I-T - Reduction of sales figure in sales ledger by following AS-9 accounting standard is unlawful when an entry in ledger is made according to mercantile system of accounting: ITAT
By TIOL News Service
BANGALORE, MAR 08, 2019: THE ISSUE IS - Whether reduction of sales figure in the sales ledger by following AS-9 accounting standards is unlawful, when an entry in the ledger is entered according to the mercantile system of accounting. YES IS THE VERDICT.
Facts of the case
The assessee company is engaged in the business of rendering counselling and consultation services in the form counselling to employees of the clients' organization. Upon filing the return, the case was selected for scrutiny. During the asessment proceeding, the AO noted that assessee had sou motu reduced the sales figure in the sale ledger. Explaining such reduction, the assessee submitted that the counselling services provided to the clients was intangible in nature, the assessee recognizes accrual of income only when the bills are raised on the clients for services rendered. This explaination was rejected by the AO holding that such reduction was not permissible in law and addition was made.
The CIT(A) upheld the findings of the AO and the addition. The appellate authority held that the assessee followed a mercantile system of accounting and was therefore bound to recognize revenue on the basis of accrual. Once income had accrued, the assessee cannot suo motu refuse to recognize revenue on the pretext that it follows proportionate completion method as per AS-9 of ICAI. Therefore, the Revenue can be recognized only when services are substantially rendered by the assessee and when the bills are raised. Assessee appealed.
On appeal, the Tribunal held that,
++ the only issue that arises for consideration is whether the revenue authorities were justified in making the addition. It is clear from the submissions made before the CIT(A), that there was accrual of income as per the mercantile system of accounting when the first entry is passed. The second and third entry are explained as entries which are passed in tune with Accounting Standard-9 issued by ICAI. AS-9 deals with accounting standards for recognition of income. AS-9 has not been notified u/s.145 and hence does not have statutory force. AS-9 cannot be said to be either Cash system or Mercantile system of accounting but has trappings of both cash system or mercantile system. The assessee follows mercantile system of accounting and therefore under the Act, the AO is empowered and bound to compute income in accordance with the mercantile system of accounting. There is no dispute that under mercantile system of accounting, debit of value of services was not because of non-accrual of income but only because bills were not raised on the customers for value of services which had already accrued. The fact that bills were not raised does not stop accrual of income under the mercantile system of accounting. Therefore the claim of the assessee, purely based on AS-9, is not sustainable. The action of the Revenue in making the addition was justified;
++ the concept of value of service for the purpose of levy of service tax and total income for the purpose of levy of income tax are different and are determined on relevant statutory provisions applicable. However, to make it clear, the income recognition of which was postponed by the assessee by following AS-9 cannot be regarded as income in the AY in which it is offered to tax by the assessee because the law is well settled that same income cannot be taxed twice. The burden will however be on the assessee to show as to how the income offered in a later AY was income which was not recognised in earlier AY by reason of application of AS-9. Subject to these observations, appeal by assessee is dismissed.
(See 2019-TIOL-605-ITAT-BANG)
