ITA No.367/2004 & 296/2006 Page 1 of 42 REPORTED * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No. 367/2004 M/s. Devsons Pvt. Ltd. ..... Appellant Through: Mr.O.S. Bajpai, Sr. Advocate, with Mr. V.N. Jha, Advocate. versus Commissioner of Income Tax and Ors. ..... Respondents Through: Mr. Sanjeev Sabharwal, Advocate. AND + ITA No. 296/2006 Commissioner of Income Tax ..... Appellant Through: Mr. Sanjeev Sabharwal, Advocate. versus M/s. Devsons Logistics Pvt. Ltd. (earlier known as M/s. Devsons Pvt. Ltd.) ..... Respondent Through: Mr.O.S. Bajpai, Sr. Advocate, with Mr. V.N. Jha, Advocate. % Date of Reserve : August 17, 2010 Date of Decision : November 19, 2010 CORAM: HON’BLE MR. JUSTICE A.K. SIKRI HON'BLE MS. JUSTICE REVA KHETRAPAL 1. Whether reporters of local papers may be allowed ITA No.367/2004 & 296/2006 Page 2 of 42 to see the judgment? 2. To be referred to the Reporter or not? 3. Whether judgment should be reported in Digest? : REVA KHETRAPAL, J. 1. These appeals relate to the assessment year 1995-96 and was admitted to hearing on 20th March, 2006 when the following substantial questions of law were framed for consideration: - ITA No. 367/2004 “1. Whether the Income-tax Appellate Tribunal was right in law in holding that there was, in the facts and circumstances of the case, a change in the method of accounting introduced by the assessee without any justifiable reasons? 2. Whether finding recorded by the ITAT that there was no evidence regarding payment of ` 36,17,980/- by the assessee to the sub- contractor in connection with the execution of the garbage collection work is perverse? ITA No. 296/2006 “1. Whether the ITAT was correct in law in deleting the penalty of ` 36,07,220/- imposed by the Assessing Officer under Section 271 (1) (c) of the Income Tax Act, 1961?” ITA No.367/2004 & 296/2006 Page 3 of 42 2. The necessary facts available on the record are that the appellant derives income as a contractor with the Jaipur Municipal Corporation (hereinafter referred to as „the JMC‟) for lifting the garbage from the walled city of Jaipur and had filed its return of income on 30th November, 1995 declaring the total income of `4,50,317/- for the year under consideration. The appellant had shown gross receipts from JMC at ` 81,90,784/-. From the details of the bills submitted by the appellant, however, the Assessing Officer concluded that the total receipts of the appellant from JMC were ` 1,17,39,415/- as against ` 81,90,780/- as shown by the appellant. The Assessing Officer also concluded that the appellant had declared receipts on the basis of the amount actually received which was contrary to the system of accounting maintained by the appellant, viz., the mercantile system. Accordingly, the Assessing Officer made an addition of ` 35,39,631/- to the total receipts of the appellants and enhanced the income of the appellant by such amount as undisclosed income. The Assessing Officer also made a further addition of ` 36,17,979/- on account of sundry creditors appearing in the books of ITA No.367/2004 & 296/2006 Page 4 of 42 the appellant. The Assessing Officer noted that the assessee had engaged the services of petty contractors for clearing the garbage in the city, but the payments to these contractors, though due, was not made ,but with respect to these petty contractors, the assessee had claimed deductions. The Assessing Officer issued notices under Section 133(6) of the Act to these parties, which were received back with the remark of “Incomplete address”. The Assessing Officer apprised the appellant of this position on March 17, 1988 and required the appellant to furnish confirmations from these trade creditors. Further opportunities were provided to the appellant to furnish the addresses of the aforesaid sundry creditors on 19th March, 1998 and 24th March, 1998. On 24th March, 1998, the assessee- company expressed its helplessness to furnish the information given the paucity of time. The Assessing Officer did not accept the credit standing in the names of the aforesaid persons and added the same to the income of the appellant to the extent of ` 36,17,979/-. 3. In first appeal, the Commissioner of Income Tax (Appeals) deleted the addition of ` 35,39,631/- and found that the appellant had ITA No.367/2004 & 296/2006 Page 5 of 42 been maintaining the accounts of income receivable from JMC on the basis of the bills submitted and approved by JMC after making various deductions as per the contract. This system of accounting had been regularly followed by the appellant and accepted by the Department since 1990. The CIT(A) also observed that there was a dispute between the appellant and the JMC on account of the non- determination of the amounts due to the appellant and on the writ petition of the appellant such matter had gone up to the Rajasthan High Court, which eventually was decided against the appellant. On facts, the CIT(A) found that on an accrual basis the appellant had actually overstated rather than understated its income for the period under consideration. 