Method of accounting can be changed if such change is bona fide, scientific, accurate and complies with statutory requirements of AS-9 and S.5 of the Act:

AO, on finding that the assessee had changed the method of accounting during the year under consideration, took a view that on account of such change, assessee had shown less profit and hence, he made addition in respect of the same which came to be deleted by CIT(A) and ITAT. On Revenue’s appeal, Hon’ble High Court observed that the CIT(A), while deleting the said addition, found that earlier, assessee used to account for “advances received from sponsors” as income and “expenses incurred on such projects” as expenditure in the very same year irrespective of the fact whether the said project was completed or not in the said year. However, during the year under consideration, the new method of accounting adopted was such whereby advances received and expenses incurred only in respect of completed projects were accounted for in P&L a/c whereas advances and expenses in respect of incomplete projects were shown in B/S under the head “Advances” and “Work-in-progress” respectively. Such change in method of accounting was bona fide, more accurate and scientific. It was in line with the statutory requirements of AS-9 on “Revenue Recognition and Section 5 of the Income-tax Act. Hence, the new accounting system was permissible under the law. Also, AO had neither pointed out any defect in the books of accounts, nor established that that on account of change in method of accounting, assessee’s profit cannot be deduced. Hence, rejection of such method of accounting was not sustainable and consequently, the impugned addition was deleted. The said order was confirmed by ITAT and even Hon’ble High Court held that ITAT’s order didn’t require any interference. Accordingly, Revenue’s appeal was dismissed.

[CIT vs. Mapin Publishing Pvt. Ltd. – Tax Appeal No.902 of 2013]

Penalty u/s 271(1)(c) cannot be levied on disallowance made u/s 40(a)(ia) by invoking legal fiction:

AO levied penalty u/s 271(1)(c) on disallowance made u/s 40(a)(ia). Hon’ble ITAT observed that the assessee had debited expenses in respect of payments made to C & F agents. However, tax was not deducted at source while making such payments since the assessee was under a bona fide belief that no TDS was required to be made on the same because such payment was in the nature of reimbursement and no element of income was involved in the same. It wasn’t towards any services rendered by such agents. It was further observed that such expenses were duly debited in P&L a/c. The concerned disallowance was made on account of difference in opinion as to applicability of TDS. AO had not alleged that the said payment was non-genuine, bogus, excessive or unreasonable. Disallowance u/s 40(a)(ia) was made by merely invoking the legal fiction. It was thus held that disallowance u/s 40(a)(ia) will not attract penalty for furnishing inaccurate particulars of income. Accordingly, the penalty was deleted. Reliance was also placed on the decision of the Hon’ble Apex Court in the case of “CIT vs. Mother India Refrigeration Pvt. Ltd. – 155 ITR 711 (SC)” wherein in was held that legal fictions are created for some definite purpose and the same must be limited to that purpose and should not be extended beyond that legitimate filed.

[M/S. ELECTRO POWER ENGINEERS Vs. ACIT – ITA No.2153/Ahd/2010]

Penalty u/s 271(1)(c) cannot be levied on income disclosed by an assessee at the time of moving application u/s 273A before CIT:

AO levied penalty u/s 271(1)(c) on long term capital gain (LTCG) declared by the assessee. Hon’ble ITAT observed that such LTCG was not declared in the original return of income, but was declared subsequently along with application u/s 273A before CIT for waiver of penalty to be levied u/s 271(1)(c). Alongwith the said application, assessee filed revised computation of total income duly reflecting such LTCG arising on sale of ancestral property. On the basis of the said information, AO reopened the assessment and computed the income on the basis of return of income filed by the assessee in pursuance to notice issued u/s 148. Thereafter, penalty was levied on such LTCG. AO did not detect any concealment while framing the assessment. Rather, the assessee himself had declared the LTCG arising on such land transaction. Department came to know about income from such land transaction only after the same was disclosed by the assessee. It was established that failure to disclose correct income did not arise from any fraud or any wilful negligence on his part and hence, the penalty was deleted.

