145A. On the other hand, DR had submitted that firstly there was no reference whatsoever in the assessment order to both these aspects of the assessee’s assessment. Non-application of mind by the AO, apart from an incorrect assumption of fact/s or an incorrect application of law, would satisfy the requirement of an order being erroneous. In the instant case, the law stands amended by Finance Act, 1995, w.e.f. 01.04.1997, so that in terms of section 145, as substituted thus, there was no scope for the assessee to follow a mixed system of accounting qua its income u/s.28 or 56. Accordingly, the income assessable either as profits or gains from business or profession or from other sources, was to be computed in accordance with either cash or mercantile system of accounting as being regularly employed. The assessee was admittedly following mercantile method of accounting, so that no infirmity could be said to attend the objection as raised by the CIT. With regard to the second objection, the law again provides for no exception, and the assessee is required to return its income following the prescription of section 145A, i.e., by following an inclusive method of accounting. The CIT had not rendered any specific findings in the matter, but only remitted the matter back to the file of the AO with a direction to frame the assessment afresh after verifying the facts and examining the relevant aspects of the assessment. Further, the phrase ‘prejudicial to the interest of the revenue’, was again of wide import, and not confined to a mere loss of tax, which in fact exists in the instant case inasmuch as the income to this extent had remained to be brought to tax. In rejoinder, it was submitted by AR that an order, for being subject to revision, ought to be also prejudicial to the interest of the Revenue, i.e., apart from being erroneous. No prejudice thereto in the instant case had been shown to be caused by the Revenue, or had in fact been actually caused, inasmuch as the refund under reference had been received in a subsequent year and offered to tax, for which the tax rate remains the same.
Having heard the matter, Tribunal held that,
++ even as clarified by the Bench during the hearing, and as also sought to be highlighted in her arguments by the DR, it is impermissible for the assessee to follow cash method of accounting in respect of the sales tax/VAT refund due to it; it admittedly following mercantile method of accounting. As such, in terms of s. 5 r/w s. 145, income becomes chargeable to tax when the assessee acquires the right to receive such income. In fact, apart from the auditor’s report, to which reference has been made by the CIT, the notes to the assessee’s accounts itself state that the sales-tax (VAT) paid on purchases amounting to Rs.25.15 lakhs and, thus, included in the cost of the purchases, is, though refundable from the Sales Tax Department, not taken as income as the same is subject to acceptance by the Sales Tax Authority. At this stage, we may clarify that the issue of accrual of income (or expenditure for that matter) is a matter of fact. If, as claimed, there is uncertainty - a matter of fact - with regard to the acceptance of its claim, no income can be said to have accrued to the assessee. However, merely making a bald claim, without substantiating or showing the ground/s for the existence of uncertainty in its respect, the same cannot be entertained, so as to hold that there is, as a matter of fact, no accrual of income. The assessee has throughout completely failed to exhibit the uncertainty that it claims to have prevailed, and which weighed with it in deferring the recognition of the said income, i.e., in its accounts. The assessee is rather, it is apparent, following the same, i.e., the said procedure, as a matter of course, regularly accounting for the VAT refund only upon receipt, and which, as explained, cannot hold in view of section 145 proscribing (w.e.f. A.Y. 1997-98) a mixed method of accounting in preference to a pure, i.e., either cash or mercantile, method of accounting; ++ the apex court in the case of CIT vs. Punjab Bone Mills [2001] 251 ITR 780 (SC) clarified that income by way of cash incentive accrued to the assessee at the time of filing of the claim in its respect (with the concerned authority). We have already noted that the assessee has not stated any factual reason/s with regard to the uncertainty that is stated to exist with regard to the claim for VAT refund. Once, therefore, a valid application for refund is submitted with the authorities in accordance with the law, following the prescribed procedure, the assessee is entitled to believe that its claim would be accepted. The procedural delay in signifying the acceptance of the claim, or the actual refund, which could be delayed for various reasons, and which the AR was at pains to impress upon us, would we are afraid be of little moment. Again, the fact that the income stands to be returned in another year by the assessee, which is a matter subsequent, would be to no effect. This is as income has to be subject to, notwithstanding it being returned for another year, tax in the right year; each year being an independent unit of assessment. Going by the assessee’s argument, it would not make any difference if the assessee were to disclose any income, or claim any expenditure for that matter, either on cash or mercantile basis, irrespective of the year for which it is exigible as per the method of accounting adopted, rendering the same as of no consequence. In fact, where the difference in income followed a consistent though incorrect method of valuation of closing stock, so that its effect neutralized in the succeeding year, the argument was found not valid by the apex court in CIT v. British Paints India Ltd. (2002-TIOL-796-SC-IT). The direction by the CIT, therefore, for including the amount of VAT refund accrued to it is to be upheld. We decide accordingly;
++ again, on the second aspect, the fact that the assessee has been before the AO able to exhibit that no difference to its returned income arises when reckoned in terms of section 145A, would not in any manner undermine the jurisdiction or the validity of the revisionary order on that score. The CIT could have examined the said issue himself, and it is quite within his competence to direct the AO to examine the assessee’s case, as stands done by him. In fact, all his order shows is that the issue had not been verified at the time of the assessment proceedings and, accordingly, directs the AO to pass a fresh order upon due verification and in accordance with the law. As such, on the merits of both the objections, we find the revisionary order as sustainable in law. In fact, the non-application of mind in the matter by the assessing authority, which is evident qua both, would itself render his order liable for revision. The AR during the proceedings also raised an issue with regard to the invalidity of the revisionary proceedings inasmuch as the proposal u/s.263 was moved by DCIT and, further, forwarded by the Addl. CIT. Even as explained during hearing, we are unable to find the basis of the assessee’s claim. The show cause notice u/s. 263 in the instant case has been issued by the CIT under his hand. Further, the objections raised by him are with reference to the material on record, including the assessment order. Under these circumstances, how could the legal competence of the CIT in initiating the revisionary proceedings, or the charge of the non application of mind at his end, hold? Once the authority issues a show cause notice under his signature, it is to our mind quite irrelevant as to how the proposal was first mooted. It is the CIT who has issued the show cause notice, and which rather than showing a non-application of mind, exhibits a clear application of mind by him in the matter. That he chooses to be assisted in the matter, or has sought administrative assistance for the purpose, is to no effect. The assessee’s objection would, to our mind, be thus to no avail. The decisions quashing s. 263 proceedings on the ground of non application of mind by the revisionary authority, relied upon by the assessee before us, would be of no avail in view of our clear finding of fact as to application of mind by him, and in fact, on both the issues. We decide accordingly.
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