4. On the second issue of the non-confirmation of the sundry creditors, the CIT(A) was pleased to delete the addition of ` 36,17,979/- on the basis that the factum of rendering of services by the sub-contractors was not in dispute and the appellant had meticulously maintained log books for each sub-contract, which were duly verified and authenticated by JMC. These log books were ITA No.367/2004 & 296/2006 Page 6 of 42 shown to the A.O. during the assessment and produced before the C.I.T. The latter accordingly held that the onus that lay on the appellant had been discharged and therefore the addition of ` 36,17,979/- was totally unwarranted. 5. Against the order of the First Appellate Authority, the Department preferred an appeal before the Income Tax Appellate Tribunal (for short „ITAT‟). The ITAT reversed the order of the CIT(A) on both counts by its order dated 4th February, 2004. As regards the addition of ` 35,39,631/- the ITAT held that during the period under consideration, the appellant had changed its method of accounting and such change was not bonafide. The Tribunal found that the appellant, despite the fact that that he had been maintaining the accounts on mercantile system, had declared the receipts from the JMC on the basis of the amounts actually received. The Tribunal observed that though it is the prerogative of a party to maintain accounts in the manner it likes, but the assessee cannot be at liberty to change his system of accounting at the drop of the hat, at his whims and fancies. ITA No.367/2004 & 296/2006 Page 7 of 42 6. As regards the addition of ` 36,17,980/- on account of sundry creditors, the Tribunal observed that it was unable to agree with the findings of the CIT(A) which had deleted the addition on the ground that the onus cast upon the appellant of proving the factum of rendering services by the 8 sundry creditors of the appellant stood discharged. The Tribunal observed that from the judgment of the Rajasthan High Court passed by the Division Bench in Special Appeal (Writ No. 686/1995) arising from the order dated 20th September, 1995 passed by the Single Bench in Civil Petition No. 2816/1995, the facts that emerged are that there was not only a dispute between the JMC and the appellant with regard to the execution of the works but also with regard to the plying of the requisite number of trucks for the removal of garbage. This led the Tribunal to conclude that there was a dispute in respect of the services having been rendered by such contractors and if there was a dispute with regard to the execution of the work, the only thing the appellant was required to do was to prove it by cogent evidence, “which in this case could be either persons who had executed the works or officers ITA No.367/2004 & 296/2006 Page 8 of 42 of the Jaipur Municipality.” The mere filing of a log book, the Tribunal observed, was not sufficient to discharge the onus laid upon the appellant and, therefore, the CIT(A) had committed a serious mistake by deleting the additions made by the Assessing Officer. The Tribunal, therefore, set aside the order of the CIT(A) and restored the order of the Assessing Officer. 7. The appellant filed an appeal before this court sometime in January‟04 against the order of the ITAT which was dismissed for non-prosecution on 16th July, 2004. 8. By an order dated 30th September, 2004, passed under Section 271 (1) (c) read with Section 274 of the Income Tax Act, 1961, the Assessing Officer imposed a penalty of ` 33,07,220/- by invoking the provisions of Explanation 1 to Section 271 (1) (c) on the ground that the assessee had concealed the particulars of his income and furnished inaccurate particulars. The CIT(A) by an order dated 30th December, 2004 confirmed the penalty imposed by the Assessing Officer. However, on second appeal the ITAT by its order dated 29th July, 2005 deleted the penalty imposed by the Assessing Officer on ITA No.367/2004 & 296/2006 Page 9 of 42 the ground that no “satisfaction” was recorded by the AO in the assessment order before initiating penalty proceedings. On facts, the ITAT held that the assessee could not be said to have concealed its income or furnished inaccurate particulars thereof. The assessee had itself placed the details of the total bills