[PARESH CONTRACTOR Vs. ITO – ITA Nos.2125 to 2127/Ahd/2010]

Trust can claim depreciation on assets even if cost of such assets has been allowed as deduction on account of it being application of income:

AO disallowed depreciation on assets claimed by the assessee-trust on the count that the entire cost of such assets had been allowed as a deduction on account of it being application of income. He was of the view that allowing the claim of depreciation on such assets shall tantamount to double deduction. Hon’ble ITAT was of the view that allowing such a claim of depreciation shall not lead to double deduction since allowing exemption u/s 11(1) in respect of cost of acquisition of asset is not akin to allowing deduction of any expenditure for the purpose of computing income. In fact, it is an incentive provision that extends benefit of exempt income to a trust to the extent of cost of such assets. Income of a trust remains the same only. Revenue’s contention that allowing claim of depreciation will result into cash surplus being available with the assessee that goes outside the books also has no legs to stand because even if claim of depreciation is allowed, it has no impact on cash availability with the assessee. Further, income of a trust has to be computed on commercial principles. Accordingly, it was held that claim of depreciation is allowable on such assets.

[ITO Vs. SARDAR PUBLIC CHARITABLE TRUST – ITA Nos.285 & 286/Ahd/2013]

Sales tax refund received by the transferee of the business subsequent to transfer of entire business cannot be taxed u/s 41(1) in the hands of transferor:

AO made addition u/s 41(1) in respect of sales tax refund. Hon’ble ITAT observed that the appellant-firm had, during the year under consideration, transferred all its assets and liabilities to M/s. Hemraj Trading Co. (HMT) and the said sales tax refund was received by HMT subsequent to such transfer. Earlier, Hon’ble ITAT had set aside the said matter to the file of AO with a direction to tax the said sum in the hands of the assessee only if such sales tax refund has been given by HMT to the partners of the appellate-firm. In the second round of litigation, the partners of the assessee-firm had placed their affidavits before AO stating that they haven’t received such refund. Still, AO made the said addition which was confirmed by CIT(A). It was thus held that the addition so made was against the directions of the Hon’ble ITAT and hence, the same was deleted. However, the Hon’ble ITAT stated in its order that the revisionary authorities under the sales tax realised their mistake and had demanded such refund back from HMT along with interest. Further, the said matter was under litigation. Hence, in case such refund was received by partners of the appellant-firm, then AO shall be free to proceed as per law.

[VIRAJ TRADING CO. & ORS. Vs. ITO – ITA Nos.2588 to 2590/Ahd/2010]

No addition can be made in respect of on-money merely on the basis of third party’s statement recorded u/s 131(1A) and certain notings on rough papers found at third’s premises during search:

AO made an addition in respect of on-money paid by the assessee towards purchase of a land which was deleted CIT(A) and ITAT. On Revenue’s appeal, Hon’ble High Court observed a search was conducted at the premises of a third party and certain notings on rough papers were found. AO also recorded statement of a third party u/s 131(1A). On the basis of such statement and the said notings, AO made the impugned addition. There was no material or evidence that any on-money was paid by the assessee. Further, the said land had a registered document and the value had been accepted by the registered authority for the purpose of stamp duty. AO had also not referred the matter to DVO for determining the market value of the said land as of the date of registration. Even the statement of the said third party was a self-serving statement without any supporting evidence. In light of the above, ITAT held that such third party evidences could not be a base for the impugned addition and deleted the same. Hon’ble High Court didn’t find any error in ITAT’s order. Consequently, Revenue’s appeal was dismissed.

[CIT vs. Kantibhai Revidas Patel – Tax Appeal No.910 of 2013]

No addition can be made u/s 2(22)(e) if after merging all the accounts of the concerned company maintained by the assessee, the final balance is Nil:

AO made addition u/s 2(22)(e) in respect of loan advanced to the assessee by the Pvt. Company in which he had substantial interest. Hon’ble ITAT observed that the assessee maintained four separate accounts of the said company in his books viz. Current account, Deposit account, Share investment account and Loan account. AO, on perusal of the loan account, found that assessee had withdrawn certain sum on various dates through cheques from the said company and at the end of the year, assessee transferred money from his current account and deposit account to the loan account and hence, balance of the loan account was Nil at the year end. Thus, AO worked out the loan advanced by the company to the assessee and made the impugned addition u/s 2(22)(e) as deemed dividend. It was further observed that after merging all the four accounts maintained by the assessee, the final balance was Nil. It was thus held that, on the whole, the assessee did not owe any money to the company and hence, it cannot be said that the assessee had taken any loan or advance from the said company. Hence, question of any deemed dividend doesn’t arise at all. Accordingly, the impugned addition was deleted.

[ACIT Vs. SHRI CHUNILAL HARIBHAI GAJERA – ITA No.1497/Ahd/2012]