raised against the Jaipur Municipal Corporation, according to which the total receipts of the assessee company for the financial year 1994-95 was ` 11,73,945/-. The amount deducted from this amount by the JMC as not payable to the appellant was, however, not declared by the appellant as its income. The non-acceptance of these particulars stated by the AO did not amount to concealment of income. Regarding penalty in respect of the balance outstanding in favour of the sundry creditors, the ITAT observed that the addition was made by the AO on the ground that the appellant was not able to prove the same. However, the credit outstanding against the same creditors was accepted by the AO in subsequent years and therefore no penalty could be levied. Since the additions were made only on account of divergent views taken with regard to the material on record, it was unsafe to conclude ITA No.367/2004 & 296/2006 Page 10 of 42 that the appellant was guilty of concealment of income or of furnishing inaccurate particulars thereof. 9. Argument at the Bar were addressed by Mr. O.S. Bajpai, the learned senior counsel on behalf of the appellant-M/s. Devsons Pvt. Ltd. and Mr. Sanjeev Sabharwal, the learned counsel for the respondent-Commissioner of Income-tax. 10. Mr. O.S. Bajpai, the learned Senior counsel appearing for the appellant, at the threshold assailed the findings of the Tribunal as set out in paragraph 12 of its order dated 4th February, 2004, wherein the ITAT observed that the appellant had without justification and at the drop of the hat changed its method of accounting from mercantile to cash, which was unacceptable. Mr. Bajpai contended that what the appellant did was to take credit for income in respect of the bills that were accepted by the JMC without any deductions and wherever there were deductions, it was only the balance amount, which was taken as credit for as income, on the footing that it was only the balance that had actually accrued to the appellant. This did not amount to following the cash system of accounting but only indicated the basis ITA No.367/2004 & 296/2006 Page 11 of 42 on which the assessee considered income as having accrued. It only meant that the assessee did not consider the amounts, which were deducted by the JMC from its bills as having accrued to it. The ITAT, therefore, rightly observed in its order dated 29th July, 2005: “If this basis has been consistently followed as it appears to be, the assessee could not be said to have changed its method of accounting from mercantile to cash and cannot be charged with suppressing the receipts to the extent of `35,39,635/-.” 11. It was further observed as follows: - “It is also noteworthy that the figure of ` 1,17,39,415/- which represented the amount for which bills were raised by the assessee on JMC during the year, was furnished by the assessee itself. The further contention was that whatever has been deducted from the amount as not payable to the assessee was not taken as having accrued to the assessee. In our opinion, when all the facts have been placed by the assessee itself before the AO and a particular legal stand is taken by the assessee, which is not accepted by the AO, it cannot be said that the assessee is guilty of concealment of income. The first page of the assessment order records that “details of the total bills raised against the JMC were also furnished by the assessee according to which the total ITA No.367/2004 & 296/2006 Page 12 of 42 receipts of the assessee company for the FY 1994-95 arrive at ` 1,17,39,415/-. When these facts have been placed before the AO by the assessee itself as income, the assessee can be said to have taken a legal stand on the facts disclosed by it and, if such a stand is not accepted by the AO, there is no question of concealment by the assessee. Reference may be made in this connection to the following judgments: 1. ITO vs. Burmah Shell Oil Storage Co. Ltd., 163 ITR, 496 (Cal.) 2. CIT vs. Late G.D. Naidu & Others, 165 ITR 63 (Mad.) 3. Cement Marketing Co. of India Ltd. ACIT, 124 ITR 15 (SC).” 12. The learned Senior counsel for the appellant was also at pains to point out that as regards the second issue, viz., addition of ` 36,17,980/- as well, contradictory findings had been rendered by the ITAT in its order dated 4th February, 2004 passed in quantum proceedings and its order dated 29th July, 2005 passed in the penalty proceedings. In the former order, the ITAT observed that there was no evidence on record to show, except the logbook maintained by the appellant, that the amounts were payable to the contractors for the ITA No.367/2004 & 296/2006 Page 13 of 42 services rendered by them during the relevant accounting year. The Tribunal observed that the appellant should have obtained the evidence of the persons who had executed the work or of the officers of the JMC to prove that the work was actually carried out and the amounts were payable. In the latter order, i.e. in the order in penalty proceedings dated 29th July, 2005, the ITAT after referring to page 33 of the Paper Book-II and the columnar statement filed by the appellant giving the names of the creditors (in dispute) and the balances outstanding to them as on 31st March, 1995 to 31st March, 1998 (at page 267 of the paper book) and also referring to the ledger accounts of the sundry creditors placed at pages 70-109 of paper book No.-I observed that “….the addition appears to have been made only because the assessee was unable to prove the balances in the manner required by the Department, though there were other material embedded in the record itself and accepted in the subsequent assessment proceedings, to the effect that the outstanding were genuine”. ITA No.367/2004 & 296/2006 Page 14 of 42 13. The Tribunal noted that from the columnar statement in Paper Book No.-II, it emerged that there were a total of 8 persons to whom the appellant owned ` 36,17,979/- for the year under appeal. The amount outstanding to these very same persons as on 31st March, 1996, 31st March, 1997 and 31st March, 1998 was ` 49,93,063/-. It further noted that it was not disputed on behalf of the Department that in the subsequent assessments, the Assessing Officer had not made any additions of the balances, despite the fact that the balances were outstanding in favour of the very same persons whose names appeared in the balance-sheet as on 31st March, 1995, which the AO had added in the year under consideration. This was evident from the assessment order for the year 1998-99, which was one passed under Section 143 (3) of the Act, after scrutiny. In this order, the following observations appear: - “The assessee has shown in the balance sheet under the Schedule III as details of sundry creditors – hire charges of ` 58,55,005, but during the course of hearing it was intimated by them that it was only the payments to be made to the contractors who were plying the trucks on behalf of the company and the company had hired them for the Jaipur Municipality for removing the garbage. The list of these creditors to ITA No.367/2004 & 296/2006 Page 15 of 42 whom the amount is payable have been filed and affidavits to the effect for the person concerned have been filed statement thereby the amounts receivable by them from M/s. Devsons Pvt. Ltd. (sic) The total amount of ` 58,55,005 consists of sundry creditors of ` 49,93,063 and other creditors for hire charges of ` 8,61,942. Thus, there has been a scrutiny of the amount outstanding towards these 8 persons in the subsequent years and at least in one of the assessment orders there is a finding that the amounts were actually due to them and that some of them have filed affidavits also to the effect that the amounts are due to them. At our instance, the learned counsel for the assessee pointed out to the ledger accounts of the sundry creditors placed at pages 70-109 of the paper book No.1. The account of Morari Lal to whom an amount of ` 4,71,658 is outstanding as on 31.3.95 is at pages 71A to 73A. The account shows that several payments were made during the year under appeal to this contractor and there has been no disallowance of the amounts so paid. This indicates that the AO has no objection to allowing the actual amounts paid to these persons, which could have been only on his being dissatisfied that such a person actually existed, that he has done work for the assessee company during the year and the payments was otherwise genuine and bonafide incurred for the purpose of the business. It is not, therefore, understood as to how the balance outstanding to such persons at the end of the year can be considered to be non genuine. The ledger account also shows that the assessee has deducted tax on the hire charges paid to Morari Lal. The ledger accounts of all the other 7 creditors have also been placed in the paper book and these also exhibit the same position.” ITA No.367/2004 & 296/2006 Page 16 of 42 14. The learned counsel for the Revenue, Mr. Sanjeev Sabharwal, to rebut the contentions of Mr. Bajpai, relied upon the following observations in the assessment order of the Assessing Officer: - “….Not even a single confirmation has been furnished by the assessee. On the basis of the address furnished by the assessee, notices u/s 133 (6) of the Income Tax Act were sent to them to confirm their credit balances. All the letters have been received back with the postal remarks “Incomplete address”. The assessee was apprised of the position on 17.03.98 and he was again provided an opportunity to furnish the confirmation of these trade creditors. Thereafter, another opportunity was provided to him on 19.03.98 and 24.03.98. However, on the last date of hearing Sh. S.P. Patnaik, Manager Taxation, of the assessee company expressed his helplessness to furnish this information. Under the circumstances, the credits standing against the following names are not accepted and added to the income of the assessee company as income from undisclosed sources Ved Prakash 4,40,758 Murari Lal 4,71,658 Nafai Singh 4, 41,005 Ashok Kumar 3,90,576 Gurdyal Singh 4,16,581 ITA No.367/2004 & 296/2006 Page 17 of 42 Surjit Singh 5,15,866 Madan Lal 4,90,247 Bhule Ram 4,51,288 ------------ 36,17,979” ------------ 15. The contention of Mr. Sabharwal is that there was a dispute between the appellant and the JMC with regard to the execution of the work. The appellant had raised bills upon the basis of the certificates issued by the JMC for work executed, but lost sight of the fact that under the mercantile system of accounting, it was bound to show the bills on accrual basis. Mr. Sabharwal contended that the appellant could have claimed bad debts in the subsequent years but could not have changed its system of accounting. He further contended that note of the accounts attached with the audited accounts also showed that the appellant was adopting the accrual system of accounting – the income and expense has been accounted for in the mercantile method. Thus, the difference of ` 35,39,631/- in the receipts on accrual basis ITA No.367/2004 & 296/2006 Page 18 of 42 and receipt basis was unexplainable. Mr. Sabharwal, in this context, placed reliance upon the matching concept of accounting. 16. On the second issue it was contended by Mr. Sabharwal that with regard to the issue whether the sundry creditors were genuine or not, it was not open to a coordinate Bench of the Tribunal to set aside the findings of fact arrived at by an earlier Bench in quantum proceedings. Mr. Sabharwal was, however, not in a position to dispute that there was a total of 8 persons to whom the assessee owed ` 36,17,979/- from the year under appeal and that during subsequent years there had been a scrutiny of the amounts outstanding towards these 8 persons, and at least in one of the assessment orders there is a finding that the amounts were actually due to them and that some of them have filed affidavits also to the effect that the amounts were due to them. Mr. Sabharwal also did not dispute on behalf of the department, that in the subsequent assessment, the Assessing Officer has not made any addition of the balances despite the fact that the balances were outstanding in favour of the very same 8 creditors whose names appeared in the balance sheet as on 31st March, 1995. ITA No.367/2004 & 296/2006 Page 19 of 42 17. We propose first to examine the aspect as to whether the Tribunal was right in holding that in the facts and circumstances of the instant case, there was a change in the method of accounting introduced by the assessee without any justifiable reason. As noticed above, Mr. Bajpai on behalf of the assessee, urged that the assessee had consistently followed the mercantile system of accounting and merely because the assessee took into account the deductions made by the JMC, wherever there were such deductions, this did not amount to the assessee changing its method of accounting from mercantile to cash method. 18. It is no doubt well settled that it is not open to an assessee to adopt a hybrid system of accounting. It is also trite law that where a method of accounting has been consistently followed in the past, it may still be rejected by the Department. In Commissioner of Income-tax vs. British Paints (1991) 188 ITR 44, the Supreme Court observed that there was no estoppels in the matter of method of accounting consistently followed by the assessee and the Assessing Officer is not bound by the method followed in the earlier years, if ITA No.367/2004 & 296/2006 Page 20 of 42 correct profits cannot be deduced therefrom. However, it is also well settled that the Department should not ordinarily depart from its earlier decision, more so, where such departure would result in injustice to the assessee, and the Department is bound to treat the accounts of a continuing business in a consistent manner. Even in the mercantile system of accounting it is the real income which has accrued in a practical sense that is to be brought to tax. In CIT vs. Shoorji